Pension reform allows cities to bypass bargaining

Pension reform approved by the Legislature last week gives many cities new cost-cutting power that some have been unable to win from public employee unions at the bargaining table.

The legislation does not cover several of the state’s biggest cities that have independent retirement systems, some with well-publicized pension problems: Los Angeles, San Diego and San Jose.

But for most cities the legislation extends retirement ages, caps pensions and gives new hires a lower pension by imposing a single formula (rolling back increases after SB 400) instead of allowing bargaining on a menu of different formulas.

The legislation calls for a 50-50 split of “normal” pension costs between employers and employees. As current contracts expire, if unions do not agree to equal cost sharing in bargaining by 2018, cities can impose an employee contribution increase.

A survey of city managers earlier this year by the League of California Cities found that 47 percent of the responding cities had bargained lower pensions for new hires and 64 percent had bargained increased employee pension contributions.

“While not perfect, the League views this legislation as a substantial step forward in implementing pension reform largely in keeping with the League’s own comprehensive pension reform principles,” the League directors said in a statement last week.

The League agrees with eight of the 10 points in the legislation, AB 304, prepared in private by Democratic legislators and Gov. Brown. He asked that two of his original 12 points be omitted for possible action later: retiree health care and pension boards.

The cities dislike a cap on high-end pensions for new hires, preferring a “hybrid” plan with a pension providing at least 70 percent of final pay. And cities think pension forfeitures should be limited to felonies for pension fraud, not broader activities.

League of Cities policy aligns with eight of 10 reforms

The legislation limiting bargaining for pensions moves California closer to the mainstream.

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.

Critics say bargaining resulted in “bidding wars” that drove local government pensions to unaffordable levels. New benchmarks were set when tCalPERS sponsored SB 400 in 1999 giving state workers a major pension increase.

Three formulas for pensions, a ladder for step-by-step increases, were added for local governments by AB 616 in 2001. Although not a sponsor of the bill, CalPERS offered local governments an incentive for boosting pensions with the new formulas.

The California Public Employees Retirement System said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier for the employer to pay for the more generous pensions.

The pension formulas specify an employee contribution, usually 5 to 8 percent of pay, that can be changed through bargaining. The employer contribution, often at least twice what employees pay, is adjusted annually as pension fund levels rise and fall.

During bargaining, many employers agree to pay part or all of the employee contribution, sometimes in lieu of a pay increase. The practice is common enough to have its own bureaucratic term, EPMC or “employer paid member contribution.”

The president of a pension reform group said AB 340, though an “important step to reform,” should have had a “hybrid” plan making employees share the risk of investment losses and a constitutional safeguard against a rollback by future Legislatures.

“The provision requiring that almost all public sector employees pay half the cost of their pensions is the most significant of the reforms and will provide both immediate and long-term savings,” Marcia Fritz of the California Foundation for Fiscal Responsibility said in a news release.

If employees increase their pension contribution, employers can reduce their contributions by a similar amount

Prodded by a record 100-day state budget deadlock, the largest state worker union agreed two years ago to raise employee contributions from 5 to 8 percent of pay, helping to reduce the annual state payment to CalPERS by about $400 million a year.

On the other hand, the city of Sacramento laid off 16 police officers in July because the police union would not begin paying the employee share, 9 percent of pay. Sacramento firefighters agreed to phase in full payment of their employee contribution.

AB 304 calls for an equal employer-employee split of the “normal cost” for pensions earned during the current year. But most retirement systems have an “unfunded liability” from shortfalls in previous years caused by below-target investment earnings.

For example, last year state miscellaneous workers contributed 8 percent of pay, more than half the 14.4 percent normal cost. But state employers contributed 18.2 percent, an amount that includes a payment for a large unfunded liability.

In a review of the governor’s plan last November, the nonpartisan Legislative Analyst’s Office said employees should share in the cost of the unfunded liability, but doubted that higher employee contributions can be legally imposed on many workers.

“Since increasing current employees’ contributions is one of the only ways to substantially decrease employer pension costs in the short run, the legal and practical challenges that we describe mean that the governor’s plan may fail in its goal to deliver noticeable short-term cost savings for many employers,” said the analyst.

The legislation apparently is designed to clear legal hurdles by changing bargaining law to give employers more flexibility to increase employee contributions. Impasse procedures can be used to impose contribution increases.

A legislative analysis of AB 340 said impasse cannot be used for contribution increases that exceed statutorily required contributions for current employees or half the normal cost for employees hired on or after Jan. 31, 2013.

Local governments have until 2018 to bargain employee contributions that share half of the normal cost. Then imposed increases are limited: 8 percent of pay for miscellaneous workers, 12 percent of pay for police and firefighters.

Importantly, the self-described guardian of pension “vested” rights under contract law, CalPERS, is not warning that requiring employees to pay half the normal cost is likely to be challenged in court.

A CalPERS analysis said only two parts of the plan may raise vested rights issues: barring current employees from purchasing “air time” service credits to boost their pensions, and requiring some members convicted of felonies to forfeit their pensions.

Narrowing an earlier preliminary estimate, CalPERS told legislators the legislation should save employers using its plans between $42 billion to $55 billion over the next 30 years.

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 4 Sep 12

56 Responses to “Pension reform allows cities to bypass bargaining”

  1. Captain Says:

    Without including Reforming CalPERS it’s doubtful this watered down version of the governors plan will save anything. With all the talk of eliminating pension holidays we are still allowing CalPERS to use a variety of accounting gimmicks that essentially create a perpetual pension holiday. We still aren’t fully accounting for cost while continuing to allow CalPERS 15-30 year smoothing policies (debt deferral) isn’t consistent with the spirit of pension reform, nor is their continued pursuit of even higher risk investment strategies which equate to nothing more than gambling with taxpayer Money.

    The problem is just too BIG to accept these impotent bandaids as true pension reform.

  2. Tough Love Says:

    So, will the 50% of “normal cost” be 50% of the well-understated (high-discount-rate, too-liberal-accounting) normal cost, or 50% of the real/actual/developing normal cost ?

