Pension reform: New wave of proposals

San Diego Mayor Jerry Sanders dropped the big one on public pension advocates last week, proposing that all new city employees except police and firefighters get a 401(k)-style individual investment plan instead of a pension.

The mayor’s announcement that he plans to put an initiative on the next city ballot is the most far-reaching proposal to emerge so far after voters approved seven of eight local pension reforms this month.

The Los Angeles city council last week put a measure on the March 8 ballot that would cut police and firefighter retirement costs. After San Francisco voters gave pension reform its lone setback this month, officials there reportedly are discussing new plans.

At the state level, two reform groups are talking about an initiative. University of California Regents may act on pension reform next month. State worker union holdouts will test incoming Gov. Jerry Brown in negotiations for new contracts.

And the possibility that public pensions will become a federal issue has CalPERS officials planning a trip to Washington, D.C., next month to begin staking out a position in case there is a national debate.

San Diego voters rejected a Sanders-backed proposal for a sales tax increase linked to pension reforms. Controversial deals in 1996 and 2002 lowered city pension contributions below actuarially required levels, while raising pension benefits.

“Eliminating pensions is a radical idea in municipal government, but we must acknowledge that we cannot sustain the current defined-benefit system, which was designed in another era for completely different circumstances,” Sanders said in a news release.

“Public employees are now paid salaries comparable to those in the private sector, and there’s simply no reason they should enjoy a far richer retirement benefit than anyone else,” he said.

A spokeswoman said the mayor’s proposal, not yet drafted, exempts police and firefighters to avoid “severe recruiting issues.” The unsuccessful Republican candidate for governor, Meg Whitman, made a similar exemption in her proposal to switch new state workers to 401(k) plans.

The president of a pension reform group, which is planning a third attempt to put an initiative on the ballot, said a question added to a recent private poll found that exempting police and firefighters from a 401(k) proposal caused a sharp drop in support.

“The luster has gone off public safety (workers),” said Marcia Fritz, president of Californians for Fiscal Responsibility.

A campaign against a 401(k) proposal briefly backed by Gov. Arnold Schwarzenegger in 2005 featured police and firefighters, who traditionally have strong public support.

Most private-sector employers that offer retirement benefits now use 401(k) plans rather than pensions. The employer makes a “defined contribution” and avoids the long-term debt of pensions. Workers have a retirement plan easily shifted to a new employer.

A 401(k) plan also shifts the risk of investment loss from the employer to the employee. Pensions depend on investment earnings for much of their revenue, 75 percent for many public plans.

One reason public pension costs are going up, diverting money that could be spent on other programs, is huge investment losses in the stock market crash two years ago.

Critics contend that optimistic earning forecasts conceal massive public pension debt. A Stanford graduate student study said state pension debt is $500 billion if a risk-free bond rate is used, not the $55 billion reported using risky diversified investments.

Fritz argues against switching new government employees (current workers have pension rights protected by the courts) to a pure 401(k) retirement plan. Some of the problems she cites:

Most public employees in California do not receive Social Security, a backup if investments fall short. Closing a pension plan ends revenue from new members, driving up employer costs. Pure 401(k) plans in Alaska. Colorado and Nebraska have not provided enough retiree income.

Fritz prefers a “hybrid” plan that combines smaller pensions with a 401(k)-style individual investment plan. She thinks that an initiative is needed, because public employee unions are unlikely to agree to the necessary long-lasting reforms.

Her group has not been working with the new Think Long Committee for California backed by $20 million from financier Nicolas Bruggruen. Its broad agenda for an overhaul of state government reportedly includes “runaway pension costs.”

Gov. Arnold Schwarzenegger got two-thirds of unionized state workers to agree to cut pension costs. Current workers contribute more toward their pensions, new workers get lower pensions, and the sweetener is a top-step pay raise after two or three years.

Unions representing the other third held out, hoping for a better deal from the new administration. But Jerry Brown was an early advocate of pension reform, proposing lower benefits for new hires in the final budget of his previous term as governor.

His argument for a “two-tier” system in 1982 was that pensions and Social Security gave some retirees more income than they earned on the job.

UC Regents may vote Dec. 13 on a plan to begin closing a $21 billion unfunded retirement liability. Unions must approve parts of the plan to increase employer-employee contributions, reduce retiree health coverage, and extend new worker retirement ages.

A ballot measure to cut Los Angeles police and firefighter retiree costs has union support. Pensions for new hires would be lowered. Current workers would contribute 2 percent of their pay toward retiree health care. Critics say more savings are needed.

Unions and others reportedly spent more than $2 million to defeat a San Francisco ballot measure that would have increased worker pension contributions and cut health care coverage for dependents of current workers.

But the ballot measure sponsor, Public Defender Jeff Adachi, told a newspaper columnist he may try again. Unions said they are working on their own plan to cut pension costs in San Francisco.

A federal lobbyist, Don Marlais, told the California Public Employees Retirement System board last month that Congress and federal officials are beginning to be affected by “the relentless drumbeat of negative press” about public pension plans.

“We assured them and congressional staffers that public pension plans are sound and they are not looking for a bailout,” Marlais said.

