CalPERS actuary: pension costs unsustainable

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

So, are the critics right: Do overly generous pensions threaten to eat up too much of state and local government budgets?

An historic stock market crash wiped out a quarter of the CalPERS investment fund last fiscal year. Some experts are forecasting limited investment earnings in the years ahead, making it difficult to replace the losses.

Now “sustainability,” a term used in environmental discussions, has become a common label for a big question about public employee pensions: Will the current level of benefits be affordable in the future?

.The question of pension sustainability emerged as a hot topic during a seminar in Sacramento last week sponsored by the Public Retirement Journal.

Ron Seeling, the CalPERS chief actuary, described the process used to “smooth” the rate increases that will be imposed on the 1,500 local government agencies in CalPERS in 2011 in the wake of the stock market crash.

Instead of a rate increase of 4 to 20 percent of pay, the smoothing will reduce the rate hike to a more manageable 0.5 to 2 percent of pay.

“I don’t want to sugarcoat anything,” Seeling said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

Anne Stausboll, the CalPERS chief executive officer, told the seminar that the CalPERS board talked about the “cost and sustainability of pension benefits” the previous week and decided that the system should take a “proactive role” on the issue.

“They asked us to formulate a way to convene our stakeholders — employers, labor, legislators and other stakeholders in our system — to convene everybody and start having a constructive dialogue on sustainability of pension benefits,” Stausboll said.

Dwight Stenbakken of the League of California Cities told the seminar that pension benefits are “just unsustainable” in their current form and difficult to defend politically.

“I think it’s incumbent upon labor and management to get together and solve this problem before it gets on the ballot,” he said.

Public pension advocates worry about a drive to replace the “defined benefit” plan, a guaranteed monthly check for life, with the “defined contribution” 401(k)-style individual investment plan increasingly common in the private sector.

Four years ago Gov. Arnold Schwarzenegger briefly backed an initiative proposed by former Assemblyman Keith Richman, R-Northridge, that would have switched all new state and local government hires to a 401(k)-style plan.

But Richman has since called a switch to a 401(k)-style plan “politically” unfeasible. He and the California Foundation for Fiscal Responsibility have talked about extending retirement ages and capping pension payments at two-thirds of final pay.
(See Calpensions 26 Jan 09: “Pension intiative via internet”)

Last June Schwarzenegger, calling current benefits “unsustainable,“ proposed that pensions for new state hires be rolled back to the formulas used before CalPERS-sponsored legislation, SB 400, enacted a major benefit increase in 1999. (See Calpensions 30 Jun 09: “Arnold: cut retirement benefits for new hires”)

The governor dropped an attempt to make his “two-tier” pension reform proposal part of state budget negotiations. But he added pension reform to the list of issues he plans to pursue with legislative leaders later this year.

Schwarzenegger’s plan is similar to a proposal made four years ago by a League of Cities task force, which also referred to “dramatic benefit enhancements” made in the late 1990s.

The legislation, SB 400, only increased benefits for state workers. But the same higher benefits are now widespread among local government pension systems.

“The excuse that I’ve always heard is, “We don’t want to adopt these retirement formulas, but I have to because our neighbors adopted it and we have to be competitive in the labor market,” said the League of Cities’ Stenbakken.

He said eliminating all options and returning to pre-SB 400 retirement formulas for new hires would eliminate the competition between local governments that has increased pension benefits.

“I think this is one of the major mistakes we made with the PERS system,” said Stenbakken. “STRS, the State Teachers Retirement System, doesn’t have this problem. If you’re a teacher in Eureka or you’re a teacher in Los Angeles Unified, you get the same pension.”

In California, attempts to cut pension benefits are usually two-tier plans, cutting benefits only for new hires. Pensions bargained under labor contracts are said to be protected by court decisions, which allow cuts only if something of equal value is provided.

“In terms of dealing with pension cost currently, I only know of two ways to do it,” said Stenbakken. “That’s lay people off or reduce salaries.”

A retirement actuary, John Bartel, told the seminar that two-tier plans do not save much money, even after several decades. He said costs from the untouchable high-benefit first tier, a vested right protected by contract law, continue to grow.

“Unless that vested right issue changes, and I’m not expecting it will, that second tier is not going to save money,” he said.

Bartel said his clients tell him that the main motivation for switching to a two-tier plan tends to be “political in nature,” rather than an expectation of significant savings.

“It’s because a board member or a council member can stand up and say, “We think there’s a lot of bleeding here and we need to stop that bleeding, and we are going to do it on that basis,’” he said. “That’s what I’m hearing from my clients.”

