Rolling back pension costs: how far will it go?

The Highway Patrol union that negotiated the most generous pension formula a decade ago, a trendsetter for police and firefighters statewide, has tentatively agreed to reduce pensions for new hires.

The “three at 50” formula, providing 3 percent of final pay for each year served at age 50, became the best-known part of a sweeping state worker pension increase, SB 400 in 1999, often cited by critics who say public pension costs are “unsustainable.”

Gov. Arnold Schwarzenegger, applauding the Highway Patrol agreement last week, said once again in a news release that rolling back the benefit increase in SB 400 is one of the demands that must be met before he signs a new state budget.

“I am absolutely committed to getting pension reform done because we cannot continue down this unsustainable path that has taxpayers on the hook for $500 billion in debt,” the governor said.

New Highway Patrol hires would get a “three at 55” pension formula, if the bargaining agreement is approved by Highway Patrol members and then enacted by legislation.

That’s a significant cut. But it’s still more generous than the pre-SB 400 Highway Patrol formula, “two at 50,” which provided 2.7 percent of final pay for each year served at age 55.

At a CalPERS forum in January, the chief executive of the California Association of Highway Patrolmen, Jon Hamm, said he might negotiate lower pension benefits for new hires. Pensions promised current workers are regarded as contracts that can’t be cut.

“I have come to the conclusion it’s a very strong likelihood I would be looking out for future employees by negotiating a second-tier retirement system,” Hamm said. “The last thing we want to do is leave it to the initiative process.”

An attempt to put an initiative on the November ballot to reduce state and local public pension benefits and extend retirement ages failed for lack of funding. But the backers are talking about trying again if pension costs are not cut.

This time, however, the initiative might be a proposal to switch new hires from pensions to the 401(k)-style individual investment plans common in the private sector, a change that a poll last fall showed had strong support among voters.

A severe economic recession has sharply reduced tax revenue, forcing deep cuts in state and local government programs. Public pensions are the exception, moving into the spotlight by imposing or projecting big cost increases to replace investment losses.

A study of state pensions issued in February by the Pew Center on the States, grimly reporting a $1 trillion funding gap, said the good news is that a growing number of states are changing benefits and taking other “reform” action.

But in California, Schwarzenegger faces Democratic legislative leaders, traditional allies of labor, who say any cut in pension benefits must be done through labor negotiations, not imposed by legislation.

The tentative agreements announced last week, some including pay cuts, with four unions representing 23,000 patrolmen, firefighters, psychiatric technicians and others are projected to save the state $72 million in the new fiscal year beginning July 1.

That’s about 12 percent of the state workforce. If similar agreements were reached with eight other unions, said the governor’s news release, state savings next year would total $2.2 billion.

In addition to lower pensions for new hires, the four unions agreed to boost the pension contributions from current workers to 10 percent of pay, up from 5 to 8 percent contributed now depending on the union.

The powerful California Public Employees Retirement System board last week ordered an 18 percent increase in the employer contribution from the state in the fiscal year beginning next month. The new state rates range from 20 to 33 percent of pay.

The tentative agreements have an “anti-spiking” provision aimed at manipulations to boost pensions. Pay used to calculate pensions would be broadened from the final year to the last three years, a safeguard already in a number of state contracts.

Meanwhile, some local governments also are cutting pension costs this year. Action in at least 62 local government agencies ranges from considering proposals to completed contract amendments, the CalPERS board was told last week.

“There is no cookie-cutter approach,” said Pat Macht, the CalPERS public affairs director. She mentioned lower benefits for new hires, higher worker contributions, anti-spiking, extended retirement ages, and “golden handshakes” to encourage retirement.

The CalPERS report and tracking done for Dave Low, chairman of a public employee union coalition on retirement issues, show that some local governments are not following the Highway Patrol this time.

Rolling back police and firefighter pensions all the way to the pre-SB 400 formula, “2 at 50,” reportedly has been discussed by city managers in the San Francisco east bay and executives in a half dozen Sacramento area counties.

A decade ago, the Highway Patrol was a clear leader with the “three at 50” formula. Local governments are under pressure in labor talks to meet or exceed benefits offered by other agencies, a competition some say “ratchets up” pensions.

Data from the giant California Public Employees Retirement System, handling pensions for 1,568 local governments, shows that none of its plans were as generous as “three at 50” before SB 400, said an Assembly Republican report earlier this year.

Now 64.7 percent of local public safety plans in CalPERS have the Highway Patrol’s trendsetting “three at 50” formula, said the report, but about a third still have lower benefits.

Although SB 400 helped boost local public safety pensions, the report suggests that some of the motivation for the landmark legislation was that state worker pensions in the largest job classification, “miscellaneous,” trailed local government pensions.

“More plans that offer SB 400-level benefit formulas were adopted before the implementation of SB 400 (913 plans) than were adopted after (640 plans),” said the Assembly Republican report.

