California among few states bargaining pensions

In pension-troubled Rhode Island the state auditor general is recommending the end of something that makes California unusual among states: allowing labor unions to bargain for pension and retiree health benefits.

Bargaining is blamed by critics for a “bidding war” that drove local government pensions in California to unaffordable levels. New benchmarks were set when CalPERS sponsored legislation, SB 400 in 1999, giving state workers a major pension increase.

A nonpartisan watchdog, the Little Hoover Commission, said SB 400 started “a chain reaction of retroactive pension increases granted to public employees up and down the state” and is regarded as “pivotal” in the pension crisis.

Last week the auditor general of Rhode Island, where the receiver in bankrupt Central Falls is said to be cutting the pensions of some retirees by 50 percent, proposed a series of changes to prevent more city bankruptcies in the nation’s smallest state.

The fourth of 12 recommendations by auditor Dennis Hoyle is that cities “seek to remove pensions and retiree health benefit provisions from collective bargaining” and instead set them through “local ordinances or charter provisions.”

State worker pensions and retiree health in Rhode Island are set by law, not bargained. Benefits are more uniform and visible, said the auditor, and there is less tendency to negotiate current savings by offering more retiree benefits in the future.

An end to bargaining is not among the pension reforms recommended by Little Hoover in February or by the final report of a governor’s commission on public employee retirement in January 2008.

Collective bargaining by public employee unions for wages and working conditions, not just pensions, moved into the national spotlight earlier this year in Wisconsin.

A new Republican governor, Scott Walker, obtained legislation limiting bargaining and union dues collection, despite demonstrations, a quorum-busting walkout by Democratic legislators, lawsuits and recall elections.

About 30 states allow collective bargaining by public employees. But only a few allow bargaining for retirement benefits — notably California, Vermont and New Jersey in a survey by the National Association of State Retirement Administrators in 1998.

Pension bargaining is rare enough that a paper taking a broad national look at the impact of unions on public pension benefits assumes that the pension benefits are legislated, not bargained.

“The generosity of the pension formula does not appear to differ between states with high levels of unionization and those with low levels,” said a paper issued by the Center for Retirement Research at Boston College in July. “This result is most likely explained by the fact that pensions are legislated, not bargained …”

The best-known provision of the landmark SB 400 sponsored by the California Public Employees Retirement System gave the Highway Patrol a 50 percent pension increase.

A pension based on 2 percent of final pay for each year served at age 50 was increased to 3 percent at 50. The increase was bargained by the Highway Patrol union before being enacted by the legislation.

Critics say “3 at 50” spread as local governments were asked during contract bargaining to match competing employers. The pension formula in SB 400 became the standard for many urban police and firefighters.

Now after a recession and stock market crash took a big bite out of pension fund investments, government pension costs are going up to cover the losses — particularly in local government, where most of the budget is spent on personnel.

One of the issues is whether unions will agree to enough “give backs” in bargaining to reduce pension costs, which are growing while funding for other programs and services is being cut.

The Highway Patrol led the way among state worker unions with higher employee payments and lower pensions for new hires. Other unions made similar agreements, trimming the state CalPERS payment by $400 million to $3.5 million this year.

A spokesman for a union coalition said “dozens and dozens of concessionary packages” are being negotiated in local government. But he estimated that 80 percent of the local pension plans are adequately funded.

“Despite the fact that we are going through the greatest economic downturn since the Great Depression most of the pension funds are still actuarially sound,” said Dave Low, chairman of Californians for Retirement Security.

He pointed to a report last February by a major credit rating firm, Fitch, that said a funded ratio of 70 percent or above is considered to be adequate and a funded ratio of less than 60 percent is weak.

Low said the view that SB 400 touched off a bidding war in local government contract negotiations seems to be “anecdotal” rather than based on before-and-after statistics.

“I have a difficult time swallowing the argument until someone actually shows me some facts,” he said.

Some local government officials are bypassing bargaining and going to voters with ballot measures. Last November voters in six cities and one county approved a wide range of pension proposals.

Late last month more than 70 percent of voters in San Luis Obispo approved two pension measures. One eliminated a city charter requirement for a public vote on terminating a CalPERS contract or reducing pension benefits through bargaining.

The other measure eliminated binding arbitration for police and firefighters, approved by voters a decade ago. Voters in San Jose and Vallejo approved eliminating or restricting binding arbitration last year.

Only about 20 California cities are said to have binding arbitration. When bargaining deadlocks, a neutral arbitrator picks either the management or labor proposal with no modifications.

Opponents say arbitrators tend to pick the proposal of labor, which uses arbitration as a threat in bargaining. Backers say the selection process ensures that arbitrators are neutral and that binding arbitration is favored by private-sector employers.

In November San Francisco voters will choose between a cost-cutting pension measure backed by Mayor Ed Lee and labor and one backed by Public Defender Jeff Adachi, whose previous pension proposal was rejected by voters last fall.

