Few Solutions To Pension Mess

OCT. 11, 2010

It has become almost impossible to exaggerate the depth of the state’s pension scandals, as more details emerge not only about the city of Bell, but about common abuses in other burgs. A new report produced by the California Foundation for Fiscal Responsibility, and championed by San Diego Councilman Carl DeMaio, for instance, found that San Diego’s top 10 pensioners stand to receive $61 million in pension payouts over the next 25 years. Those employees include the city librarian, deputy city manager, a fire battalion chief and an assistant police chief.

DeMaio reports that 70 percent of San Diego’s payroll budget goes to benefits for retirees, which leaves little for current employees. In the private sector, any company with this imbalance would find itself answering to a bankruptcy judge. But in the public sector, which operates mainly for the benefit of the people in the system, services get cut so the employees and retirees don’t have to scale back their lifestyles. The report found that some San Diego pensioners are receiving four public pensions at once, many are receiving more in retirement than they earned while working, and some politicians are receiving retirement payments at age 35.

Another report, released last week by the Foundation for Educational Choice (in conjunction with my employer, the Pacific Research Institute), pinned the state government’s pension debt (not including localities) at $326.6 billion plus at least $51 billion in retiree health care obligations. These benefits are senior state obligations, meaning they have high priority, and the public soon will be feeling more pain in the form of tax hikes and service cuts.

What’s really scary is that there is no solution to the problem without a massive restructuring of current public employee pension obligations. Virtually all reform efforts have focused on creating a lower pension benefit for new government hires, which doesn’t touch the bulk of the problem. The state’s public sector unions and Democratic leaders (same thing, really) have repeatedly argued that a new tier won’t fix the problem, which they use as an excuse to avoid any reform. They argue that the stock market will rise again and solve the problem for us.

This is fantasy. Public employee pension systems determine their obligations by predicting a rate of return on their investments over 30 years. If the market performs well, then the predicted debt will be low and vice versa. The pension obligations are based on annual rates of return of about 8 percent, which, in this economy, is extraordinarily high, and is therefore leading to increased debt projections.

The pension funds have resorted to various measures to hide their debt levels to reduce the public’s alarm, but the truth seeps out. The foundation’s report quotes the head of the California State Teachers’ Retirement System: “In order to fully fund the [defined-benefit] program in 30 years, investment returns for the next five years would have to exceed 20 percent per year, a rate of return that is 2 1/2 times the assumed investment return.” CalSTRS debunks the idea that the fund can “‘invest its way’ out of the problem.”

Yet the unions are fighting even the most modest reforms. And the new state budget approved Friday – any wagers on how long before we learn that the state is once again deeply in the red? – includes pension reform, but it’s so modest that it doesn’t hope to close the unfunded liability gap.

The budget creates new, slightly lower pension formulas. For instance, most employees would receive nearly the same benefit, but would have to wait to retire until age 60, rather than 55. Public safety employees would receive 75 percent of their final year’s pay at age 55, rather than at 50. And the budget would remove one form of pension-spiking, forcing state employees to calculate their retirement payout on the final three years’ of work, rather than on the final year of work. We have a massive problem and the state is addressing it with tweaks.

Yet the most astounding pension story in recent days involved former Bell Police Chief Randy Adams, who, according to a Los Angeles Times report, “was declared disabled the same day that he was hired. Under the arrangement, the 59-year-old Adams would receive a lifetime disability benefit whenever he decided to retire, meaning he would not have to pay taxes on half of his $400,000-plus annual pension.”

The “disabled” Adams bragged in his job application to become Orange County sheriff that he loves skiing and runs in a 120-mile relay race through the Mojave Desert.

Disability pensions are common among public safety workers for reasons that usually have nothing to do with battling violent felons. The Sacramento Bee had reported that 82 percent of California Highway Patrol officers at the management level retire with a disabling injury. We’re talking mostly about back and knee problems, which are typical ailments for anyone in their 50s, not just law enforcement bureaucrats.

Public safety workers often view disability retirements as a perk. They rarely are disabled in any serious sense. We think of a disabled worker as someone who no longer can work. But police and firefighters routinely retire under disability, then go on to take other strenuous jobs, or to run marathons and to live life to the fullest, albeit with a tax shelter more amazing that one finds in Swiss banks or the Cayman Islands. Until the Bell revelations, few people really questioned these scams.

Adams’ attorney said the former chief did nothing wrong. So many officials take advantage of these retirements, and they don’t even think of it as being wrong. This is a reflection of the corrupt mindset that has enmeshed itself deeply in the world of government work. That and other mindsets need to change if the state will ever find itself back on a fiscally sane course. Don’t expect your elected officials to wise up, but the financial markets eventually might impose some discipline.

–Steven Greenhut