Soaring pension costs: should workers pay more?

There aren’t many ways to make quick cuts in public employee pension costs, but Gov. Arnold Schwarzenegger proposed one last week.

His new budget would divert an additional 5 percent of state worker pay to help the state cover pension costs, doubling the annual pension contribution already being made by most state workers.

The larger employee payment is expected to yield $406 million, allowing a similar reduction in the annual state payment to the California Public Employees Retirement System.

The shift would take a big bite out of the annual state pension payment, which the powerful CalPERS board increased from $3.3 billion currently to $3.5 billion in the new state budget year that begins in July.

The state pension payment for most state workers is 16.9 percent of payroll. The governor’s proposal would move the payments toward a more even split, the typical employee contributing 10 percent of pay and the state 11.9 percent.

“Another major area that we must reform is our pension system, whose costs have gone up by more than 2,000 percent in the last 10 years — from less than $150 million a year to more than $3 billion a year and growing fast,” Schwarzenegger said as he unveiled his budget proposal Friday (Jan. 8).

In his State of the State address on Wednesday, the governor renewed his call for a pension reform he proposed last June — a cut giving new hires the same pensions received by state workers before a major benefit increase a decade ago.

The cut would be limited to new hires because pensions promised current workers are vested rights, protected under contract law, and government also has an obligation to keep its word.

“Now, for current employees these pensions cannot be changed, either legally or morally,” Schwarzenegger said in his State of the State address. “We cannot break the promises we already made. It is a done deal. But we are about to get run over by a locomotive. We can see the light coming at us.”

Lowering benefits for new hires is perhaps the most common pension reform proposal A “two-tier” plan, with different benefits for current employees and new hires, would be created by an initiative proposed by a reform group led by Marcia Fritz.

One of the problems with a two-tier plan is that most savings are delayed until much of the current workforce is replaced, which can take decades. The governor’s two-tier plan, for example, would be expected to save $74 billion over the next three decades.

But his follow-up proposal to boost worker contributions, yielding immediate savings for the state, is part of the governor’s proposal for a new package of worker pay cuts to replace the current furloughs, three Fridays a month that reduce pay 14 percent.

The furloughs, saving the state $1.1 billion a year, would be replaced by a broader $1.4 billion package that includes a 5 percent pay cut, a 5 percent cut in the total number of state workers, and the 5 percent increase in pension contributions.

The state budget condition is dire, despite major spending cuts and tax increases last year. To help close a $20 billion shortfall over the next 18 months, the governor’s plan assumes the state will get an additional $6.9 billion from the federal government.

If there is no federal windfall, as some think is likely, the governor’s fallback list of additional cuts needed to close the budget gap includes another 5 percent pay cut for state workers, saving the state $508 million.

About two dozen lawsuits have been filed to overturn the furloughs. CalPERS and the California State Teachers Retirement System comply with the furloughs, even though cuts in their independent budgets do not directly aid the deficit-ridden state general fund.

The furloughs were done by the Republican governor through executive order. A switch to pay cuts and a pension payment increase requires action by the Legislature, possibly creating a dilemma for majority Democrats.

The state general fund has already had historic cuts, dropping from $103 billion in a budget approved less than a year and a half ago to $83 billion in the governor’s proposal for the new fiscal year beginning in July.

The governor and Republican legislators oppose additional tax increases. Lawmakers face painful decisions, perhaps including the outright elimination of some health and welfare programs.

For Democratic legislators, every dollar not taken from state workers, whose unions are their allies, may look like a dollar that could have been used to reduce devastating cuts in human services they strive to protect.

The governor’s budget proposal was not welcomed by the president of the largest state worker union, Yvonne Walker of Service Employees International Union Local 2000.

She said the furloughs have been counterproductive and costly for the state in many cases — cutting staff time for tax collection, aiding the unemployed, processing motor vehicle payments, aiding veterans, rehabilitating prisoners and other things.

Walker said members of her union, acknowledging the need to contribute to a budget solution, approved a pay-cut package that included one furlough day and the elimination of some overtime and holidays.