    Of course, the unions/workers with press mightily for the former (perhaps paying only 20% of the true REAL cost), but Taxpayers, we must not allow that.

    As new employees, they start out with a clean slate … no unfunded abilities. So any developing unfunded liabilities MUST MUST MUST be 50% paid for by THE WORKERS … and ANNUALLY (not being deferred and allowed to grow into anther nightmare).

    Don’t let them pull the 2-nd act of the play ……. “Public Sector Union/worker Financial Rape of the Taxpayers”.

  3. Tough Love Says:

    Quoting … ” Three formulas for pensions, a ladder for step-by-step increases, were added for local governments by AB 616 in 2001. Although not a sponsor of the bill, CalPERS offered local governments an incentive for boosting pensions with the new formulas.

    The California Public Employees Retirement System said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier for the employer to pay for the more generous pensions.”

    Re that 2-nd paragraph: First time I have heard of that. Not fraud on the part of CalPERS ? If the “inflated” value of the local government’s pension investment fund was not backed by incremental REAL assets, then that “inflated value” was but a LOAN, to be repaid (with interest) by Taxpayers via greater future- year contributions.

    And ………….CalPERS PROPER role is to (a) accurately “administer” the Plans per written Plan provisions, and (b) act as a fiduciary in investing and protecting Plan assets. Clearly, that role has morphed into an ADVOCATE for bigger and better pensions for member-participants. Hardly surprising when considering the make-up of the BOARD, and a good reason why the composition of that Board must be radically changed, with member allegiance to the TAXPAYERS.

  4. Tough Love Says:

    Quoting … “Local governments have until 2018 to bargain employee contributions that share half of the normal cost. Then imposed increases are limited: 8 percent of pay for miscellaneous workers, 12 percent of pay for police and firefighters.

    Importantly, the self-described guardian of pension “vested” rights under contract law, CalPERS, is not warning that requiring employees to pay half the normal cost is likely to be challenged in court.”

    Of course CalPERS (acting in it’s IMPROPER role as member-participant ADVOCATE) … see above comment) suggests the 50% sharing, as outlined in the 1-st paragraph above, won’t be challenged…. because IT KNOWS that ..”8 percent of pay for miscellaneous workers, 12 percent of pay for police and firefighters.” … is not even remotely close to 50% of the actual total Plan costs that will develop over time. In fact, both of those percentages are almost certainly less than 25% of the costs that will actually develop.

    See my comment time-stamped 1:36 PM earlier today. That’s why Taxpayers MUST demand that notwithstanding the 8% & 12% caps, the workers must ANNUALLY pay 50% of all unfunded liabilities that develop …….. or, as I said earlier we begin act 2 of ….. “Public Sector Union/worker Financial Rape of the Taxpayers”.

  5. John Says:

    Regarding AB 340, when does the CalSTRS provision to eliminate buying “airtime” begin?

  6. Tough Love Says:

    Quoting …”Narrowing an earlier preliminary estimate, CalPERS told legislators the legislation should save employers using its plans between $42 billion to $55 billion over the next 30 years.”

    Financial estimate should be clear to the reader. IS the above estimate the PRESENT VALUE of the future year savings (and if so, what interest rate was used in calculating that present value), or it it simply the mathematical sum of the year-by-year savings estimates.

    Either way, the estimated savings is very minor in the context of CalpPERS future payout obligations, and certainly not sufficient to delay it’s demise by more than 1-2 years.

  7. SeeSaw Says:

    I would imagine that City Managers or their designees answered this survey–certainly not the employees. Of course the CMs would prefer the hybrid to the cap, because they all make 300-400K+ salaries. The employees certainly do not prefer a hybrid to a full DB plan.

    Those CM’s, that prefer the hybrid plan, obviously did not hear the same presentation by the pension reform experts that I heard last June.: The final analysis was that a new employee, hired with the proposed hybrid plan, would only be able to look forward to a definite 15%-18% of final salary at the time of retirement.

    If you are going to quote the President of a pension reform group, Mr. Mendel, you should at least name that person.

  8. The Spirit Says:

    Very interesting. Strange that no one has addressed the issue of using GASB Rules for funding pensions. GASB only applies to financial statement presentation, not funding. I am for using real values, not artificially manipulated numbers. Pension contributions should be based on long-term estimates, not how well the stock market performed last year. What do you think Captain?.

  9. Captain Says:

    The Spirit Says:
    Very interesting. Strange that no one has addressed the issue of using GASB Rules for funding pensions. GASB only applies to financial statement presentation, not funding. I am for using real values, not artificially manipulated numbers. Pension contributions should be based on long-term estimates, not how well the stock market performed last year. What do you think Captain?.

    “Very interesting. Strange that no one has addressed the issue of using GASB Rules for funding pensions. GASB only applies to financial statement presentation, not funding.”

    Spirit, have you answered your own question? The GASB rules, and I’m assuming you’re referring to the new proposed rules, only change the requirements for reporting purposes. While the change will definitely impact the financial outlook of cities financial statements when they eventually take effect, and hopefully wake up taxpayers and city officials, CalPERS is still in control of the level of debt that is hidden with the help of both their smoothing policy and their union dominated Board of Directors which controls the “Assumed Rate of Return” (and that is a BIG deal). Much of the GASB Exposure Draft has been watered down due in part to CalPERS own lobbying efforts. But…

    Moody’s may pick up where GASB left off: “Moody’s has announced they now believe far more California local governments are in severe financial danger than they thought and have initiated a comprehensive re-appraisal of credit ratings in the state. Many if not most local governments are very likely to get very unpleasant news very soon – and one more nail will be pounded in the coffin of the public’s confidence in the financial management of their elected officials.” http://www.yourpublicmoney.com/

    California is on the verge of an even worse credit ratings (is that even possible) and higher costs for borrowed money. I consider that a positive.