Now 99 percent of local plans have miscellaneous formulas equal or better than SB 400, up from 58 percent before the legislation.

Benefits for miscellaneous state workers were increased by SB 400 from “two at 60” to “two at 55.” The “two at 60,” still a little-used option, was a reduction enacted under former Gov. Pete Wilson in 1991.

SB 400 also took the unusual step of authorizing a retroactive increase in pension payments to retirees, ranging from 1 percent to persons who retired in 1997 to 6 percent to persons who retired in 1974 or earlier.

CalPERS told legislators that the benefit increases in SB 400 would be mainly paid for by investment earnings, resulting in little change in state costs for a decade. But the state payment to CalPERS, $150 million in 2000, is $3.9 billion in the new fiscal year.

Much of the dramatic increase is because CalPERS, with a surplus from a booming economy, gave the state a contribution “holiday” in 2000, dropping the state payment from $1.2 billion several years earlier.

As local government officials in some areas talk about area-wide agreements that could help “ratchet down” pension costs, would a reduction in Highway Patrol pensions cause the state prison guard union to do the same?

Probably not, but there is some irony.

The California Correctional Peace Officers Association has made perhaps the biggest gains among state worker unions of recent decades, often by negotiating pay and other benefits linked to the Highway Patrol.

But after personal attacks on Gov. Arnold Schwarzenegger, with portable billboards towed around the Capitol and other tactics, the union has worked with an expired contract since 2006 and may be waiting for a new governor next year.

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 23 Jun 10

26 Responses to “Rolling back pension costs: how far will it go?”

  1. john moore Says:

    This is the worst type of “reform” If 3@2.7 had been the rule sinc 2000,the unfunded deficits would still be impossible to manage. Sure,deficits won’t grow as fast,but even 2@50 would have caused an unfunded deficit two-thirds the size of the current deficit. Two reasons: First,salaries grew twice as fast as estimated by the actuaries,and Second,stoc market losses were huge,with no relief in site.

  2. Tough Love Says:

    Here’s a much better way to go ………………. time to get rid of the unions. No unions = No union dues = No money to bribe politicians = no reason for politicians to give the unions workers excessive pay, pensions, and benefits !

    Indiana has the best approach …decertifiying Indiana’s public-employee unions ….now we’re talking. Time magazine story.

    Indiana Governor Mitch Daniels, a budget czar in the free-spending Bush administration, has proved an efficiency fiend at the state level, privatizing bureaucracies, selling a poorly managed toll road, even harvesting the paper clips from state tax returns for reuse in government offices.

    Daniels took the controversial step of decertifying Indiana’s public-employee unions, a move that may endear him to Republican voters should he decide to run for president in 2012.

  3. SeeSAW Says:

    TL: This decertification by the Indiana Governor looks a little suspect. Unions are decertified many times, by the membership. How can a Governor take that action arbitrarily and individually? I have looked on the sites and cannot find any information on it. I am beginning to doubt that it ever happened. If you have any other links with supporting information, please provide.

  4. Stevefromsacto Says:

    I see my old friend Tough Love is polluting this blog as well with his “no rights for public employees” agenda. SeeSAW shouldn’t try to confuse him/her with the facts. His mind is closed.

  5. Tough Love Says:

    SeeSaw ……. here’s the Link to the TIME magazine article which discussed this….www.time.com/time/nation/article/0,8599,1997284-3,00.html

    Stevefromsacto ……. No, YOUR mind is closed. YOU believe the status quo (MUCH MUCH greater pension/benefits for Civil Servants than for the Private Sector taxpayers that pay their way). I believe BOTH sides should get the SAME … which DOES mean reductions for FUTURE years of service for CURRENT Civil Servants.

  6. Tough Love Says:

    Here’s a taste … (from a different article on Indiana’s Union decertification) …… may this spread like wildfire across the nation !

    On his first day (Indiana Governor) Daniels reversed an executive order signed by a Democratic predecessor granting collective bargaining rights to state employees. Union membership plummeted overnight. “I think they were happy to have the extra thousand dollars that would have gone to dues,” Kitchell said. Decertifying the public-employees’ union has spared Indiana pressures that have crippled other state governments. Unhindered by union demands, the governor instituted a “pay for performance” scheme, rewarding state employees who met explicit goals with raises ranging from 4 percent to 10 percent. The salaries of underperforming employees stayed flat. No one was fired, but every time a job went vacant a supervisor had to justify hiring a replacement. The number of state employees has fallen from 35,000 to under 30,000, back where it was in 1982. […]

  7. SageWisdom Says:

    TL. I am good with pension benefits be equal with public and private, just make sure the pay is as well. In my personal case, I made 25% more in the private sector, but chose to trade it for a ‘better pension.’ Also, let me he have a choice on whether I want to participate or not.

