by CalWatchdog Staff | August 26, 2010 7:22 pm
AUGUST 27, 2010
By STEVEN GREENHUT
This piece was originally published on the Nieman Watchdog site.
As the economy boomed, few people worried much about the debt that local and state governments were amassing to pay for increasingly generous pension and health-care benefits for public employees. Now that budgets are tight thanks to a down economy, the issue is big news — made even bigger by the outrageous pay and benefit plans received by officials of the small, working class city of Bell, Calif., where the now-ex-city manager stands to receive a pension valued at $30 million. That news story, uncovered by the Los Angeles Times, put some faces on overall public-employee-pension scandal.
Even bigger news is the size of the pension debt — estimated in California alone at $500 billion, according to a recent Stanford study. The nationwide debt is more than $3 trillion. The state of New Jersey settled this month with the Securities and Exchange Commission. As the Newark Star-Ledger explained: “For years, New Jersey had been cooking its books and neglecting to tell investors it was grossly underfunding pension plans.” Although California and New Jersey have taken the pension-abuse situation to the extreme, it remains a nationwide problem.
The national media have done an excellent job focusing on the expanding pension debt; all one has to do is peruse the pensiontsunami.com Web site to see how widespread and in-depth the coverage of it has become. But in recent weeks, I’ve noticed a counter-offensive from defenders of the status quo, especially from public-sector union officials who are trying to depict public concern as unfair attacks on public employees. Here are some questions journalists should ask as they consider these rebuttals:
Q. Is an unfunded pension liability really that significant?
Although some union officials recognize the problem, the vast majority of the ones that I’ve interviewed, debated and have heard testify in the state Capitol insist that there is no fundamental problem in the current system. In fact, organized labor’s allies in state legislatures continue to gut even the most modest reforms (such as a recent California bill limiting blatant pension-spiking abuses) and even push for retirement and disability expansions. These union officials would like the public to believe that pension funds that are only 70 percent or so funded are in perfectly good shape because the amount of debt is basically a guess — based on assumptions about the rate of investment return in the future. When the rates of return go up, they say, all will be well and the pension systems will be fully funded — which means that legislators won’t have to increase contributions to make the systems whole.
It’s true that financial assumptions are at play here. The retirement systems make investments and if the rate of return is high, then the debt is low and vice versa. But increasingly the systems are making riskier investments to cover up for all the enhanced pension promises made over the years. Politicians have repeatedly made the retirement formulas more generous, and often have done so on a retroactive basis. By “enhancing” the formulas mid-stream, the investment funds have additional pressure to take bigger risks, which explains in part why the California Public Employees’ Retirement System invested in leveraged housing developments at the height of the housing bubble. If such “roll of the dice” investments pay off, then there’s more money for public employees and less political pressure to reform the pension system, and if they don’t, the taxpayers are on the hook. It’s the ultimate privatization of gain and socialization of risk.
The unfunded liabilities have gotten so large, however, that it appears unlikely that a rebounding economy will provide high-enough rates to cover up the problem.
During Senate testimony regarding pension reform, California Gov. Arnold Schwarzenegger’s chief pension adviser, David Crane, explained: “When the state makes a pension promise to a state employee, it is simply promising to pay money to the employee at points in the future. Thus, state pension obligations are no different than state debt obligations, which also are promises to pay amounts in the future. But they differ in two important respects: (1) voter approval is not required for pension obligations — governors and legislators have all the responsibility in that regard, and (2) pension costs, unlike debt service costs, are neither capped nor precisely quantifiable in advance.”
So while the amount of debt is not “precisely quantifiable in advance,” these pension obligations are real debt that must be paid by taxpayers. Furthermore, as Crane noted, “Pension payments are senior obligations of the state to its employees and accordingly have priority over every other expenditure except Proposition 98 (i.e., K-14) expenditures and arguably even before debt service.”
I’ll deal with the significance of that point in the following question.
Q. Pension contributions only comprise a small percentage of any state’s budget, so why is this debt such a major problem?
At the state level, the contribution is relatively low, but it’s growing and should be much higher. CalPERS and other retirement systems nationwide have engaged in a process known as “smoothing,” whereby they spread out the risks further into the future — sort of like refinancing that Ford Focus for 20 years to keep the payment low. Their goal is to hide the amount of debt in order to avoid calls for pension reform, given that legislators will howl if they need to funnel additional billions of dollars in general fund revenue into the state pension systems.
Because pensions are senior obligations, as Crane noted, they must be funded before other programs: “All of the consequences of rising pension costs fall on the budgets for programs such as higher education, health and human services, parks and recreation and environmental protection that are junior in priority and therefore have their funding reduced whenever more money is needed to pay for pension costs. Thus those who should be most concerned about pension costs are families and businesses concerned about California’s colleges and universities, recipients of the state’s health and human services, users of state parks, citizens interested in environmental protection, and current and future state employees concerned about the potential for pay increases.”