    A friend of mine once told me this: “(regarding current pensions) This is a good example of poor decisions made when pensions were over-funded. The cost of the pension benefit was not really zero back in the nineties and its is not really 50% today. It is 24% then, now, and every year in between. What is not paid in for one year has to be paid in some subsequent year. That’s where we are today. Most of the increases in pension benefits from 75% to 90%, along with grandfathering in past service, were sold on the belief that there would be no additional cost to the employer. What simple minded thinking.”

    What simple minded thinking indeed – and that same thinking continues today. While I accept my friends basic premise I also acknowledge that his assumptions are based on CalPERS returning a consistent 7.75% rate of return. That hasn’t happened over the past several years nor is it expected to happen going forward. CalPERS performance over the past five years ranks dead last for pension systems with over 10 billion in assets (less than 1% returns). That adds significant taxpayer cost which comes in the form of reduced services, reduction in reserves, or the cry for increased taxes to pay for it all.

    “Pension contributions should be based on long-term estimates, not how well the stock market performed last year. What do you think Captain?.”

    I think Calpers should dump their current smoothing policy and use the industry standard 5 years to smooth gains and losses. They should also use a more conservative 6% assumed rate of return. They won’t do it as long as their union dominated Board of Directors dictates how the entire organization is run.

    CalPERS is as corrupt as they come. They can only claim the unrealistic return assumptions by taking on extreme risk levels. And, of course, the unions aren’t concerned about the high risk for massive losses as long as they believe the taxpayers are required to guarantee their gambling losses.

  10. Tough Love Says:

    Captain, Well said, but while dropping the discount rate used in calculating Plan liabilities will indeed scare people into realizing the precarious nature of these Plans, it will also significantly INCREASE funding requirements and hence the bills to already strapped cities (and ultimately to their taxpayers).

    While there are ONLY painful solutions to addressing current unfunded liabilities, notwithstanding current legal interpretations we MUST stop digging the hole deeper (every day as additional accruals are earned) by either (a) hard freezing these excessive DB Plans, and replacing them with DC Plans with a modest taxpayer “match” comparable to what Private Sector Plans grant (about 3% of pay …. plus the employer’s Social Security contribution), or (b) significantly reducing the DB Plan accrual rate for future service …. noting that to bring that accrual rate down to what would be typical in Private Sector Plans (with recognition of the greater value of younger unreduced full retirement ages, and annual post-retirement COLA increases) would require at least a 50% reduction, and perhaps 75% for safety workers.

    California’s Hoover Commission recommended just such actions … reductions in the future service accrual rate for CURRENT workers, and several legal scholars have challenged the entire premise under which the “California Rule” (that pensions for current workers, even for future service, cannot be reduced) developed.

    In the end-game, the intelligent know that the math will govern the outcome, and w/o significant changes those citizens and businesses WITH sufficient funds to pay the very high taxes that would be required to fully fund such promises, WON’T. They will just move away, hastening the Plans’ demise.

  11. spension Says:

    DC plans are *much* more expensive than DB plans, about twice as expensive:

    https://www.imrf.org/press_room/research/2009/better_bang_buck/images/bang_1.jpg

    Much better to put employer and employee contributions into a well managed DB plan. A 3% Employer contribution would go roughly twice as far in providing retirement income in a DB plan compared to a DC plan. A *total* employer+employee contribution of about 17% is needed for reasonable retirement income in a DC plan… so only 10-12% is needed in a DB Plan.

  12. Tough Love Says:

    spension is wrong … and has been shown as such but continues to repeat the same erroreous statement that DC Plans are 2x more costly. What is his agenda ? DB Plan participant… or a participant family member?

    He is wrong because his reasoning ignores that while he assumes much higher sums must be saved to account for the DC Plan participants who live LONGER than their life expectancies, he ignores the remainder that goes to the employee-participants beneficiaries WITHOUT being forfeited upon death as they would be under DB Plans.

    Spension, give it up already. DB Plans don’t work in the Public Sector arena because we will never be able to stop the Public Sector Union/Politician collusion & thievery resulting from the trading of campaign contribution and election support in exchange for favorable votes on pay, pensions, and benefits.

  13. Captain Says:

    Tough Love Says: “Captain, Well said, but while dropping the discount rate used in calculating Plan liabilities will indeed scare people into realizing the precarious nature of these Plans, it will also significantly INCREASE funding requirements and hence the bills to already strapped cities (and ultimately to their taxpayers). ”

    Thanks TL. Regarding the above statement I’m fine with that. Time to wake up the masses, which CalPERS is desperately trying to avoid, and let them decide if they want to tax themselves more – take money from their own nest egg, to support an unsustainable, overblown, and ever increasing cost to fund these ridiculous pension plans. If they don’t then bring on the bankruptcies.

    On a related note there is an excellent Editorial in the Contra Costa Times (from the pensiontsunami.com website): Flawed pension reform bill result of flawed process

    Here is an excerpt:

    “while the pension bill was sold as reform, it wasn’t. It fiddled on the margins, a small down payment on a huge debt. The state has a pension shortfall of, conservatively, $257 billion. That averages $20,700 per California household.

    The California Public Employees’ Retirement System, the largest pension plan in the nation, has about $117 billion of the debt. Yet, by CalPERS’ quickie analysis, released last week, the present value of the savings from the bill was, at best, $15 billion.”
    http://www.contracostatimes.com/news/ci_21466055/contra-costa-times-editorial-flawed-pension-reform-bill

    CalPers earned 1% in FY2011-12, on assets of 239.6 billion. That means they didn’t earn 6.75% of their Assumed Rate of Return which is 7.75%. 239.6B * .0675 = an additional 16.17 Billion in unfunded pension liability. Essentially we are in even worse shape with the so-called pension reform then we were just 1 year ago. It is even worse because some people will assume the problem is being addressed when it really isn’t.

    We’ve added over 16 Billion in taxpayer backed debt obligations while the present value of CalPERS claimed 40-60 billion in savings is really only 15 Billion at best – and that probably assumes the go-forward 7.5% discount rate/return assumption.