The Modesto City Council placed three pension advisory measures on the November ballot: Should new hires be switched to a 401(k) plan? Should pensions be based on one year’s pay rather than a three-year average to prevent “spiking” or boosting? Should retirement age be increased to mirror the private sector?

Proposals for a statewide pension reform initiative next year are fading, apparently still lacking funding. San Diego Councilman Carl DeMaio is scrambling to get the signatures needed to place a 401(k) plan for new city hires on the June ballot.

San Jose Mayor Chuck Reed has talked about placing a pension reform measure on the local ballot next year. He thinks reducing the pensions current workers will earn in the future is necessary, which could trigger an important court test if approved by voters.

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 26 Sep 11

11 Responses to “California among few states bargaining pensions”

  1. Rex The Wonder Dog! Says:

    “Despite the fact that we are going through the greatest economic downturn since the Great Depression most of the pension funds are still actuarially sound,” said Dave Low, chairman of Californians for Retirement Security.
    —-

    LOL…what a low class liar. Nearly every public pension fund in this state is BK-CalTURDS and CalSTRS are both under 50% funded.

  2. Rex The Wonder Dog! Says:

    He pointed to a report last February by a major credit rating firm, Fitch, that said a funded ratio of 70 percent or above is considered to be adequate and a funded ratio of less than 60 percent is weak.

    More lies.

    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. Pension experts say funding levels below 80 percent place the long-term viability of pensions in jeopardy and are nearly impossible to overcome without massive borrowing, painful tax increases, cuts to benefits and increased contributions. 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.

    Both CalTURDS and calSTRS are “critical”.

  3. Reilleyfam Says:

    BARK, BARK, BARK – that’s all you lame wimpy pension haters ever do. Nothing will change – best legislature money can buy.

  4. spension Says:

    Pensions are fine, but assuming future annual gains of 7-8% is unrealistic. Annual gains averaged over 30 years can and have fallen to around 4%, for example, from about 1966-1996.

    I don’t think it is a public sector/private sector issue. The private sector has gone for DC plans after the Corporate DB plans were raided in the Boesky etc corporate takeovers in the 1980s. DC plans are more costly (they provide a smaller benefit per $ contributed) than DB plans do, because everyone in a DC plan must plan to live until about age 101.

    In a DB plan the average date of death is 86 or so, and those who live between 86 and 101 are funded by those who die before 86.

    But the public DB plans have assumed future returns that are unrealistically high, and put taxpayers on the hook for the difference. Had the CalxxRS systems guaranteed lower benefits commensurate with 3-4% yearly gains from the markets, taxpayers would not now be on the hook.

  5. Rex The Wonder Dog! Says:

    DC plans are more costly (they provide a smaller benefit per $ contributed) than DB plans do,
    ==
    SOURCE for that comment

    /
    In a DB plan the average date of death is 86 or so, and those who live between 86 and 101 are funded by those who die before 86.

    ==
    Mortality rates do not change by the pension plan, in CA it is around 81 for men and 85 for women.

  6. Ted Steele Says:

    Rex the poodle– poor old sleepy troll from the orange county register—- zzzzzzzzzzzzzzzzzz—— clueless.

  7. spension Says:

    The point is not mortality rates, but the fact that any one person has a 1% chance of surviving from 65 to 101, and should plan for that possibility in their DC plan. You can adjust if you want to use the age for a 5% chance for survival or 10% chance for survival.

    In a pooled plan with thousands or hundreds of thousands of contributors, the probability of everyone surviving from 65 to 101 is truly infinitesimal, like 10^{-1000} or so… similar numbers for the 5% or 10% survival chance.

    So a pooled/DB pension system does *not* have to save for *every* member surviving until age 101.

    A pooled/DB pension really can plan on the average member dying at age 86 or so, and save just enough money for that, which is a whole lot less money than saving for survival until 101.

    DB systems *properly run* are simply more economical than DC systems. And that is not including another important effect… the constant contributions in `steady state’ from existing employees have another stabilizing effect, and allow durations longer than 30 years to be used for averaging over stock market performance.

    DC plans… you have only 1 contributor for 2 or so retirees, who quits contributing when they retire, so the instabilities are greater, and more money must consequently be salted away to guard against bad investment periods, compared to DB.

    But the DB plans have been mismanaged in the California public system, putting the taxpayer on the hook for the difference, and also giving DB plans a false reputation for being extravagant. The extravagance was in the promised benefits of California’s public systems, which defied all good financial planning.

  8. Matt Block Says:

    Are there any financial repercussions for a city to opt out of PERS?

  9. Matt Block Says:

    Are there any financial repercussions to a city that opts out of PERS?

  10. SeeSaw Says:

    Yes there are–millions of them. Log onto the Pacific Grove website, and you will find out.

  11. Doug Says:

    Hello Ed,

    You mention:
    “About 30 states allow collective bargaining by public employees. But only a few allow bargaining for retirement benefits — notably California, Vermont and New Jersey in a survey by the National Association of State Retirement Administrators in 1998.”

    Do you have a link of this survey? I have visited the NASRA website but cannot locate said survey. Thanks.

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