But the Legislature never approved the agreement the union negotiated with the Schwarzenegger administration, reportedly because Republican legislators thought the cuts did not save the state enough money.

“It’s not like the unions are not going to sit down and negotiate on their contracts,” said Walker.

The furlough days do not reduce the pensions of state workers, which are based on final pay and the number of years served. But the pay cut proposed by the governor could reduce pension amounts.

The governor is not the only one proposing that public employees pay more of their pension costs. Similar proposals were made last year by city manager groups in San Diego and several other counties.

Unlike state workers, many local government workers do not make pension payments. Their employers agreed in labor negotiations to pay the employee share, often ranging from 5 to 9 percent of pay under CalPERS formulas.

Many public pension systems, particularly after benefit increases that began with SB 400 in 1999, assume that most of the money needed to make payments to retirees will come from investment earnings, not contributions by employers and employees.

When investment earnings fall below their target, as happened in a big way during the recent stock market crash, higher annual payments to make up for the losses are required by law from the employers, not the employees.

To avoid a rate shock for the state, the CalPERS board last month approved an extraordinary “smoothing” method expected to leave the fund 65 percent funded after 30 years, well below the 80 percent some say should be the minimum.

Actuaries told the board that an additional $1 billion contribution from the state would be needed to push the estimated funding level above 80 percent three decades from now.

The smoothing method pushes the debt into the future. But CalPERS has $200 billion in assets and annual payments to retirees that currently are only a few billion above employer-employee contributions.

If the CalPERS board is willing to accept low funding levels (CalSTRS was at about 30 percent in the 1970s) the locomotive mentioned by the governor could be a long time getting here.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 11 Jan 10

14 Responses to “Soaring pension costs: should workers pay more?”

  1. Larry Littlefield Says:

    Yes, current workers should pay more. In fact, they should pay more than new workers, if their pensions are more generous.

    In my view, in fact, it is the taxpayer-funded portion of pension contribution that should be fixed. Employees would pay less (higher take home pay) in booms, when private sector workers also made gains, but would pay more (lower take home pay) in busts when private sector workers were hurting and they were lucky to have jobs.

    A fixed employer contribution would prevent politicians from underfunding pensions in booms, shifting costs to the time when taxpayers can least afford them. And it would alter the incentives for the unions, with regard to pension enhancements and abuses, as they would pay for them.

  2. Jim Reilley Says:

    “a pay-cut package that included one furlough day and the elimination of some overtime and holidays.”

    That’s all you’ll get from us and we can wait until Arnold is out of office in a year for a way better deal from Jerry. Any new contract has to be ratified by the members and we wont ratify anything other than that.

  3. Peyton Farquhar Says:

    Regardless of who sacrifices/pays or how much, cuts across the board must happen. The system is insolvent. Finger pointing isn’t constructive and neither are lawsuits.

    The bottom line is that as painful as they may be, sacrifices must come. I believe that this should also apply to the State Legislature as well. Start by cutting their health insurance and make them pay higher premiums, and cut existing salaries an additional 12%. Prop 1E did not go far enough. 18% salary cut to the clowns in Sacramento is nothing because they make up for it in health insurance and other bennies.

  4. BIll Says:

    “The smoothing method pushes the debt into the future. But CalPERS has $200 billion in assets and annual payments to retirees that currently are only a few billion above employer-employee contributions.”

    Gee that is awfully close to the definition of a Ponzi Scheme.

  5. Larry Littlefield Says:

    Following up on my fixed employer contribution scheme, in NY I suggested 8 percent for most jobs, 12 percent for physical labor jobs, and 15 percent for public safety jobs. But in NY, government workers with pensions get Social Security to, while in California I believe they don’t. So you’d have to add 6.2 percent to that.

    The employees would pay the rest. And the expected rate of return should be cut to something real, not something based on 1982-2000.

  6. Touch Love Says:

    The CURRENT overly generous pension formula (as well as retiree healthcare, of course) is the problem. Increasing the employee contribution has very limited impact on current employees with limited additional work years.

    A MUCH better approach is to reduce the pension formula not just for NEW employees but for FUTURE years of service for CURRENT employees.