Labor union officials told the seminar they worry that statewide pension reform legislation might bypass local collective bargaining. They said the Richman group’s list of 5,000 pensioners that receive $100,000 or more a year is less than 1 percent of total public employee pensions.

“I actually think it is sustainable,” said Terry Brennand of the Service Employees International Union. He said the basic problem is investment losses, not high benefit levels.

“What is sustainable?“ said Lou Paulson of the California Professional Firefighters. He said proposals to extend the retirement age for firefighters from 50 to 55 would result in more injuries with advancing age, driving up workers’ compensation costs.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 10 Aug 09

15 Responses to “CalPERS actuary: pension costs unsustainable”

  1. Bruce Ross Says:

    I’ve never heard a satisfactory explanation to this question:

    Granted that existing vested pensions are guaranteed under law, but why are future years’ earnings sacrosanct? To wit, if a civil servant was working for 2.7 percent at 55, and had 15 years of service, what’s to prevent that from being changed going forward to 2 percent at 60, with the eventual pension blended? After a total of 30 years, you might have 15 at 2.7 plus 15 at 2, for a total of 70.5 percent at 60.

    I’m not sure how you’d handle the gap between ages 55 and 60, but I’m sure it could be negotiated.

    You have a right to what you’ve earned. You don’t have a right to earn that for the rest of your career. Or do you?

  2. Dr Robert J Houchin Says:

    The Government has had no compunction about changing Social Security Law after the fact. Why should public pensions be any different. The simple fact of the matter is the legislature made an error in promissing more than could be delivered. So fix it.

  3. rick roeder, FSA Says:

    You guys are being logical! However, state law, for better or worse, has a doctrine of “contract impairment” which precludes a reduction in a benefit level, even for future years, without some equal compensation. I have been waiting for years for this doctrine to be challenged by a governmental agency. Given the current financial climate, I would not be surprised by a challenge in the near term.

  4. Gil Siegmund Says:

    Without empirical studies or other types of data analysis, it became quite apparent to me several years ago that the amounts of individual pensions received by government employees in California and other states would eventually be unsubstainable. The State of California, or New Jersey, or New York, et al, simply cannot retire people after 20 or more years of service at their full working incomes or even at a high percentage of their regular working incomes, sometimes, I’m told, with full medical benefits. The Counties and Cities cannot sustain similar exorbitant pensions. The system would eventually fail in the sense that more and more revenue from the people would be needed even if there were no economic recession/(depression-for many of those out of work)

    Yes, an ideal economy without any economic contraction and with continuing, appropriate private economic growth may have precluded all or some of our current CA state and local pension problems. However, as good as the capitalistic, private-enterprise system is, history teaches us that there will be downturns–recessions, panics, depressions, etc. History also teaches us that the way out of these economic downturns is not more and more Federal or State spending. Governments secure their money, their revenue from those who produce goods and services–private enterprise. The fact is government produce nothing, and right now our Federal and CA State governments are following economic policies that will kill the Golden Goose, that is the private sector—from which all governmental revenue is derived.

    The way out, as was the case in the brief recession of 1920, is to let the system clear itself of the problem–which it did in 1920-1921. John F. Kennedy also used the private, free enterprise system to avoid a recession—by lowering taxes on corporations, small businesses and the people, thereby creating a positive economic investment outlook that would help expand our national economy and provide increased governmental revenue instead of what we now have in the State of California and at the Federal level.

    In hindsight, the answer to our current State of California pension problems would have been granting pensions based on living decently but not high on the hog as all too many California and Federal retirees do today. A good number of CA State, County, and City retirees, other State and local-government retirees, and Federal retirees would not agree with my proposal–because it would mean less money for them. Yet, those who retire after 20 years and then begin a new State career and get a second and perhaps a third State retirement are, in fact, getting rich off of the people of California or off of a some kind of mingling of different retirement plans. We have all heard the term double-dippers; how about triple dippers. At one time, those of us who worked for the government were called civil servants, made less money than those in the private sector, and really believed in serving the taxpayers–even thought of it as being a privilige to do so. For example, currently the average Government employee is making about $74,000 per year while the average private-sector employee is making about $47,000 per year. I don’t believe this is what the founders of our beloved United States had in mind! I also do not believe it should cost
    General Motors an average of $76.00/hr. for union workers–some of whom, if laid off, are paid 95 percent of their full salary ad infinitum.
    That does not include their medical benefits and other retirement benefits.