Hence, Crane and some other of California’s progressive Democrats, such as San Francisco Public Defender Jeff Adachi, have joined fiscal conservatives in calling for reduced pensions or increased pension contributions by public employees. The progressives realize that rising pension costs are sucking the life out of the government programs they so strongly support.
Furthermore, the portion of the budget that goes to servicing pensions does not count the full cost of public employee pensions to the taxpayers — the dollars that taxpayers put into the system in the form of compensation. It also doesn’t consider the harsh effect of public pensions and pay packages on local governments. In the bankrupt city of Vallejo, Calif., approximately 75 percent of the city’s budget went to police and fire, which left little room for anything else. Because the union-dominated City Council would not reduce current pensions even in the face of bankruptcy, the city was left with slashed police and fire budgets – even as police captains earned $300,000 compensation packages. Pension debt is indeed crippling local governments’ ability to provide other services. The Sacramento Bee recently opined that “this year, the city of Roseville will spend as much to fund its pension plan as it does on parks and recreation. San Luis Obispo will spend six times as much on pensions as it does prosecuting criminals.”
The Bee also opined: “County government is becoming a pension provider that provides government services on the side.”
Cities across the country, such as Evanston, Ill., are having to drop more money into their pension funds to keep them afloat. That means less money for public services or higher tax rates.
Q. Police and firefighters put their lives on the line and they die soon after retirement, so why are critics giving them such a hard time for their generous pensions? And they have a high disability rate, making them more deserving, right?
Public safety and firefighter unions argue that they deserve their “3 percent at 50” (3 percent of their final year’s pay times the number of years worked, available at age 50) pensions because they die shortly after retirement — some claim that the typical cop or firefighter only lives five to eight years after retiring. CalPERS has debunked this myth (as has the Oregon retirement system) and finds that the longest living categories of public sector employees are police, followed by firefighters. They live on average into the low- to mid-80s. According to the Bureau of Labor Statistics, neither police nor firefighting are in the top-10 most-dangerous jobs. And the high disability rate is evidence mainly of abuses in the system. The Sacramento Bee reported a few years back that 82 percent of manager level officers in the California Highway Patrol retired on disability — a number that spiked after CHP shut down its fraud division.
Q. The average public employee pension is less than $30,000 a year. So aren’t critics only “scapegoating” public employees because of the current tough times?
These averages are misleading given that they include all the many people who have worked in the public employee system over the years, many of whom worked for short periods of time. The massive pension increases have taken place over the last decade, so that amount is higher for newer employees. The average new CHP employee has a pension of almost $90,000 a year. Even the lowest number is far higher than the average pension for private-sector workers. And the number of $100,000 Pension Club members in California is at 15,000 and growing by 40 percent a year. The formulas are the formulas. If a person starts work in an agency that offers “2.7 percent at 55,” that person will retire with 81 percent of their final year’s pay after 30 years, period. That’s far more generous than what’s available to most private-sector workers. Reporters need to do more comparisons between private-sector and public-sector benefits.
Q. Everyone who was anyone said it was OK to increase pensions for public employees, so shouldn’t we just blame the economy?
The bad economy has reduced revenues and forced governments to deal with a problem they have created over many years. Now people are saying, “Everyone said it was OK.” But that’s not true. There were many voices warning against the massive pension increases that took place over the past decade. In California, the SB400 legislation that allowed and encouraged municipalities to adopt “3 percent at 50” was rammed through the Legislature without full analysis and oversight — given that almost everyone involved stood to gain under the enhanced formula.
During the debate over SB400, CalPERS did not reveal its own internal memo showing the mess that the enhancement could cause if the economic scenarios were not so rosy. Here is blogger Ed Mendell, who covers pension issues:
“As CalPERS publicly said a decade ago that a major pension increase, now targeted for rollbacks, could be paid for with investment earnings rather than higher state costs, its actuaries made a startlingly accurate forecast of the impact if earnings fell short. The actuaries said the annual state payment to CalPERS, $159 million in 1999, could soar to $3.954 billion in fiscal 2010-11 — a long-range forecast that scored a near bull’s-eye on the $3.888 billion state payment for the fiscal year that began this month.
“Legislators were told in a 17-page CalPERS brochure that the pension increase, SB 400 in 1999, would not increase state costs. And as critics have pointed out, the brochure did not mention the state would have to pay if investments faltered.”
Q. Aren’t public employees’ leaders working on a solution? Can’t these matters be fixed at the negotiating table rather than through state-imposed reforms?
Many public employee unions are claiming that they want reform even as their lobbyists and legislative supporters stifle every modest reform — even reforms that would leave current retirement benefits untouched while instituting a second-tier retirement formula for new workers, and reforms that help cities get out from under crushing pension obligations. When unions squelched a recent proposal in the California Senate, the Democratic and union mantra was that these matters can be fixed at the negotiating table. But it’s at the negotiating table, where those who negotiate on behalf of the taxpayer often stand to benefit from any pension increase, that the unions are the strongest. No serious reform will come from there.
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