Two CalPERS officials, chief executive Anne Stausboll and external affairs director Patricia Macht, are scheduled to go to Washington next month to gather information about the national pension situation.

If there is going to be a federal discussion of long-term retirement security, as some expect, CalPERS wants to be ready to participate, possibly with guidelines to be considered by the board next spring.

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 22 Nov 10

22 Responses to “Pension reform: New wave of proposals”

  1. Dr. Mark H. Shapiro Says:

    We all know how well 401K pension have done over the past decade. Great idea mayor.

  2. jskdn Says:

    A defined-contribution plan doesn’t have to be invested in an individually owned and managed 401k with all the known risks and management expense inherent in those. Those contribution could also be pooled into a shared risk, professionally managed retirement fund that paid out benefits based upon a safe averaging of return over time applied to the constant time-value of money of a beneficiaries contributions to the fund.

  3. Algernon Moncrief Says:

    WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.

    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 mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.

    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.

  4. roger Says:

    What makes cops & fire so special? They are the reason we are in this mess. $100K @ 50 years old is ridiculous!!!

  5. Tough Love Says:

    THREE separate comments below:

    (1) Quoting ….” San Diego Mayor Jerry Sanders dropped the big one on public pension advocates last week, proposing that all new city employees except police and firefighters get a 401(k)-style individual investment plan instead of a pension. The mayor’s announcement that he plans to put an initiative on the next city ballot is the most far-reaching proposal to emerge so far after voters approved seven of eight local pension reforms this month.

    FAR REACHING MY FOOT. (A) SAFETY WORKERS’ PENSIONS ARE THE BIGGEST OFFENDERS, AND (2) CHANGING PLANS ONLY FOR NEW EMPLOYEES DOES NEXT TO NOTHING FOR 20-30 YEARS UNTIL THESE NEW EMPLOYEES BEGIN TO RETIRE. IF WE SIMPLY CANNOT REDUCE PENSION & BENEFITS FOR (FUTURE YEARS OF SERVICE ONLY) FOR CURRENT WORKERS THEN WE HAVE TO OUTSOURCE 90+% OF THEM THO END THE EMPLOYMENT RELATIONSHIP AND WITH IT FUTURE PENSION GROWTH.

    (2) Quoting …“Eliminating pensions is a radical idea in municipal government, but we must acknowledge that we cannot sustain the current defined-benefit system, which was designed in another era for completely different circumstances,” Sanders said in a news release. Public employees are now paid salaries comparable to those in the private sector, and there’s simply no reason they should enjoy a far richer retirement benefit than anyone else,” he said”

    SANDERS ABOVE COMMENTS ARE RIGHT ON THE MARK.

    (3) Quoting …” Fritz argues against switching new government employees (current workers have pension rights protected by the courts) to a pure 401(k) retirement plan. Some of the problems she cites: Most public employees in California do not receive Social Security, a backup if investments fall short. Closing a pension plan ends revenue from new members, driving up employer costs. Pure 401(k) plans in Alaska. Colorado and Nebraska have not provided enough retiree income.”

    MS. FRITZ HAS GOOD INTENTIONS, BUT SHE IS WRONG HERE. THERE IS SIMPLY ZERO JUSTIFICATION TO GIVE PUBLIC SECTOR WORKERS (WHOSE CASH PAY IS EQUAL TO OR BETTER THAN THEIR PRIVATE SECTOR COUNTERPARTS) BETTER PENSIONS & BENEFITS….. PERIOD …. BUT ESPECIALLY WHEN 80-90% OF IT IS FUNDED BY THE PRIVATE SECTOR TAXPAYERS.

    IT MUST NOT BE A FUNCTION OF THE PUBLIC SECTOR EMPLOYER TO ASSURE THAT THEIR EMPLOYMENT SINGULARLY PROVIDES FOR THEIR EMPLOYEES’ RETIREMENT NEEDS. WHAT HAPPENED TO SAVING ON YOUR OWN …. JUST LIKE PRIVATE SECTOR TAXPAYERS MUST DO ?

  6. Rex The Wonder Dog! Says:

    We all know how well 401K pension have done over the past decade. Great idea mayor.

    ===================
    \And your solution is to push the liability of DB pensions onto those who don’t have them, the working class of America who have the 401K DC’s.

    Great idea.

  7. Rex The Wonder Dog! Says:

    What makes cops & fire so special? They are the reason we are in this mess. $100K @ 50 years old is ridiculous!!!

    ==================
    They are by far making the most in salary and OT, so they should be self funding their pensions, not taxpayers.

  8. SkippingDog Says:

    Rex the Dog just hates cops. I really can’t understand why, but his comments are always consistent.

  9. Tough Love Says:

    Skipping Dog,

    Speaking of “hate”, you just “hate” the fact that people challenge your righteous attitude that (with a cash pay level already way in excess of those in the Private sector), you are also entitled to 4-6 times the pension.

    No who’s the hater ?

