State pension costs: A partisan issue?

Gov. Arnold Schwarzenegger, who dropped pensions from state budget talks, will now find out if Democratic legislative leaders share his view that retirement reform is urgently needed.

The governor said last week that he will delay pension negotiations until after a new budget is enacted. Then he presumably will renew his push to cut retirement benefits for newly hired state workers.

It’s a relatively modest proposal. Among other things, a major pension increase enacted a decade ago would be rolled back. New state employees also would have to work 25 years, instead of 20, before getting full retiree health benefits.

The governor is not, as he did briefly four years ago, proposing that all new hires be switched to a 401(k)-style plan. The “defined contribution” plans increasingly common in the private sector rely on investment earnings.

Public employee retirement systems are the last stronghold of guaranteed monthly pension checks. Pension officials sound at times as if they think their “defined benefit” plans are under siege, if not in an outright holy war with the 401(k) forces.

“Defined benefit plans can work fine in government,” said David Crane, Schwarzenegger’s pension advisor. “The issue is controlling them and properly funding them when promises are made.”

Crane said that after doing some research, and talking to reformers elsewhere, he thinks that government employees tend to have “a different mind set” than persons in the private sector.

The governor’s proposal preserves the monthly check system. But for new hires, most benefits would be cut back to the amount in effect before SB 400 in 1999, saving the state an estimated $74 billion over the next three decades.

Current and retired state workers have retirement benefits under labor contracts guaranteed by law. The governor’s proposal last month said the promises “cannot and should not” be reduced.

“I know some people who have talked about doing something with existing obligations,” Crane said. “ I don’t share that view.”

What Crane does share is the view of business leaders such as investor Warren Buffet and John Bogle of Vanguard mutual funds. They think generous government pension benefits are based on unrealistic forecasts of investment earnings. (See Calpensions 10 Mar 09: “Pension funds: A double whammy?”)

If they are right, pension debt could crowd out funding for other government programs, force tax increases and burden future generations. Crane, who helped build a San Francisco global investment firm, has been sounding the warning for years.

While on the board of the California State Teachers Retirement System, he repeatedly questioned an earnings forecast of 8 percent. His appointment was not confirmed by the Senate, ousting him in 2006 after nearly a year on the board.

Crane gave his view again last week in the Huffington Post, arguing that “the amount of our underfunding is simply staggering.“ A lengthy article in the July 11 issue of the Economist magazine shares his concern.about underfunded public pensions.

A case in point for Crane is what legislators were told about the SB 400 benefit increase, The California Public Employees Retirement System expected state pension contributions to “remain below the 1998-99 fiscal year for at least the next decade.”

Instead, state contributions to CalPERS, which were $766 million in 1998-99, had climbed above that amount four years later. The state payment to CalPERS in the fiscal year that began this month is $3.3 billion.

“What’s happening is all the promises are being made with inadequate funding,” said Crane. “People are making those decisions with inadequate information and imposing an enormous burden on future health, welfare and education programs.”

Crane, a Democrat, said Democratic legislative leaders may act on pensions, even without being prodded in a budget deal. He thinks they recognize that pension obligations are “squeezing out funding for the very programs many of them regularly champion.”

Representatives on the CalPERS board of two Democratic officials elected statewide, Treasurer Bill Lockyer and Controller John Chiang, have talked in general terms about re-examining pension benefits. (See Calpensions 14 May 09: “Smoothing costs, not cutting benefits”)

But public employee unions are a major Democratic constituency. Pension cuts are usually proposed by Republicans: Schwarzenegger, Senate GOP leaders, former Assemblyman Keith Richman, R-Northridge, and business-aligned groups.

The timing for a pension cut is not great. The governor has ordered state workers to take three furlough days a month, a pay cut of about 15 percent. The biggest union, Service Employees International Local 1000, is talking about a strike.

Union officials say generous pensions for government workers traditionally offset pay that is lower than in the private sector. If true in the past, said Crane, government pay is now equal or greater than for comparable private sector jobs.

Union officials also have said the governor’s “two-tier” pension plan creates fairness and equity problems among state workers. Crane said unequal compensation is common in the private sector.

What Democratic legislative leaders may hear, if they take up the pension issue, is an impassioned defense of the CalPERS earnings assumption, 7.75 percent a year, from the CalPERS chief actuary, Ron Seeling.

He and his staff have developed “smoothing” plans to avoid sharp contribution increases after the stock market crash last fall devastated pension funds. The CalPERS board approved a plan last month for local governments and schools. (See Calpensions 18 Jun 09: “CalPERS softens hit on local governments”)

The CalPERS board delayed action on a “smoothing” plan for the state, which is opposed by the governor. Schwarzenegger said that delaying a contribution increase would be gambling with “our kids’ money” on future investment earnings.

His administration estimated that a state contribution increase of $879 million next July would be lowered under the “smoothing” plan to about $30 million, followed by an increase in 2011 of $464 million.

At a news conference last week, Schwarzenegger said that after the state budget is done he wants to work on consolidating energy agencies, meeting future needs for water and pension reform.

“Everyone understands that we are running out of money, that we have at least $300 billion of unfunded liabilities there in the pensions,” the governor said.

“And this is not even talking about the health care for retired state employees and all this,” he said. “We’ve got to solve these things. We cannot continue promising people things that we cannot deliver.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 20 Jul 09

4 Responses to “State pension costs: A partisan issue?”

  1. Really Says:

    Quoting ……. Crane said that after doing some research, and talking to reformers elsewhere, he thinks that government employees tend to have “a different mind set” than persons in the private sector.

