Cost-cutting initiative: end pension competition

A public pension reform group is writing an initiative that would not only cut benefits for new hires and push back retirement ages, but also establish a single statewide pension rate.

Critics say government agencies are under pressure to raise pension benefits to remain competitive with other government agencies, a “ratcheting up” of pension costs said to be needed to retain workers.

The California Foundation for Fiscal Responsibility founded by former Assemblyman Keith Richman, R-Northridge, and now headed by Marcia Fritz, hopes to put the initiative on the November ballot next year.

“Most other states’ benefits are set by the Legislature, and they are uniform for everyone in the state,” said Fritz, the foundation president.

But in California, she said, pension benefits are set during bargaining for labor contracts. An increase in benefits by one local government agency puts pressure on neighboring agencies to do the same.

Fritz said a proposal to increase pension benefits for employees of the Metropolitan Water District of Southern California, dropped last week after public outcry, was driven by a desire to be competitive with other districts.

She said “Met” employees currently have “generous” retirement benefits that include a monthly pension payment, an employer contribution to supplemental 401(k)-like individual investment plans, and retiree health coverage.

“Yet it’s not enough simply because the other districts are doing the same or more,” Fritz said.

The competition problem was mentioned in a pension reform proposal issued last June by a group of city managers in San Diego County, which would reduce benefits for new hires and have employees make pension contributions.

“By acting as a region, no one city will be disadvantaged by pension reform,” said the proposal from the city managers of 17 cities with retirement programs administered by CalPERS.

Court documents filed in the bankruptcy of the City of Vallejo last year use retirement benefits in neighboring cities as a benchmark, not the simple standard of whether Vallejo’s benefits adequately meet the needs of its retirees.

Vallejo paid for a study of 15 cities by Andrew Belknap of Management Partners that concluded, among other things, that “Vallejo provides benefits to its firefighters and police that are at or near the top in every category.”

In addition to keeping pace with the neighbors, government agencies also face internal competitive pressure among their own bargaining units.

“The Ventura City Council in a split vote Monday adopted a new labor contract granting sworn firefighters raises and a sizable pension upgrade — and now must face stiffened efforts by other union groups wanting their own compensation increases,” the Ventura County Star reported on Aug. 6 of last year.

Public employee pensions in other states “run the gamut” from statewide uniformity to local bargaining, and one “political subdivision” playing off another is not unique to California, said Keith Brainard, research director for the National Association of State Retirement Administrators.

“There is a ratcheting phenomenon at work among Florida municipalities,” actuary James Rizzo wrote in the April/May 2007 publication of the Florida Government Finance Officers Association.

“Each city concludes that it must ‘keep up’ with the Jones” and keep raising pension benefits in order to compete in the marketplace for new employers and retain the ones they have,” he wrote.

Fritz thinks the “Pandora’s box” of pension competition was opened a decade ago when SB 400 authorized increased pension benefits for state employees and for state and local police and firefighters.

Another bill, AB 616, authorized increased benefits for local government employees. As an incentive, the CalPERS board offered to inflate the value of the pension fund assets of local governments that boosted benefits.

Now during labor negotiations, the more than 1,500 local government agencies in the California Public Employees Retirement System can choose among four retirement formulas for police and firefighters and five formulas for miscellaneous workers.

The CalPERS website shows that many local governments still have plenty of room to ratchet up benefits.

Only about half of the local governments have the most generous benefit formula for police and firefighters: 3 percent of final pay for each year served on retirement at age 50. About a tenth of the agencies have the least generous formula: 2 percent at 55.

About 8 percent of local governments have the most generous formula for miscellaneous workers: 3 percent at 60. A fifth have the least generous formula, 2 percent at 60, and well over a third are 2 percent at 55, one notch above the lowest formula.

Fritz and her group are still drafting their initiative. But, she said, one of the provisions will be a uniform statewide benefit formula for all state and local government pensions.

She said the benefit for police and firefighters is roughly modeled after federal pensions adopted under former President Ronald Reagan. The initiative may propose 2.2 percent at 58, with or without Social Security.

The benefit for miscellaneous workers proposed by the initiative may be 1.6 percent at 65, similar to an innovative plan for Orange County employees authorized by a bill signed last week, SB 752 by Sen. Lou Correa, D-Santa Ana.

Other initiative provisions are aimed at stopping “spiking, which allowed several Contra Costa County fire chiefs to retire at age 50 this year with pensions well above their final pay.

The initiative also will limit “double-dipping,” when a retiree collecting a government pension goes back to work and gets a government paycheck.

A statewide Field Poll released last week found that 51 percent of voters favor reducing pension benefits for new hires, not a strong showing for an initiative expected to face a well-funded opposition campaign from public employee unions.

Fritz said she was encouraged by a finding that persons who pay attention to state government are more likely to think that public pensions are too generous. “Honestly, it’s exactly what I expected,“ she said.

Gov. Arnold Schwarzenegger and the CalPERS chief actuary, Ron Seeling, are among those who have said the current benefit are “unsustainable.” The critics think growing pension costs will eat up too much of state and local government budgets.

“If we do get the initiative qualified for the ballot and the unions are successful in keeping it from becoming law, then it’s their problem,” said Fritz. “They have totally taken ownership. Be careful what you wish for.”

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 19 Oct 09

6 Responses to “Cost-cutting initiative: end pension competition”

  1. kevin c Says:

    This is great, but I wonder why we aren’t going for a defined contribution system?

  2. Drew Says:

    Kevin C; in response to your question: because they suck. We should actually be working, as a nation, toward a national pension plan. ‘How would we afford this (?)’, you might ask. ‘ By not starting and losing Trillion Dollar wars’, I would respond.

  3. ReilleyFam Says:

    Unfortunately we cannot sustain a defined benefit plan in todays or tomorrows world. We have to switch to a defined contribution plan. I’m a govt employee and I’ll benefit from the current set-up but it’s unsustainable for new-hires. As it is it will take 10-20+ years to reap the benefits of the change so they need to do it now. I’m for a generous retirement package but defined benefits have to end.

    That aside, a State-wide uniformity would go a long way to ending the spikes and competition. They do have to account for the fact that cost of living in LA/SF is way different than Modoc. Also, if you take away the ability to compete with remote counties wh

  4. md Says:

    Drew, we have a national pension plan called “Social Security.”

    The problem with defined benefit plans is that the folks doing the accounting don’t seem to have an accounting background. They promised retirement benefits that are unable to be provided at current contribution rates. The solution is a combination of reducing pension benefits, raising contribution limits, and raising the retirement age.

    The defined contribution plans work great, as long as folks contribute to them every month over a 40-year career and diversify among investment options.

  5. Mike Says:

    I believe that all government employees should be on Social Security as the rest of us. You all have had it too easy for far to long a time.

  6. Drew Says:

    Read the October 9, 2009 issue of Time Magazine. It tells us how much 401K and similar plans fail. They were never designed to do what people expect of them. I’ll say it again; they suck. We must go back to defined benefit pensions or we will have a nation of starving Seniors. I’m already against the NEXT war; let’s wise up direct a few Trillion toward hard working Americans for a change. (Unsustainable pensions indeed; what a pile of crap …The rest of the western developed world does it !)

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