    It would have been a lot better to have included a buffer factor in retirement pensions, meaning, for example, providing pensions that
    allow for the various factors that could produce less revenue from those paying into the system, from the State revenue funds or other State funds used to finance the State retirement systems. At this time, CA and certain other governmental pensions are based on the employee’s annual income–a very great incentive to make certain that those working under you and the newly-hired get higher and higher salaries so those at the top of a given governmental entity can justify their higher salaries and higher retirement incomes.

    It is also to be noted that a great number of government employees, at all levels of government, are basically guaranteed their jobs for as long as they want those jobs. I mean I have personally seen instructional aids (whose job, at least in California, is just about fire-proof) tell instructors and administrators to shove it when they did not want to do as they were instructed to do within the scope of their legitimate duties. And why should a U.S. Senator who serves six years get a retirement salary for life–or a Governor or a President of the United States??? I know people working for the government who have told me that it is almost impossible to terminate or fire anyone–it will take seven or more warnings–all fully documented, of course.

    It would then appear that we, as a people, would do well to re-evaluate our current thinking on what the proper compensation for governmental employees is and that would include their pension plans. However, that will take some doing because once people are entrenched in a certain way of doing things, they want to keep their status and compensation. Take a look at the nationalized healthcare programs in Great Britain, in Canada, and in France.

    Those countries cannot revert to what we still have, the best medical care available, in the world. No, that does not mean I think the poor should not be taken care of in our country when it concerns medical care–not by a single-payer, Federal healthcare program that will deliver grossly inferior medical care and allow the Federal Government to take over one-sixth of the economy. Make no mistake about this, the proposed Federal takeover of healthcare is a grevious grab for power and will not serve our people well. I appreciate the opportunity to express my beliefs. Thank you. Gilbert Paul Siegmund February 11, 2010.

  5. bob kelly Says:

    This article seems very well written until you begin to read the distorted “facts” that your entire position is based upon. What is quite clear is that you provide support for you facts with the words “I’m told”. So based upon hearsay you continue your argument.
    You write that the state of California can not retire people with 20 years of service with 100% of their income or even more. I can assure you that not one person ever, ever, EVER retired from state service with 20 years and received 100% or more of their working salary. You should go to the CA DPA website and check out the retirement formulas.
    I can’t write any more except –the author above has not clue, does not know the facts, and we should reject his entire writing as foolish.
    Please read a book and get educated before continuing with such distortions of truth.

  6. bob kelly Says:

    Let me correct my blog here. It is not the writer of this article it the blog written by Mr. Gil Siegmund.

    If only if Mr. Siegmund read the empirical data he would not have written most of his blog.

  7. Gil Siegmund Says:

    Dear Mr. Kelly:

    I notice that you have not cited any empirical data, and had you actually done so, I cannot believe that you would have come to this conclusion. As is so often the case, you are quick to presume that my findings are to be discarded because I did not quote empirical data. How much data would you like to utilize. If one keeps poking holes in a large water tower, eventually the tower will remain empty and, even if it rains or snows, that tower simply will not retain the water too long, unless it is frozen. Along the same lines, the taxpayers are not a bottomless pit. This world is filled with limitations. That goes for income and expenditures, too.
    It does not take a rocket scientist or even a genius to determine that continuing to grant excessive pensions that may well be paid out for 20 or more years will result in in unsustainable postion–in other words the State, as is our beloved United States moving toward, will bankrupt itself. With 40 percent of every dollar going for our national debt, I would think you could easily see my point.
    Of course, it is much easier to seek the short-gains and let our children, children’s children–and on and on pay for our unwillingness to change what must be changed if the United States of America is to remain the exceptional Country that it is, and if California is to be capable of sustaining the California in which I grew up. I hope to shout.
    By the way I am from San Diego–that’s right a native Californian who has watched his beloved State go downhill for years now. By the way, it is irrelevant as to whether or not anyone ever received 100 percent of their regular salaries; what is relevant is way too much money in entitlement pensions is currently being paid out to public employees who retire.
    It might interest you and the readers to know that I have a degree in Public Administration and am quite familiar with the amounts of pensions public employees in this State receive or can receive. So, your admonition to read a book is baseless. One doesn’t have to read some expert with his or her own liberal, left-wing agenda, to ascertain that staying on the current path with respect to public pensions will lead to our total demise. Thank you for letting me express my findings on this matter. Gilbert Paul Siegmund May 21, 2011

  8. Gil Siegmund Says:

    Additional Reply to Mr. Kelly’s assertions. May 21, 2011 3:04 P.M. PDT

    Please refer to my earlier reply today, which was actually written at around 2:00 A.M. this morning, PDT. Upon further reflection concerning the subject at hand, it would appear that you, Mr. Kelly, not only failed to read my entire February 10, 2010 statement but also failed to peruse the primary calpensions, actuarial statement which prompted these blog responses from various people. And for you, Mr. Kelly, to tell all others that what I had stated was distorted to the extent that my entire writing should be rejected indicates what looks like a very strong bias in favor of those who would have our governments, at all levels, spend us all into financial oblivion.