    And this is what the Governor is selling as pension reform to help justify additional taxes of between 6.8 – 9 billion per year over the next 7 years. Pension Reform is promising “at best” 15 billion in savings (and they are assuming cities will actually adopt the changes beginning in 2018) while asking taxpayers to tax themselves between 47.6 Billion to 63 Billion.

    That is one CRAPPY deal.

  14. spension Says:

    Well Tough Love, I say: save money by only paying the employee’s pension. Don’t pay pension benefits to others. For example, if the employee leaves their estate to their pet ferret, or to Al Qaeda, you say: the employer should pay for that. I say: no way, only pay pension benefits to the employee.

    Lots of DB plans in the US have *not* followed California’s excess. Here are 6 of them… Social Security and military pensions are 2 more examples…

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    It is simple factually false that all DB plans *always* suffer from the maladies that Tough Love cites. It is simply factually *true* that well-managed DB funds are more economical than DC funds. It also simply *true* that the highest California pensions do *not* go to union members… they go to administrators, professors, and physicians… another fact Tough Love neglects when he rants about unions.

    My motivation is truth, and I strongly feel California’s DB benefit rates got out of hand and benefits for existing vested employees and also retirees must be systematically and carefully reduced.

    Tough Love has never clarified his motivations, nor discussed whether Wall Street, which stands to collect billions of dollars if California moves to DC plans, is paying him.

  15. spension Says:

    Let’s also remember that according to the Wall Street Journal, the median 401(k) in the US has $149,400 in it, but the WSJ says $636,673 is needed for retirement. Thus, the 401(k)’s in the US are… 149400/636673 = 23.5% funded, which is far worse than the DB plans even in California.

    http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html

  16. Tough Love Says:

    spension, would you please stop incorrectly telling ME what I’m saying.

    I’ll make it simple for you … take the $ contribution that would go into your beloved DB Plan (that contribution being equivalent to what Private Sector workers typically get from their employers… and no more) but put THAT $ contribution into a DC Plan … so that the workers & politicians can’t collude to change the game and screw us taxpayers by enhancing the promised benefits as they HAVE and will CONTINUE to do at every opportunity in a DB Plan.

    And, I don’t give a hoot if the same $ contribution in a DC Plan buys the workers a smaller retirement annuity. Public Sector workers have eminently proven time & again that they cannot be trusted in DB Plans …. gaming the system at every opportunity..

    spension…………. I’m convinced that you or a family member is now or will benefit from current participation in a Public Sector DB Plan …. and you are doing your darnest (via your endless inaccurate comments bashing DC Plans) to lessen the possibility that your DB Plan be frozen (as it should be) and replaced with a DC Plan.

  17. Tough Love Says:

    spension … and since you asked, I do not make one dime (directly or indirectly …. in ANY way) from DC Plans.

  18. Tough Love Says:

    Quoting spension ….. ” Thus, the 401(k)’s in the US are… 149400/636673 = 23.5% funded, which is far worse than the DB plans even in California.”

    That just proves you’re an idiot. By definition 401K Plans are ALWAYS 100% “funded”

  19. Depressed Says:

    Hey TL knock off the idiot stuff. I usually enjoy your posts.
    Yeah you’re technically right that a 401k is always fully funded because that’s all you got and that’s all your going to get. What Spension is saying is that you need on average the $600k to retire on, I.e. your fund, and that the average is way below that. It’s going to be nasty when all the boomers retire at only a quarter of what they need.

  20. Tough Love Says:

    Depressed….. yea, I got carried away. I know what he meant, but he if he’s a smart as he claims, he should state what he means correctly.

  21. Pro-Pension Says:

    I don’t follow some of what you’ve said, but I would like to point out that most public sector employees are not even represented by unions. Also, you oversimplify the issues. This is not something we are going to resolve with one bill or in one fiscal year. As with Social Security & everything else in this economy, PERS is in trouble.

    I think it is difficult for private sector employees to understand it from the the public sector’s point-of-view. Not to say we need to do more, I am certain we will make more and more changes so that we Baby Boomers will have nothing to look forward to in our old age, after paying in to these systems all our lives.

    Yes, my husband has worked hard as a public employee for more than 20 years, and he will continue to do so for another 17+. I’m not ashamed to say so either, I’m proud of him.

    Think about the fact that many public employees reach the highest pay step & receive anywhere from 0%-3% maximum for wage increases. This is far below than employees receive in the private sector. Think of the unpaid furlough days they ahve to take, I am very thankful he doesn’t work for the State. Imagine not receiving a paycheck for months, or being payed at minumum wage!

  22. SeeSaw Says:

    It is certainly a fallacy to state that CalPERS is union controlled. CalPERS is not a union and more of the beneficiares were non-union workers, when they were active, than were those who had belonged to unions. Once an active retires, there is no more union connection, unless one elects to continue paying dues–I don’t know any retiree that does that. There are only three of 13 CalPERS Board members with current or past connections to unions.

  23. spension Says:

    Penn Specialty changed the rules and started skimming 2.4% from its DC plans… I guess that is just fine with you, Tough Love. Somehow greedy behavior in the DC sector doesn’t bother you, nor do the highest pensions at the top of the ladder in California… which do not go to union members.

    Once again, plenty of DB plans in the Country do *not* suffer from the excessive benefits that California suffers from. You keep overlooking that fact, Tough Love. You claim that all DB plans get out of control, but here are 6 that did not:

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    BTW, 401(k)’s were *never* intended to be the sole source of retirement benefits. Back in the 1970’s when they were started, a mix of pension, 401(k), and SS was presumed. In fact my husband is in a DB plan… in the private sector. In fact it is 1% at 65. It is 100% employer funded. But he also has a 401(k), to which we maximize payments, as we do to my DC plans.

    But his corporate DB plan is a way better deal for the contributions, that is where I learned about the efficiency of DB plans.

    Tough Love, you evaded my point… do you make any money in any way from Wall Street, directly or indirectly. I make nothing from DB plans and my husband is in the private sector.

  24. Tough Love Says:

    Quoting …”Tough Love, you evaded my point… do you make any money in any way from Wall Street, directly or indirectly.”

    NO.

