Lockyer, Others Deny Pension Crisis

NOV. 1, 2010

News Analysis


Apparently the ideological left, public employment unions and some the state’s top financial officials still don’t get that we have a public employee unfunded pension liability crisis, or they are just in denial.

Late last month, I attended the Milken Institute’s annual “State of the State” conference a usually lively event featuring in depth discussion of the biggest challenges facing the state and sometimes-innovative ideas hosted by one of the state’s most recognizable left-of-center think tanks. Topics discussed ranged from the 2010 gubernatorial election to California innovation to the housing boom and subsequent collapse.

The panels were meaty as one would expect from the institute except for the last panel of the conference. The panel analyzing what I would argue is one of the top three most pressing issues facing the state—unfunded  public employee pension liability—missed the mark on almost all counts demonstrating to me little hope for legislative or administrative reform from Sacramento lawmakers, nor a chance at cooperation for labor union leaders.

Panelist Scott Minerd, the chief investment officer for Guggenheim, a financial services firm that buys state debt, set the tone for the misguided panel when he said, “I don’t actually think there is a pension crisis.” Woah! Hold up. According to various recent studies, the unfunded pension liabilities for the state of California ranges from $300 billion to $500 billion. In February, the Pew Center on the States suggested California faced a $1 trillion pension GAP and the Foundation for Educational Choice released a study earlier last month illustrating that “California’s public retirement systems are more than three times underfunded than state officials projected.” That sounds like a crisis. But from Minerd’s perspective given that California is a “longstanding institution” a pension fund roughly funded at 80 percent is “fairly safe.”

Aside from Minerd, the panel was made up of some of the people guiding the pension woes of the state: Bill Lockyer, the California state treasurer, John Hamm, CEO of the California Association of Highway Patrolmen (a union), Jerilyn Harris, chairwoman of the California State Teachers’ Retirement System and the token Republican legislator, the state Senate Minority Leader Dennis Hollingsworth, R-Murrieta.

All sorts of excuses were thrown out for the liabilities including the economic downturn, market returns and lower-than-expected rate estimates, but it was clear from the panelists, especially Lockyer, Harris and Hamm that they were not planning to budge in their positions.

Harris said numerous times that defined benefit plans — retirement accounts that guarantee a set retirement regardless of investment returns— were critical for teachers in particular. She said, “Defined benefit is extremely important to teachers” because teachers are not very good with investments so they need to be taken care of at retirement age. Her remarks were meant to offset calls for moving teachers and other state workers into 401(k)-style retirement packages like most private sector workers have.

Hollingsworth acknowledged that the median rate of investment return over the last 25 years has been 9 percent but in the last several years it was only 3 percent. He asked, “What is an acceptable level of risk?” The bigger issue is the retirees are not taking any of the risk — or even part of the risk, since taxpayers are assuming all of the risk on the government workers’ behalf.

As for Hamm, when pressed about giving more concessions on the pension front he said, “We already shared in the sacrifice,” referring to concessions made by his union during state budget negotiations this year.

Lockyer defended the robust pension system for state workers, saying it was adequate for “a lifetime of service.” He added, “There is a point in having decent pensions in both public and private life and instead of attacking and victimizing people let’s talk about the inadequate pensions in the private sector and figuring out how to fix that problem.” The reason private sector employees have less lucrative pensions is because private companies don’t have taxpayers to depend upon if the market doesn’t perform as predicted.

After agreeing with Lockyer that teacher pensions were not out of line, Minerd asked, “If the percentage is out of whack from the projections, though, should the taxpayers be on the hook or should the employees be on the hook?” Lockyer retorted, “The courts have already decided that in defined benefit plans.”

Unfortunately. the panel of experts was more a panel of enablers and deniers more concerned with taxpayer dollars being diverted from the state budget or state programs to cover pension shortcomings rather than addressing the bigger issues surrounding public employee pensions: unfunded liabilities, their lucrative nature, the taxpayer burden and the responsibility of a worker to share in their investment risk.

This particular pension panel was a perfect microcosm of why many in the fight for pension reform have a pessimistic view of making progress on this issue under the current leadership in Sacramento.

Brian Calle is a senior editorial writer and columnist for The Orange County Register in Santa Ana and a contributor to CalWatchdog.