  10. SeeSaw Says:

    The Mayor’s plan would not fly if SD was in CalPERS. CalPERS rules do not allow new employees be placed on a DB plan only if the entity in question is already a member of CalPERS, with a DB plan. That is what Meg was going to do with miscellaenous employees. She would have had to use the initiative process and was planning to use her own money. Glad we don’t have to see her again for a while.

    This SD Mayor is sadistic. Just like Meg. I don’t wish him well with his petty plan.

  11. Tough Love Says:

    You’re already retired and collecting, but you never know…. below is a perspective from Mike “Mish” Shedlock (a registered investment adviser representative for SitkaPacific Capital Management ) at http://globaleconomicanalysis.blogspot.com

    “Fraudulent Promises Need Not Be Kept

    Many will say we cannot renege on promises. The reality is those promises are invalid because they came about as a result of fraud. Politicians got into bed with public unions by making promises they knew they could not keep, in return for endorsements from unions to get elected.

    The entire vote-buying process by unions is fraudulent. No one represented taxpayers, even though public workers are supposed to be public servants.

    It is not at all wrong to take away promises made via fraudulent vote buying, influence peddling, and bribes. The same applies to public union wages as well.”

  12. SeeSaw Says:

    See the documentary film, “Inside Job”. I guarantee you will learn who the real economic culprits are.

  13. drywit Says:

    Hey Tough: public pensions are PRE-funded for the next 30-50 years. Adopting reforms now makes sense for the time when POTENTIAL unfunded liability may show up. A lot can change in the markets between now and then…between now and 2015…

  14. fIA Says:

    Exempting public safety, the largest liability will ensure all the politicians continue to get contributions from them to finance their campaigns.

    A cap of $100K would actually help, people making more than that can afford to save through their own 401K plan or IRA.

  15. ChangeCALPERS Says:

    The pension problem is easy to solve. Close CalPERS to any new employees and any losses in CalPERS investments should not be paid by cities. Losses would translate to lower pensions to existing retirees.

    Also public safety and public employee union should not be allowed to campaign for candidates.

    The problem with CalPERS is that the losses get put on the taxpayer. That is not fair.

  16. Tough Love Says:

    Dear Drywit, Keep Dreaming. Most will be up to the neck in 100% unpayable promises withing 3-10 years.

    And just WHY should the younger Union members keep throwing money into a hole (for the older retired and soon-to-be-retired members) when THEY won’t even get their contributions back.

    The pensions for OLDER group need to be frozen at the current level … with zero future growth …. for the younger member to even have a prayer of getting a reasonable pension.

  17. CA Expatriate Says:

    No one has the courage to propose that government workers are mandated/forced/coerced under the full weight of the IRS, as all private sector employees and self-employed people are, to particiate in the government-run ponzi scheme Social Security. Government employees continue to want pensions at age 55 that are about 4-5 times the maximum of social security at age 67 for about the same contribution. The press, forgetting that SS funds are stolen from the trust by the government and do not receive any compounded interest appreciation, say that SS is underfunded. The unions will do anything to elect people to avoid getting SS. No one even has the guts to suggest it. Proof of my point.

  18. SeeSaw Says:

    What on earth are you talking about TL? No young public employee is paying anything for my current retirment. New and currently working CalPERS members do not lose their CalPERS contributions. If their employment is ended prior to retirement, the contributions are refundable. You are foolish to predit doom that has never happened.

  19. Tough Love Says:

    Seesaw, There is a very large annual payout from Calpers. That money comes from Calpers (currently significantly underfunded) assets plus investment income (if any) plus annual contributions from employers and employees.

    Do you really think the employee contributions are SET ASIDE just for them?
    No, they are part of the funds that pay for you current retirement and those that will forllow you. If cannges aren’t made, these yourger employees will be lucky to just get their contributions back (w/o interest).

  20. SeeSaw Says:

    TL: That is what they have actuaries for. CalPERS has existed since the early 30’s and they have never defaulted on the members. It knows exactly what the payout is and what it needs to bring in, to remain sustainable. Why do you insist on spreading so much gloom and doom? Changes have been in the process for a while now, and people like you talk as though nothing has been or is being done. After what the big Wall Street banks did to this country and many countries around the world, recovery is going to take time.

  21. Concerned tax payer Says:

    There is absolutely no justification for public safety employees to be guaranteed these outrageous pension benefits. I’m not sure how cops and firefighters can routinely make 150k or more working in any single year let alone for the rest of their lives with no investment risk. It’s just not what they are worth. This type of pension scheme has bankrupted our automobile industry and soon will bankrupt our government. Assuming the pensions will return 8%/yr is silly. It’s also ridiculous that the government is able to hide their obligations by using this 8% discount rate when corporations are forced to use 30 year AAA rated corporate bonds yielding in the sub 5% per FASB. Why is the government different? It is also outrageous to have these union contract talks in close doors when both sides of the negotiating table are benefiting from these unsustainable future promises which will bankrupt the system and force higher taxes for all, except for the policeman who claim disability and thus receive tax free pensions. Public unions need to be broken up.

  22. Facebook’tan para kazanmak Says:

    “See the documentary film, “Inside Job”. I guarantee you will learn who the real economic culprits are.”

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