    I don’t know what Penn Specialty did, but I’m sure your choice of the word “skimming” is not accurate. There will always be a FEW companies that abuse discretion …. unlike in Public Sector DB Plans where ALL connected parties collude to abuse it (with the assistance of our self-serving politicians) at every chance they they get.

    We’ll never stop these thieves (the Unions, the workers, and the politicians) from screwing the Taxpayers via the current DB Plan structure commonly used.

    That’s why it must end … and for CURRENT, not just new workers.

  25. spension Says:

    But here are 6 DB plans that have not had California’s type of abuse…

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

  26. Tough Love Says:

    spension …. 20 to 1 that study was funded with Public Sector Union money.

    So one-sided, it’s obvious.

  27. spension Says:

    For you, any report that presents a public DB plan that is not in dire straights like those in California by definition is one-sided.

    Not a matter of mathematical truth with you, merely a matter of religion, fear, and superstition.

    And it doesn’t matter to you that the biggest pensions in the public sector do *not* go to unions. You don’t rant or complain at all about the professors, administrators, and physicians who get outsized California pensions. That is just fine with you, Tough Love. Only unionized folks who get big pensions bug you.

    I think *all* public pensions, unionized or not, in CA got too high and need to be cut.

  28. SeeSaw Says:

    By whose standards, Spension? It takes 34% of my take-home pension each month to fund the medical insurance premiums for me and my spouse. Ninety-eight percent of CalPERS retirees make $36,000 yr. or less. Maybe we should limit you to what you have now in your own DC plan–no more deposits for you–you don’t need any more, according to ME..

  29. spension Says:

    Certainly California’s DB pension payouts are too high according to Gov. Brown & the State Legislature’s standards… they changed 3@50 to 2.7@57, and other higher formulas to 2%@62.

    Some of the systems among the 6 I point out have less than 2%/year payouts.

    Saying 98% of CalPERS make less than $36,000/yr is not probative, because you make no mention of *service years*. Frankly anyone who retires earlier than 55 and gets more than $36,000/year is getting too much by my standards.

    As for medical costs: the US has the highest medical costs in the world, and ranks 37th in the world in medical system performance. Blaming that problem on the California pension system is misplacement.

  30. Tough Love Says:

    quoting spension …”And it doesn’t matter to you that the biggest pensions in the public sector do *not* go to unions. You don’t rant or complain at all about the professors, administrators, and physicians who get outsized California pensions. That is just fine with you, Tough Love. Only unionized folks who get big pensions bug you. I think *all* public pensions, unionized or not, in CA got too high and need to be cut.”

    FINALLY, we agree on something. I never said I though only Union plans were excessive ? As you said, it’s ALL Public Sector DB plans .. and (when compared to Private Sector Plans) all with greater per-year-of-service factors, much earlier full (unreduced) retirement ages, and with Post-retirement COLA increases… combining to result in pensions the taxpayer paid-for share of which is ROUTINELY 2,4, (even 6 times for safety workers) greater in value at retirement than those of similarly situated Private Sector workers. And this excess (being “formula” driven) exists at ALL salary levels, from the 20K worker to the 300K worker.

    But you’re still wrong about thinking we can solve this mess by simply cutting the DB Plan benefits. DB Plans work in the PRIVATE Sector not only because the benefit levels are lower, but because the Plan Sponsor has some “skin in the game”. It’s HIS COMPANY’S money and they’re not going to throw it away unnecessarily.

    Those controls haven’t existed in the past, don’t exist today, and will likely NEVER exist in the Public Sector. The politicians aren’t spending THEIR money, they’re spending YOURS (the Taxpayers) … and reap the political benefits for themselves. DB Plan simply cannot work in the Public Sector arena.

  31. Tough Love Says:

    Seesaw, No matter how you spin it, it you had the IDENTICAL income, retirement age, and years of service, your pension if a Private Sector worker would likely be HALF (or less) of what you receive as a Public Sector retiree.

    Your problem results from the fact that (per what you have stated on these blogs) your salary (and hence pension) was not that great…… and it appears that your public sector medical subsidy is far less than what most other Public Sector workers seem to get.

  32. Tough Love Says:

    Quoting seesaw…” Ninety-eight percent of CalPERS retirees make $36,000 yr. or less.”

    Now now now, some full disclosure should have accompanied that (misleading) figure, for example:

    (1) It includes widows/widowers with a 50% survivorship share .
    (2) It includes those who retired MANY years ago at lower salaries
    (3) It Includes MANY who retired before the big SB400 retroactive increases kicked in
    (4) It includes Part-time workers

    Now, be fair, what is the “average” pension of a Full-career (30+ years) worker retiring at age 55-60, in 2011 ?

    Isn’t THAT the more relevant figure because THAT’s what readers compare to what THEY will likely retire on.

    From what I recall, it’s just under $70K/yr.

    Tisk tisk !

  33. Tough Love Says:

    quoting spension … “Some of the systems among the 6 I point out have less than 2%/year payouts.”

    Just FYI, while there exists quite a variety of DB Plans (of the rapidly decreasing number still in operation) in the Private Sector, over a full career, most would not average out to more than 1.25% of final average pay per year of service.

    So, if you still want to keep these (politically unmanageable) DB in place for Public Sector workers, argue for reductions in the accrual rate for FUTURE service for both NEW and CURRENT workers to a level no greater than the 1.25% the few lucky Private Sector workers (who still get DB Plans) earn per year of service.

    That’s the appropriate boogie … no less, but also no more than their Private sector counterparts get.