    That being said, I agree with getting rid of the unions…not for pay reasons, but for performance reasons. Too many folks with seniority that are on-the-job-retired.

  8. OCO Says:

    Tough Love is correct, but it is not just Indiana.

    North Carolina and Virginia both stopped public employee unions from collective bargaining.

    Also, Colorado is capping public employee pensions to the years they have worked-and instituting 401K’s for All YEARS going forward > for future years-all states should do this.

    Cap the bogus 3%@50 to years actually worked-do not allow any years that were applied retroactively-and for all future years put the employees into a 401K…. like everyone in the real world has.

  9. FLAK88 Says:

    There’s a mentality among many Americans that’s something like this:
    ” I work at a job that I didn’t choose wisely at a compensation level that I’m not happy with. This is someone elses fault; not mine. It must be those people in the public sector; who else is to blame ? I think I’ll do what I can to take things away from them, even though that won’t gain anything for myself. While I’m at it, as a working person, I think I’ll also bash unions and see if I can help destroy as many as possible. Then, I’ll go out and vote for Republicans, who hate working Americans (as well as unemployed Americans, judging from the Senate vote the other day to stop extended unemployment benefits). I’ll do everything possible to vote against my own interests as a working person and then blame everyone else when I find myself getting the shaft.” (Hi there, Tough Love)

  10. Local elected Says:

    I’m extremely disappointed the Gov. is only going for 3@55. That’s still way too rich. The cost for that is still unsustainable. Also, it can’t be justified given regular citizens’ complete lack of pensions. I write this and I’m a Dem.

  11. Tough Love Says:

    FLAK88, You need some anger management …

    I particularly liked your absurd comment…”I think I’ll do what I can to take things away from them, even though that won’t gain anything for myself.”

    If you turned your mouth off (and your brain on) you’d realize that 90% of the excessive pensions/benevits are paid fro via Private sector taxes, and these taxes would be substantially lowed without this excess. I’d certainly consider this a “gain for myself” and a very justifiable one at that.

    As for Unions …. they’re a cancer on society.

  12. SeeSAW Says:

    Thank you for the info TL, although I would like to look into it more–I just don’t see giving a governor that much arbitrary power. Indiana is just another Right to Work state, which really means, “Right to Work for Nothing”.

    In the future, the employees who have been held down are sure to rise up again. That is what is happening in NC now–there is a move afoot to end the 50-year old ban on collective bargaining for public employees. No, TL, we will not go back to the dark ages like this. Any wild fire spreading will be in the direction of freedom for the people–not the other way around.

    If all will read the articles on these blogs concerning the State of NC, they will see that banning collective bargaining for public employees has certainly not lowered its pension costs. In fact, they have pensions that are just as rich as CA’s and there is no transparency available to the citizens of NC like we have in CA. CA is lite years ahead of states like this.

    OCO: Please provide link to show that CO has actually done what you say here. The only info I can find is that CO passed a law in Feb. cutting the retirees’ COLA from 3.5% to 2%. I cannot believe they would follow that up so soon with further cutting.

    Local Elected: There is a national non-profit organization dedicated to bringing defined benefit pensions to all workers in the US–not just public employees. The Director of that organization was a presenter at the CalPERS sponsored CA Dialogue in Los Angeles on Feb. 12, 2010. Maybe that is the bandwagon you should get on, instead of wishing downfall on others who might have a better deal than you, at the moment.

  13. SeeSAW Says:

    TL: I am a former public employee, and I don’t like being referred to as a cancer on society. Your words border on libel.

  14. Mikeorama Says:

    FLAK88, there’s probably some truth in what you say, but you’re missing the more significant point: there is one and only one reason that state and local government employees have the jobs that they have, and that is because the citizenry have decided that they would like some services to be provided by government, which requires government to hire employees. If the citizenry decides that public employees have become lazy and entitled and aren’t worth the salaries and benefits that they are being paid, then tough cookies for public employees. No one is entitled to a job, though public employees (or at least their union leaders) think otherwise, which probably contributes to public disdain for public employees. Now, the public may well be making a mistake by wanting to cut public employee benefits … but we never hear public employees making a strong case that valuable public services will suffer if public employee salaries and benefits are cut; instead we hear that public employees have a right to be treated fairly, to earn some level of income, etc. BS.

  15. Tough Love Says:

    SeeSaw,

    (1) As thrilled as I am with the Indiana decision, I too am quite amazed a State Governor has such authority. While I hope MANY MANY more States have the same option and exercise it, I’m sure you disagree.

    (2) I called “Unions” a cancer on society, not Public Employees. Are you a “Union” ??? By the way, I don’t blame any Civil Servant for maximizing any benefits available to them …. I would do the same. The politicians are to blame for creating the structure that allows such abuse (e.g., “spiking”) to occur, and for the granting of such excessive pensions & benefits in return fro campaign contributions and election support.