    Now, ….. that’s got to be the understatement of the decade. Clearly their mindset is ME ME ME ME ME……. and to H E L L with the taxpayers.

  2. Jeff Says:

    “Crane said that after doing some research, and talking to reformers elsewhere, he thinks that government employees tend to have “a different mind set” than persons in the private sector.”

    That “different mind set” could be described as self-entitled: the belief that they ought to command a privileged economic status in society as the expense of the rest of the population.

    ” Union officials also have said the governor’s “two-tier” pension plan creates fairness and equity problems among state workers.”

    Yet not a bit of concern for the monstrous unfairness and inequity that exists between them and the private sector employees who they want to pay for government employee’s privileged retirements. Pre-SB400 government retirement benefits are better than what the vast majority of private-sector employees have available to them. What standard of comparison is more appropriate than what most people receive? Yet the unimaginably incompetent and dishonest news media, which has finally come upon this issue with all the timeliness they brought to the housing-financial bubble, still fails to include what the cost would be for those with private retirement savings to buy an annuity that would be equivalent to these government employee pensions.

    Furthermore the news media needs to stop advocating for more taxes on the basis of suffering of the poor of infirm. With “$300 billion of unfunded liabilities there in the pensions,” the Democratic politicians made their choice what to do with taxpayers money. So if kids go hungry or without health care, at least middle-aged government employees can look forward to decades of well-funded leisure. The opportunity cost of being able to alleviate human suffering should rightly be put on government employees and the politicians they own. If taxpayers provide enough revenue to pay for compensation for government employees that is comparable to what they as private-sector employees receive and also fund important social services, then they have done their job.

    ““Defined benefit plans can work fine in government,” said David Crane, Schwarzenegger’s pension advisor. “The issue is controlling them and properly funding them when promises are made.””

    Is that because we can count on politicians to not sell out the future for the sake of pleasing current, politically powerful interest groups, despite all evidence to the contrary? If you set up systems with the incentives wrong, it’s hard to avoid bad outcomes. Defined contribution retirement systems make the costs of compensation decisions transparent and borne in the present.

    I was against SB400 from its inception because, regardless of cost, because what moral theory holds that government ought to create a privileged class out of its employees? It shows the remarkable transformation of liberal politics from its roots in the great liberal philosopher, John Rawls and his “Theory of Justice.” Political liberals have abandoned that work’s precepts in favor of greed and corruption.

    The problem with cost is, as has been noted, that a rosy prediction of future earnings is all that’s needed to avoid any real debate. And even when those costs become apparent, it should be obvious to anyone with a shred of honesty and devotion to reality that politicians will prefer to continue to avoid inflicting pain in the present, even if that simply pushes forward the inevitable and increases the eventual costs. The examples are legion. In the current scenario they are “smoothing” the previous “smoothings”.

    And the initial rosy predictions of cost given for SB400 raise another issue regarding contracts: that’s about the rights of the other party, the taxpayers, if they are on the hook if those retirement “contracts” to be guaranteed. They never signed up for that burden because no such possibility was presented. If fact in a process dominated by the self-interested, the claim was made of almost no cost. Why should taxpayers be on the hook for the misrepresentations of the government employee interest groups? What kind of contract theory holds people responsible for obligations to which they weren’t informed for the benefit of the misinforming party? They said it wouldn’t cost taxpayers and it shouldn’t. Why is that unreasonable?

  3. Wayne Martin Says:

    Because of labor unions, salary and benefits have doubled every 10-12 years. This means that sooner or latter, people in the public sector start making over $100K, and their pensions are linked to their high salary. This means that most government sector employees will be making more in their retirement than they made when they were working.

    Examples can be seen here:

    Using a COLA of only 2%, retirees receive the following payouts:

    Total Pension Payouts
    $100K–10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
    $150K–10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
    $200K–10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M

    Police and Fire Department employees are routinely drawing over $100K in the larger cities, with their pensions at 90% of their high salary. In another decade, or so, the public sector will totally bankrupt the private sector with their pension demands.

    It’s understandable why Warren Buffet is concerned–and all of taxpayers need to be very concerned. There is simply no way that school districts and cities are going to be able to pay the retirement contributions of their employees without increases taxes/fees/fines for everything associated with government. Taxpayers are already seeing about 65% of their income subject to statutory taxes. Government at all levels has been diverting about 40% of GDP for its needs in the past. This year, thanks to Obamanomics–Government is taking 50% of the GDP. There are a few articles around claiming that within a couple of years this number will be even higher.

    We will have to start with cutting all unnecessary programs, and then shift to total-cost-of-compensation numbers when dealing with employee compensation issues (in both the public and private sector).

    There are other options, rather than a 2-tier system:

    1) Shift all employees into the US Social Security System.
    2) De-link pensions from salaries.
    3) Create a top salary for pension awards (like $150K).
    4) Don’t award pensions at all, increasing the employees salary to reflect the present value of the pension and let the employees create their own retirement accounts.
    5) De-link pensions from COLAs after, say 5-10 years.

    This issue needs a complete modeling of the State’s (and all municipalities too) financial futures. The current plan is just too much of a “quickie” fix, without any evidence of long-term understanding of the real costs.

  4. Here it is: - Los Angeles Kings Hockey Fan Forum Says:

    […] of state expenditures amounts to about $1,183 per household headed by a native-born resident. State pension costs: A partisan issue? Calpensions […]

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