    If there were no problems with the sustainability of public employee pensions in California, the statements made by the actuary for Cal Pensions would not have been published in the first place. Mr. Kelly, if only I had checked a lot more empirical data–as you state that I should have done, I still would have written every word of this blog–you, Sir are absolutely incorrect in your assumption as to what I should have or would have done. It’s best not to ASSUME–if you do not know why by now, Mr. Kelly, I feel sorry for you. Yes, I will give you credit, Mr. Kelly, for pointing out that people with 20 years of service do not get 100 percent of their regular earnings for retirement–however, you seem to have left out the part I wrote about “20 years or more”–the 20 years or more is there, too. Perhaps you, Mr. Kelly, and others would be interested in knowing of a New York City school instructor who is not permitted to teach, but cannot be fired, and reports to work–to do nothing during his time at work–yet is paid about $100,000.00 per year–and will undoubtedly receive a pension based on this salary. That’s one of the problems related to public pensions about which I am concerned.
    All of us should be concerned about this kind of financial waste.

    And I can assure you that I know one California Community College Instructor who worked the last year of about 44 years so he would get more than 100 percent of his regular salary–in retirement. So, Mr. Kelly, all the checking of data would not have kept me from writing any of my Feb. 10, 2010 blog in this forum. Why—the impartial, valid data supports all that I have said with the exception, as just noted above and so kindly pointed out by you.

    You see, Sir, herein, we are dealing with public policy–not what feels good or what we might like to see, or? In a family setting, we would call it financial prudence; our citizens are a family, and we need a whole lot of financial prudence right now to remain financially stable and grow our economy so all too many will not be and stay unemployed–so our beloved United States of America and its States will not go down the path that Greece, Spain, and other socialistic countries have taken. Spain’s problem is also related to “going green”–about 20 percent unemployment rate in Spain right now. (probably higher since once people stop collecting unemployment, at least in our Country, they are no longer counted as being unemployed, thereby yielding a false unemployment rates every time the U.S.A. employment rate is given.
    Of course, that should be no surprise for many of us, since the inflation rate provided by the United States government does not include expenditures for food and gasoline. (another false report–on inflation.)

    In my fist article of Feb. 10, 2010, I also mentioned the severe problems associated with the so-called Obama Health Care Reform Legislation which barely passed by 7 votes–all Democratic votes–after browbeating or carrot-sticking certain Democrat Party Representatives and Senators for over a year. I mean we, our people, are currently in the red by about 14 trillion dollars at this time. If our country cannot even finance Medicare properly or Social Security properly–how in the world can we expect the Federal Government to provide for decent, appropriate, state-of-the art medical care for 330 million U.S. citizens and also for those who continue to remain here illegally. I don’t know about you, but I find it horrific that decisions on our medical treatment will be based on the direction of 15 bureaucratic appointees, thereby denegrating the doctor-patient relationship substantially and also tying up necessary and critical medical treatment in the time warps that are almost always connected with governmental bureaucracies. Also, due to foreseeable funding problems, it is most likely that the elderly will not receive appropriate medical treatment–since their utility has run out on them–they are no longer useful–perhaps they can just be put to sleep.

    Our southern border is not properly controlled even though Mr. Obama claims that it is. The people living in Southern Arizona and Texas are telling a much different story and experiencing that story in terms of life and death. It has been observed that other types of individuals, you know–the one from places such as Yemen, Iran, Afganistan, Pakistan, etc. are entering the United States through our Southern Border, without any problem at all. And I haven’t even mentioned the fact that Phoenix, AZ is the kidnapping capital of our Country, that the drug cartel is having its way all too often below and above the border, that signs warning Arizona citizens and others to watch out for dangers, as they travel Arizona highways, have been and are posted along side the highways.

    Certain instructors in Tuscon, AZ are teaching students that lands belonging to the United States(legitimately obtained by treaty and purchase) actually do not belong to the U.S.A. and were stolen from Mexico; these same instructors are teaching that the United States Government should be overthrown. I have also been told by certain Hispanic people that California, all of Arizona, all of Texas, all of New Mexico, and perhaps other States or parts of States should be returned to Mexico because it really belongs to Mexico, and our Country stole these lands–neglecting historical truths, such as treaties signed by legal representatives of Mexico at the time the treaties were signed–and the huge amounts of money that we paid Mexico for some of this real estate, as a part of treaties pertaining to these lands. I mean I have actually spoken with Hispanic immigrants who told me that they were, in Mexico, taught this hogwash about California and other States of our United States having been stolen from Mexico by our Country–to the extent that these people actually believe that the subject land is theirs and was stolen from them by the United States.