  16. Mikeorama Says:

    SeeSaw, all workers in the US already have a defined benefit pension plan … it’s called Social Security. And it requires 15% of all wages in the nation to support that program, even with its modest benefits.

  17. SeeSAW Says:

    Mikeorama: The defined benefit plans that are in existence, save money for SS, because of the federal windfall benefits and pension offset provisions. If you as a private sector worker do not like the idea of the same, then don’t promote, but leave the public sector, with their defined benefits, alone.

  18. SeeSAW Says:

    TL: I joined the association for the simple reason of having professional representation which was an advantage over doing it ourselves–collective bargaining between managment and rank and file is conducted, in house, whether or not any union representation exists. So, I don’t see where my group would be considered a cancer and those not in the group, otherwise, since they got the same salary and benefits, without paying the dues.

  19. Whinenomore Says:

    TL said “you’d realize that 90% of the excessive pensions/benevits are paid fro via Private sector taxes, and these taxes would be substantially lowed without this excess.”

    Oh really? I don’t think so. More over-the-top wild but erroneous claims from Tough Love.

  20. Tough Love Says:

    Dear Wwhinenomore,

    These blogs are full of comments that 75% of a public pension’s funding comes “from” investment income”. Foolish of use to buy into this Union nonsense.

    There are only 2 sources of funds … the employee and the employer (meaning the taxpayers). Investment income derives from those 2 original sources, in the absence of which there would be no “investment income”

    Looking at it another way, interest earned on the funds taxpayers contribute is really just another component of the TAXPAYERS’ contribution (not from some mysterious 3-rd source), because had they not been forced to make that contribution, the EARNINGS (as well as the original contribution) would have stayed in the taxpayers’ pocket.

    Now, as far as the split between the taxpayer and the employee, it varies based on the contractual arrangement, with ZERO employer contributions in many plans (either by design, or backdoor agreement in which the employer picks up the employee’s share).

    Gov Christie recently gave 2 examples where the sum of the employee dollars contributed was lees than 5% o f the total expected lifetime payout. Of course, just comparing dollars-in and dollars-out is not the best measure since it ignores the time value of money.

    A more proper financial workup would compare (as of the date of retirement) the accumulated value of the employee’s contributions to the present value of a the expected future payout (i.e., a life annuity).

    Under a proper compassion, it is the rare plan in which the employees contribution is more than 20% of total Plan costs. When those contributing nothing are factored into the average, the 10% from employees (or conversely 90% from the taxpayer) is quite accurate.

  21. SeeSAW Says:

    TL: All of the information comes from CalPERS. CalPERS is not a union entity. The portfolio stands at 205 billion today. If is composed of investment earnings which are used to pay the retirees.

  22. Tough Love Says:

    SeeSaw,

    CalPERS uses interest rate to determine its assets and liabilities that would not be allowed for Valuation of Private Sector Plans.

    From a valuation standpoint, there is no difference whether the Plan is a Public or a Private Sector Plan, there is simply an actuarially apprrpriate way, and “the government way”.

    Using more conservative assumptions (comparable to those REQUIRED in the valuation of Private Sector Plans …. so as to protect Plan participants), CALPERS has a funding ratio of 55-60% …. which is considered EXTREMELY at risk for default.

    Having $205 billion is not a “good thing” if they SHOULD really have $350 Billion in hand NOW.

  23. SeeSAW Says:

    They had 214 billion a month ago. It ebbs and flows with the Market. If the plan is not sustainable, CalPERS will do something, just like they did with the smoothing policy. All of the editorial boards cut off the last few words of the sentence that the former CalPERS actuary voiced, two years ago, when he said it looked like the plan was unsustainable–(unless something new was done). CalPERS has not missed a benefit payment in 78 years–pretty good record. They have weathered many recessions during those years, and they are not going to fail now.

  24. SeeSAW Says:

    TL: CalPERS does set up its plans the actuarial way. They employ several of those.

  25. Tough Love Says:

    SeeSaw,

    You said ..”If the plan is not sustainable, CalPERS will do something, just like they did with the smoothing policy.”

    You seem to think this (the smoothing) is beneficial or “solves” something.

    Not at all. On the contrary, it masks recent year asset losses. Essentially, the “smoothing” is a deferral of the recognition of the huge asset losses from 2008/2009 into future years. This (along with the unrealistically high interest rates they use in the valuation of Plan assets and liabilities) is why they SAY they are roughly 85% funded, when it’s really 55-60% when the ACTUAL market value of current assets (and more appropriate valuation interest rates ) are used.

    To REALLY fix the problem, they need to either lower benefits or VERY significantly raise contributions.

  26. Fern Henderson Says:

    Ahhh the attacks by the Right Wing Kochwhores.

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