    Atttack the REAL problem ….. overly rich benefits …. by reducing them for FUTURE years of service.

  7. Mel Says:

    I’ve been cut enough. How much to you think the average State worker makes? I have to go on my husband’s health plan because the insurance here is already too expensive. We are getting more and more busy at my office. We serve the public. People get mad at us constantly because we can’t keep up with the work. We have long lines down the hall. Work is piling up and you want me to work harder and get less pay. I don’t think so! I pay into my retirement it’s not all given to me for free. The benefits here are not outstanding! My husband’s private company gets better benefits. Enough is enough!

  8. Touch Love Says:

    Dear Mel, Thank you for your hard work, and we, the Private Sector Taxpayers generally do not want to reduce your direct pay (perhaps with the exception of safety workers where even the “base pay” is excessive).

    However, we DO want to reduce your pension and retiree heallthcare. Because, at EVERY (yes EVERY) income level the “value” at retirement of the employer (i.e., TAXPAYER) paid-for share of the typical (non-safety) Civil Servant’s retirement package (pension & retiree healthcare) is 2-4 TIMES that of the employer paid-for share of the Private Sector worker’s retirement package when making the SAME pay, retiring at the SAME age, and having the SAME number of years of service, and this multiple rises to 4-6 times for policemen & Firemen.

    In short, this is simply UNFAIR to TAXPAYERS …… PERIOD.

  9. ironclad Says:

    Cut the pension formulas for new hires all you want but the promised pensions formulas for current employees are set in stone by contract law. If there is a future shortfall, which I doubt, it can be made up by minot increases in taxes.

  10. Touch Love Says:

    Sorry Ironclad, your very generous pension formula were not “negotiated” in good faith, but by self-serving, vote-selling, contribution-soliciting politicians bought with your union’s money. Its often called a “bribe”, etc.

    Time to shut the spigot for you and all CURRENT employees for all FUTURE years of service. Just be glad we don’t try to reduce pensions for PAST years of service for current workers (or even for those already retire). Although when the if/when the well runs dry this too may come to pass.

    Just remember what GREED did to the UAW …. and unlike the Fed, California cannot print money.

  11. Larry Littlefield Says:

    “Cut the pension formulas for new hires all you want but the promised pensions formulas for current employees are set in stone by contract law.”

    Two words: Generation Greed, which will leave future generations worse off in every way, in the public and private sectors.

    Fairness requires that if pensions cannot be cut, contributions for health benefits should be increased. We’ve had one round after another of “screw the newbie, flee to Florida” contracts in NY.

  12. Jeff Says:

    Not just more, all!

  13. Furloughgirl Says:

    If you saw Glenn Beck’s show on TV this past weekend, you would see that some states (like Texas) manage fine without any income tax for residence. Now, California cannot make it with a 10.55% income tax? What’s wrong with that picture? Cutting into benefits of state employees is not the answer. The answer is STOP passing initiatives and laws that entitle so many people to so many benefits .. For example, let’s talk about Cal Grants. I happen to know if a college kid’s parents are divorced, the kid can decide which parent’s income to base their eligibility on. If one parent is unemployed and the other makes $100,000 or more a year, guess what? That kid gets a nice fat free CAL Grant for college. I know several kids whose divorced parents (who together) can well afford to send the kid to college but because of this loophole, get a free education.

  14. Brandon Says:

    @Furloughgirl:

    The reason states like Texas can do without income taxes is that they have the ability to have a reasonable property tax to generate revenue. Prop 13 destroyed that option for California.

    Using the Cal Grant example is probably not serving your point-of-view very well. Money spent toward education is actually one of the better investments the state makes. It just takes 10-15 years or so before the former students’ higher income (as a result of the education) starts “paying back” the state through taxes, etc. Higher education levels also reduce crime rates and incarceration rates *substantially*, so there are a lot of indirect savings there as well.

    The only way to fix all this mess is to create a more stable tax structure (based on property tax, not income tax) and to drastically reduce the numbers of people we send to prison, and the lengths of time we leave them there. We could fully fund 3-4 college students’ education for each prisoner we keep out of prison.

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