    In the words of Bill O’Reilly(Fox News), I believe I would be called a Patriot because my main goals are to utilize public policy that will lead to a stronger economy for our beloved United States of America and its people. Those who are pursuing only or primarily just their myopic special interests and short-run gains would, in my opinion, most certainly deserve the “pinhead” label. In essence, these PINHEADS can’t see past their noses. We need to have focus and vision–but not the kind that leads to a bigger and bigger Federal Government–which will shrink
    the freedom of all of our citizens and severely counteract the great gift of the Bill of Rights and the United States Constitution.

    Does it not strike you as most peculiar that our people fought Communism in the Cold War for decades and yet now is being pressured toward having the same type of government or a very similar type of government, at the national level, that we fought for so long? As has been said, ” A crisis is a terrible thing to waste,” and the bigger the crisis, especially when it concerns an economic one, the greater change for a larger and larger, Central government which knows, much better than we do, those things that we, as a people, should or should not do or do. Taking over General Motors, taking over 1/6 or so of our economy through the Obama-Pelosi Health Reform(so called) is a grand start toward undoing the rights guaranteed to all of us by the United States Constitution. But then, the elitists just know that we, the people, are not up to the task of doing what’s best for ourselves–so they will have to use any crisis they can to gain more and more control of our lives.
    Gil Siegmund, May 21, 2011, 4:05 P.M., PDT

  9. Gil Siegmund Says:

    Please note: Correction to last paragraph directly above, 3rd line down
    It should read after national level, that we fought against for so long?
    (instead of fought for so long). Thank you.
    Gil Siegmund May 21, 2011 at 4:21 P.M. PDT

  10. Governor Moonbeam Says:

    Hey Bob Kelly, troll much?

  11. GilSiegmund Says:

    Much Obliged, Governor Moonbeam

  12. GilSiegmund Says:

    Dr. Robert Houchin, I couldn’t agree with you more.

  13. unilselsie Says:

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  14. A resolution for 2012: Fixing California’s public pension problems | California Pension Reform Says:

    [...] true pension debts approach $500 billion. In 2009, former CalPERS head actuary Ron Seeling called the state’s pension systems “unsustainable” and said we have to “find some other solutions.”  Read the entire article . . [...]

  15. Gil Siegmund Says:

    July 17, 2012

    Please refer to my February 12, 2010 and May 21, 2011 above.
    Mr. Bob Kelly and others–my facts may not have been empirically based; however, it is noteworthy that those states, (Wisconsin–New Jersey) and other states that have taken action to modify their public employees’ exorbitant pensions and pension bargaining efforts will not need to declare bankruptcy–not only states but cities now (three in California alone)–I mean someone cleaning toilets in a city being paid $62.00 per hour (source Fox Cable News on July 17, 2012)–also fireman working overtime and getting twice their salaries(also Fox Cable News July 17, 2012—as I said on February 12, 2010, there is no other solution than to modify public employee pensions and benefits or go broke. If we raise taxes, as Governor Brown seeks to do in the November election, our economy is further weakened, and we already have enough businesses either leaving California or not placing a business or corporate office here at all. It is my understanding that the AAA Automobile Club moved its entire call center to Arizona–the last time I heard.
    And yes, some public employees do retire at 50 and do receive
    up to 90 percent of their salary plus complete, free medical care
    for life—MULTIPLYING THAT OUT–NUMBER OF RETIREES TIMES YEARS RESULTS IN STATE AND CITY BANKRUPTCY
    UNLESS PENSION TERMS ARE SUBSTANTIALLY CHANGED.
    It is now a known fact that the average salary for all too many government employees is substantially higher than if they worked in the private sector. Whatever happened to the CIVIL SERVANT IDEA–WHEN GOVERNMENT EMPLOYEES WERE PAID LESS, OFTEN DID AN EXCELLENT JOB, AND HAD GREAT JOB SECURITY?
    By the way I am a retired government employee–and it would be in my personal interests to argue for all I can get and other retirees can get–however, it would not be in the interests of our people, as a whole, nor in the overall interests of our beloved, exceptional United States of America–especially in this time of depression for some who continue to be out of work–a depression for them–a recession, a bad one for us.

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