  34. cali tax payer Says:

    Please fact check your average teacher pension of “just under $70k/year.” Since you seem so critical of teachers’ retirement, I would think you might use the calculator available at Calstrs.com to figure out what the retired teacher next door is making. His or her salary is public information- it’s on every school district’s website. For example: a teacher who made her highest year’s salary back in 2008 of $80,000 and worked 35 years to retire at age 60 will make $5,133 month in retirement. Another teacher who made $80,000 and worked 30 years, retiring at age 55 makes $3,240/month. And that’s if neither chooses a beneficiary option for a spouse. Otherwise, reduce the monthly amount by $300-$500 month depending on their beneficiary’s age. The pension spiking we read about seems to have been engineered by district office administrators who negotiated their salaries with school board members, not by teachers. It’s sad, that during the recent boom years, say 2001-2007, teachers were often times pitied for their salaries and working conditions when compared to other jobs. Now that times are tough, let’s not blame your neighborhood teacher for sticking with the same profession year after year and earning a small pension with no social security retirement benefit.

  35. SeeSaw Says:

    You want to cherry pick the groups, TL. An average takes all retirees. All retirees make up the bottom line and that’s what counts, to the entity paying the benefits. Its a little crazy to say that DB pension plans cannot work in the public sector–governments all over the US use DB plans–CA DB pensions for teachers have existed for almost 100 years in CA; for others, almost 80 years.

  36. SeeSaw Says:

    You may both sqawk all you want, and it might give you some relief. I feel that my pension and all the pensions that are currently in effect, in the CA public sector, are safe from your interference.

  37. spension Says:

    Current CalSTRS career retirees average $67,980/year..,. see Table 4, page 9 of:

    http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf

    Note page 2 of

    http://www.fixpensionsfirst.com/docs/Full_Report.pdf

    “Teachers. Retirement benefits received by this group are significantly less generous than most other public sector employees. This is partly because teachers covered by CalSTRS are not in social security, their retiree health care is provided by school districts and tends to be less generous than the State of California, and their pension formulas for those terminating before full retirement age is less generous than other public funds.”

    Also see Figure 6C on page 24 of the same report:

    http://www.fixpensionsfirst.com/docs/Full_Report.pdf

    Teacher’s post employment benefits are not double the Private Sector, but about 15% higher.

    Of course, the *cost* of CalSTRS pension benefits, as opposed to the value of the benefits themselves, are substantially below that of DC plan costs… see:

    https://www.imrf.org/press_room/research/2009/better_bang_buck/images/bang_1.jpg

    To get $1 of pension benefits in an equivalent DC plan, you need only pay $0.55 cents in a well managed DC plan… like CalSTRS where the expenses are 0.15%. (CalPERS has rather higher expenses, about 0.5%).

    And so there is this curious propaganda war going on: comparing public sector DB *benefits* to private sector DC *benefits* ignores the fact that the *cost* of those public DB benefits is only 55% of the cost of the private sector DC benefits. And let’s recall: in the US people are not saving adequately in their DC plans, according to the Wall Street Journal…

    http://online.wsj.com/article/SB10001424052748703959604576152792748707356.html

    Nevertheless, darn few well managed public DB plans have age factors above 2%/year, or retirement ages for full benefits below 60. California unwisely was too liberal with its DB benefits.

    If the securities markets recover to their historical rate of growth, Happy Days will be Here Again. If not, I’m afraid public retirees will face a crisis… either give back some benefits or face a California Sovereign Default.

  38. spension Says:

    whoops… $0.55 cents in a well managed ***DB*** plan

  39. Tough Love Says:

    Quoting cali tax payer …”Please fact check your average teacher pension of “just under $70k/year.” ”

    Where did I single out or even mention CalSTRS or teachers ? If fact CalSTRS is not mentioned even once. I was referring to CalPERS and all of it’s member-participants.

    For what it’s worth, I am surprised CalSTRS has been less successful (than CalPERS) in picking the Taxpayers” pockets…. thank God ! CalSTRS pensions (while less than other Public Sector bloodsuckers) are still MUCH greater than those of similarly situated Private Sector Taxpayers …. and there is no justification for it.

  40. Tough Love Says:

    Seesaw, Instead of ” your interference”, don’t you really mean “the necessary and material reforms desperately needed” ?

  41. Tough Love Says:

    Quoting spension ..”To get $1 of pension benefits in an equivalent DC plan, you need only pay $0.55 cents in a well managed DC plan…”

    The 55 cents is way too low in any event, but the lower DB Plan cost is illusory and temporary an exists only because you are INCORRECTLY ignoring that while there is (by definition) on average, zero funds remaining in DB Plans (when participants die consistent with the Plans’ mortality assumptions), the DC plan will on average have significant funds remaining as participants die.

    In fact, if the participants in the DB and DB Plans both die per mortality expectations, the remaining DC Plan funds will just about offset the higher contributions needed in DC Plans to account for possibly an individual may live longer than his life expectancy….. and the “just about” is there is only to account for somewhat higher DC than DB plan fees.

    spension …making this incorrect statement repeatedly won’t make it true..

  42. Captain Says:

    cali tax payer Says:

    “Please fact check your average teacher pension of “just under $70k/year.” Since you seem so critical of teachers’ retirement, I would think you might use the calculator available at Calstrs.com to figure out what the retired teacher next door is making. His or her salary is public information- it’s on every school district’s website. For example: a teacher who made her highest year’s salary back in 2008 of $80,000 and worked 35 years to retire at age 60 will make $5,133 month in retirement. Another teacher who made $80,000 and worked 30 years, retiring at age 55 makes $3,240/month.”

    To: Clai tax payer

    You sure are cherry picking your numbers. The teachers retirement age is age 60, but the formula allows them to retire at 55 under a reduced formula if they wish to retire early. That is an additional benefit not offered under social security. Your 80K teacher salary is also a low-ball number in my school district. We have Teachers making over 100k per year, and that includes a PE teacher making 110K.

    “For example: a teacher who made her highest year’s salary back in 2008 of $80,000 and worked 35 years to retire at age 60 will make $5,133 month in retirement.”

    Not true. A teacher in my district making 100k after 35 years, and retiring at age 63 (which increases the formula to 2.4% TIMES years of service), earns a pension of 84K per year – with a 2% increase each year (which isn’t even a requirement under the CalSTRS plan but they do it anyway even though they are severly underfunded).

    But that isn’t all. Teachers that have worked 9 months per year for 25 years also receive a 400 dollar per month “longevity bonus” added to their pension, or an additional $4,800 per year, for a first year total of $88,800 in year one of retirement (84k +4,800 =$88,800).