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  1. marcsays
    marcsays 1 November, 2010, 13:17

    I am all for the state of CA declaring bankruptcy, IF the ONLY positive this would be to cancel ALL union contracts and pension plans!

    I am so disgusted!

    Reply this comment
  2. Bruce Ross
    Bruce Ross 1 November, 2010, 15:13

    Maybe Minerd’s professional perspective is actually worth digesting. Just a thought.

    Reply this comment
  3. Steven Greenhut
    Steven Greenhut 1 November, 2010, 16:19

    Minerd is an interesting voice and he has, in fact, warned about deep pension problems and calls for serious reform for new hires. But I certainly was surprised to hear him call 80 percent funding “fairly safe.” I’m not surprised that Lockyer and the union folks see no crisis. The panel clearly was tilted toward those who share the minority view that the pension system will be fine, despite all the liabilities.

    Reply this comment
  4. stevefromsacto
    stevefromsacto 1 November, 2010, 16:19

    Yeah, Hollingsworth is a token. Or maybe a fox in the chicken coop would be more appropriate.

    Anyway, so glad that the impartial Millken Institute allowed some representatives from the “other side” to participate.
    At least they aren’t 100 percent “fair and balanced.”

    Reply this comment
  5. Algernon Moncrief
    Algernon Moncrief 2 November, 2010, 10:12

    Read Professor Amy Monahan’s discussion of DB pension case law, Google it, and click on “one-click download.” You will learn what pension reforms are legally possible. Look at Utah’s prospective, legal pension reform this year (went to 401Ks for new hires.)


    What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.

    We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.

    If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?

    The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.

    Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.

    PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.

    Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.

    The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.

    Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)

    Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):

    Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
    Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
    Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
    Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
    Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
    Senator Spence said “The bill places an unfair burden on retirees.”
    Senator Scheffel said “We are breaching our promises to existing retirees.”
    Senator Lundberg said “This bill is a deal that was cut before this body met.”

    The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.

    So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.

    The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.

    Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.

    It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.

    Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.

    PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”

    Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.

    Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your pension tomorrow, neither does the state and other PERA employers.

    There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.

    Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.

    The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)

    PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.

    While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).

    The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”

    Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.

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  6. Tough Love
    Tough Love 2 November, 2010, 10:44

    Why should Private sector taxpayers fund 80-90% of the pensions of Civil Servants ….. pensions that are 2-6 times GREATER than what they get from their employers ?????

    Defaulting on these plans is the necessary/appropriate response to the extreme greed of Civil Servants and their unions.

    Reply this comment
  7. Fake OCO
    Fake OCO 2 November, 2010, 11:14

    Minerd is an interesting voice and he has, in fact, warned about deep pension problems and calls for serious reform for new hires. But I certainly was surprised to hear him call 80 percent funding “fairly safe.”
    80% is not safe-it is “endangered”. Pensions with less than 80 percent of the assets needed to cover present and projected liabilities are considered “endangered,” while those below 65 percent are classified as “critical” under the Pension Protection Act of 2006.

    And Calpers is only 48% funded while Calstrs is only 46% funded, that is not only “critical” it is DOE on my book. In California actuarial methods show the Public Employee Retirement Fund (Calpers) at a funding ratio of 87 percent but when private sector market valuation is applied to Calpers, the funding ratio drops to 48 percent, according to the Bigg’s study. Likewise, California teachers’ funding (Calstrs) ratio under current actuarial methods is also 87 percent, as opposed to 46 percent when private sector market valuation is applied.

    Reply this comment
  8. New reality 619
    New reality 619 2 November, 2010, 14:40

    Self intrest is a funny thing. When you have a dog in the fight, you are rarely able to be objective about the fight or the outcome.

    Everyone that is on track for the crazy state pension seems to be unable to get beyound their own self intrest. I understadn that, and we should all understand that too.
    It is time that we stop listining to those that have a vested interest in keeping things the way they are. Let’s not be shocked when future or current pensioners say, “it’s as it should be”. That is in their own self(ish) interest.

    Reply this comment
  9. ERISANation
    ERISANation 8 November, 2010, 10:32

    Is it any wonder that political contributions to legislators, by their employees or employee representatives, influence what the employee/retirees get?

    Reply this comment

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