    I want to add that teachers have only paid 6% toward their pensions over the past decade, based on a deal the teachers struck in 2001, that diverted 2% of the “employees” 8% contribution toward “supplemental benefits”, and away from the intended purpose of the contributions – their pensions.

    Let’s keep it real, Cali.

  43. Captain Says:

    spension Says:

    “DC plans are *much* more expensive than DB plans, about twice as expensive…

    Much better to put employer and employee contributions into a well managed DB plan. A 3% Employer contribution would go roughly twice as far in providing retirement income in a DB plan compared to a DC plan. A *total* employer+employee contribution of about 17% is needed for reasonable retirement income in a DC plan… so only 10-12% is needed in a DB Plan.”

    Spensions, I agree with some of what you say but not this nonsense. When taxpayers are getting hammered by the ever increasing cost of defined benefit plans why should I care if those plans save a few bucks for the corrupt CalPERS and their members overblown pensions.

    We need to reduce cost of employee “total compensation” if our cities are to survive without massive tax increases being bestowed upon people with 401K’s. Pension costs are currently the largest driver of increased total compensation. Focus on reducing cost and quit with the nonsense about saving 1% in “management fee” money while the Defined Benefit plans are tripling in cost.

    Your argument is absurd.

  44. spension Says:

    Sheesh TL, why didn’t you just look at column 1 of Table 4, page 9 of:

    http://siepr.stanford.edu/system/files/shared/Nation%20Statewide%20Report%20v081.pdf

    Recent career CalPERS retirees receive $66,828/year.

    Calling people bloodsuckers doesn’t enhance your credibility. As Figure 6C on page 24 of the following report

    http://www.fixpensionsfirst.com/docs/Full_Report.pdf

    shows, private sector workers get 15% less post employment benefit than teachers at age 62 retirement. Is that *much*?

    And BTW, last time I checked on private corporate DB plans in the US, they were only 78.8% funded with a deficit of $355 billion. Other Post Employment Benefits were underfunded by $223 billion, with a funding rate of 21.8%.

    As usual, some companies do a great job and their pensions are fully funded… Automatic Data Processing, BofA, BB&T, Capital One, Dominion Resources, Fluor, JPMorgan Chase, Morgan Stanley, Nextera Energy, Northern Trust, Prudential, Sara Lee, Sherwin-Williams, Staples, and the Washington Post.

    But I guess you’d say that the other companies are somehow afflicted by public sector and union greed, causing the great american private sector to grant too many benefits.

  45. Captain Says:

    spension Says:

    “Recent career CalPERS retirees receive $66,828/year.”

    – What did public safety employees that retired in 2011 receive after 30 years?

    ” private sector workers get 15% less post employment benefit than teachers at age 62 retirement. Is that *much*?”

    – For teachers, according to you, they get an extra 15%. For city employees it is probably much more.

    “And BTW, last time I checked on private corporate DB plans in the US, they were only 78.8% funded with a deficit of $355 billion. Other Post Employment Benefits were underfunded by $223 billion, with a funding rate of 21.8%.”

    – Spensions, you do understand the apples to oranges thing, don’t you? And, BTW, the private sector can change pension benefits/formulas going forward.

  46. spension Says:

    Golly, TL, you miss the point continually on fees. 1% when the yearly return is 6% is 1/6=17% of the gain. Compound that over years and it is a big, big deal, much bigger than 1%. Ask John Bogle, the math of that is the basis of the company he founded, Vanguard.

  47. Tough Love Says:

    quoting spension …. ” As Figure 6C on page 24 of the following report http://www.fixpensionsfirst.com/docs/Full_Report.pdf
    shows, private sector workers get 15% less post employment benefit than teachers at age 62 retirement. ”

    Quite a SELECTIVE example wouldn’t you say … picking Teachers in CalSTRS , the LOWEST of CA pensions… now show us the same info for calPERS please.

    Always twisting the full truth ……..

    *************************

    As to your other blather about PRIVATE Sector pensions, it’s a non-issue in discussing the excesses and cost (and who pays) when it come to PUBLIC Sector Plans…. where the Union and Politicians make the 3-rd party taxpayer the sucker in the equation.

    Which is why PUBLIC Sector DB Plans must end.

  48. spension Says:

    TL, I didn’t select the example of teachers, cali tax payer did.

    CalSTRS is huge in size, comparable to CalPERS, and generally does not have grossly high benefits. It is a simple fact, but seems to be uncomfortable to some commenters here. BTW, the CalPERS numbers are in the same figure, and show that indeed CalPERS benefits exceed private sector benefits by a factor of 2.2, which I always have said is too high.

    At least I supply actual data and actual reports, TL and Captain, rather than pure opinion. I’d like to know the annual costs for recent career safety retirees too, why don’t you guys get off your tukus’s and get some actual data?

    As for comparing total compensation, I don’t really agree that is even appropriate. Total *COST* of salary and benefits is the appropriate measure. If an organization can purchase post-employee benefits at a *bargain price*, shouldn’t we encourage that? DB pension plans are way more economical than DC plans.

    And no, TL, I don’t agree with your claim that the money left in a DC plan when the retiree dies can be attributed to that retiree. They are dead, they don’t have any expenses anymore. You want the employer to subsidize the retiree’s beneficiaries. I say only subsidize the retiree, not the beneficiaries.

    As for the comparison with the private sector… let’s see, your saying that public sector shortfalls are due to greed and avarice, corrupt politicians, and influence.

    And what is causing the $576 billion shortfall in post employment benefits in the private sector? Can’t be greed, avarice, corrupt politicians, and influence.. you guys say that is only an affliction in the public sector. What is the *cause*, according to you guys?

    Naturally the public is not obligated to cover the private sector shortfalls… whoops, not really true, is it? Remember the Pension Benefit Guaranty Corporation. Uh-oh.

    I think that innumeracy is just as rampant in the private sector as the public sector, everybody is roughly equally tainted. But in both the public sector and the private sector, well run, economical DB plans can be found…

    Public…

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    Private….

    Automatic Data Processing, BofA, BB&T, Capital One, Dominion Resources, Fluor, JPMorgan Chase, Morgan Stanley, Nextera Energy, Northern Trust, Prudential, Sara Lee, Sherwin-Williams, Staples, and the Washington Post.

    Just because lots of mathematically inept institutions can’t run a DB pension, doesn’t mean all institutions are mathematically inept.

    But it sure would be refreshing for most politicians and captains of private industry to stand up and say: `We screwed up. We didn’t understand the statistics, numbers, and history. We are dunces. In most cases we recklessly and irresponsibly mismanaged our DB pensions, it is 100% our fault. Luckily, there are some institutions that did not screw up and proved the idea can be implemented if well educated, adult, responsible people are in charge. We are not those people. We resign and will all move to Calcutta to wash the feet of the sewer dwellers and untouchables.’

    Ha Ha.

  49. Pro-Pensions Says:

    Corporations are just as guilty as the public sector of costing Taxpayers … Remember the Bail Out of the Wall Street Collapse? Corporations defer & use loopholes not to pay their taxes. Do you think we aren’t making up for that? How about Oil subsidies?

    I don’t understand people who demonize the government & the public sector. Politicians, Lobbyists, Special Interest Groups, sure … but as a whole Government wants to “do good” which is far better than the profit motivation, always chasing the short-term buck, at the expense of the long term …

    Plus, thanks to jobs being sent overseas by the private sector, we especially need jobs in this Country. Let the Private Sector create a surplus of jobs, and we’ll see about scaling back the government!

  50. Tough Love Says:

    spension,

    Yes, there are 3 California Cities that indeed avoided the doomsday that has already reached (or soon will) all the cities (and the State) with DB Plans.

    The 3 cities all have DC Plans (as I advocate for). read about it here:

    http://www.contracostatimes.com/news/ci_21491291/barnidge-how-three-contra-costa-cities-avoided-doomsday

    P.S. you are either hopelessly thick-headed, or have some skin in a continuation of DB Plans for Public Sector workers.

  51. spension Says:

    Well your penchant for name calling, rather than hard numbers and math, rises once more.

    Lots of cities have DC plans. Orinda, Danville, and Lafayatte also parciplate in DB plans, for their police. So I guess they are also an example of cities that have not been brought down by DB plans.

    The 3% or 5% match in those cities would have been more economically invested in well run DB plans, like those of:

    Public…

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    Private….

    Automatic Data Processing, BofA, BB&T, Capital One, Dominion Resources, Fluor, JPMorgan Chase, Morgan Stanley, Nextera Energy, Northern Trust, Prudential, Sara Lee, Sherwin-Williams, Staples, and the Washington Post.

  52. Tough Love Says:

    Quoting spenaion …”Lots of cities have DC plans. Orinda, Danville, and Lafayatte also parciplate in DB plans, for their police. So I guess they are also an example of cities that have not been brought down by DB plans.”

    No spension, it’s just another of the routine “fear” that city officials have of confronting the absurdly generous pensions of safety workers.

    And quoting …”The 3% or 5% match in those cities would have been more economically invested in well run DB plans,
    Sure, and then they be in the SAME financial mess that all the other cities are in …. my exact point !

  53. spension Says:

    No, they’d have been in the financially stable condition of….

    Public…

    http://www.nirsonline.org/storage/nirs/documents/Lessons%20Learned/final_june_29_report_lessonsfromwellfundedpublicpensions1.pdf

    Private….

    Automatic Data Processing, BofA, BB&T, Capital One, Dominion Resources, Fluor, JPMorgan Chase, Morgan Stanley, Nextera Energy, Northern Trust, Prudential, Sara Lee, Sherwin-Williams, Staples, and the Washington Post.

  54. Local Trustee Says:

    In theory, DB plans have a major advantage over DC because you only have to save for the average life expectancy of the group, whereas with DC plans, you really need to save for darn near maximum life expectancy for each member if you want the same secure retirement for everyone. In practice, however, DB plans are subject to all the pitfalls of any large, complicated endeavor run by a group of people. This is why there are so many poorly-managed DB plans and so few that are well-managed. But let’s be realistic–if DC replaced all DB, a lot of people would manage their own DC quite poorly as well. What should we do here in Califorina? We should get rid of the well-known abuses to our DB systems. The new legislation is a good start. We should also move reduce DB benefits for new hires and put the contributions into DC plans instead. This divides the risk a little better between the sponsor and the beneficiary. Moreover, DC plans are completely portable, which is a major benefit for young workers. We should not, however, do away with our DB systems entirely. For both beneficiaries and taxpayers, DB plans provide some legitimate advantages that we would be foolish to move away from.

  55. Tough Love Says:

    Local Trustee, What you are describing is just about what the Federal Employee Pension Plan looks like….1% per year of service DB Plan + a DC component.

    But you can be CA Public Sector workers would protest loudly, as their pensions are always better and most ofter MUCH better.

  56. spension Says:

    Sure, Local Trustee, it could all be managed…. DC plans were *never* intended to be the sole source of retirement income.

    Seems to me bringing up the examples of well-managed DB plans and using those as situations to aspire to is a better tactic than unconditionally running all DB plans down. Shocked that TL even mentions the Federal DB… he usually says it is a graft-ridden dishonest piece of swindle.

    And in my opinion the core problem in DB plans was innumeracy and lack of knowledge of the history of stock market returns. For example, 100% funded should mean, in a DB plan, that if today were Sep. 3, 1929 (the peak before the depression), that current contribution levels and assets would cover all extrapolated benefits; this calculation should determine the level of benefits.

    Contributions should be strictly level for all time, maybe, 5% employee and 10% employer (more from the employer because of the `insurance’ or `pooled’ aspect of DB plans).

    Benefits should only be raised if the plan has been >100% funded for 30 years in a row.

    I’ll bet you you end up with closer to 1% per year of service than to 3%, for retirement at 62.

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