What crisis? Nearly 200 agencies raise pensions

After the stock market crash punched a big hole in their CalPERS investment funds, a new report says 26 local government agencies reduced pension benefits — but nearly 200 cities, counties and fire and water districts increased pension benefits.

A report issued last week by a bipartisan state watchdog, the Little Hoover Commission, said 13 local governments boosted pensions for police and firefighters to the well-publicized “3 percent at 50” formula said by critics to be unsustainable.

The formula that allows a safety worker to retire at age 50 with 3 percent of final pay for each year served was negotiated more than a decade ago by the Highway Patrol union.

But the formula that became a symbol of excess, the best-known part of a landmark public pension increase, SB 400 in 1999, was rolled back to “3 at 55” for new hires under a Highway Patrol contract last year.

The Hoover report said pensions for non-safety employees in 18 local agencies were boosted to “2.7 percent at 55.” That’s much higher than a state worker formula, “2 at 55,” rolled back to “2 at 60” for new hires after lengthy labor negotiations last fall.

In 22 local contracts, the “final pay” setting pensions became the single highest salary year. Going the other way, recent state worker contracts changed final pay from one to three years, making it difficult to pad or “spike” pensions by manipulating pay.

The report said 55 local government agencies boosted pensions by simply crediting employees for two additional years of service, a farewell “golden handshake” agreement as they enter retirement.

The giant California Public Employees Retirement System covers state workers, non-teaching school employees, and more than 1,500 cities, counties and special districts, which have roughly half of the non-federal government employees in the state.

The Hoover report said the pension increases in hard economic times, revealed in CalPERS reports for the last two fiscal years, call into “question the ability and willingness” of local officials to negotiate reductions in pension costs.

In a letter with the Hoover report, the commission chairman, Daniel Hancock, said local governments need state help “to impose the structural discipline they lack and to provide alternatives that can put the system on a path of sustainability.”

The key part of a pension system overhaul recommended by the commission, after a study begun last April, asks the governor and the Legislature to establish the legal authority for “freezing” the pensions of current workers.

The years employees have already worked would earn pensions under the current formulas. But after the change is made, the pension earned from that point would be under a lower formula.

“State and local governments cannot solve this problem without addressing the mounting pension obligations of current employees,” Hancock said in a news release.

Court decisions based on contract law are generally believed to mean that once a California public employee is “vested” in a pension, the pension earned in the years or decades that follow cannot be cut without providing something of equal value.

As a result, the agreements that lower pension formulas are limited to new hires, who are not yet vested in a pension. But significant costs savings are delayed until much of the workforce is made up of the new hires, which can take decades.

The Hoover commission fears that “pension costs will crush government,” crowding out funding for other programs. The common reforms of increasing employee contributions and cutting pensions for new hires do not yield enough savings.

Like employers in the private sector, the commission said, government employers must be able to reduce pension benefits not yet earned, even though this “may entail the courts having to revisit prior court decisions.”

One version of a pension initiative proposed by a reform group would cut unearned pensions for current employees. Attorney Jeff Chang is among the experts who think pensions promised current workers can be cut in a fiscal emergency.

The Hoover commission recommendation would not affect payments to current retirees. In Colorado, Minnesota and South Dakota lawsuits have resulted from attempts to cut annual increases intended to help retiree pensions keep pace with inflation.

A labor coalition responding to the Hoover commission report said government employees have been hit with pay cuts and furlough days and, in some areas, have agreed to increase their pension contributions and give new hires lower pensions.

“Across California public employees are doing their part to help meet the pension challenges caused by the market collapse,” Dave Low, chairman of Californians for Health Care and Retirement Security, said in a news release.

He said a freeze and roll back of all pensions is not the answer for 85 public retirement systems that evolved to meet the needs of different communities and the retirement security of different workers.

The Hoover commission report is the most comprehensive look at California public pensions since a report issued three years ago by the Public Employee Post-Employment Benefits Commission appointed by former Gov. Arnold Schwarzenegger.

The commission chaired by Gerald Parsky concluded that most pension systems were reasonably well-funded and not threatening to “crush” budgets. Instead, the alarm was about an estimated $118 billion unfunded state and local debt for retiree health care.

But now the new Hoover commission report said the 10 largest California public pension systems, with 90 percent of all members and assets, reported a combined shortfall last year of $240 billion.

Pension funds expecting two-thirds of their revenue from investments were shocked by the market crash. The report cites additional factors: payroll growth, retirement at age 55 or 50, longer life expectancy, and generous pensions.

One of the problems in motivating action for the dramatic pension overhaul recommended by the Hoover commission is that the big pension hit on state and local budgets is still mainly a forecast.

Here’s an extended quote from one of the key passages in the report:

“The tension between rising pension costs and lean government budgets is often presented today in a political context, with stakeholders debating the severity of the problem and how long it will last.

“To weather the market drop and subsequent recession and decline in public revenues, many pension boards gave public agencies a three-year grace period before hiking required payments in the pension fund to make up for investment losses, in effect creating a balloon payment.

“In another five years, when pension contributions from government are expected to jump 40 to 80 percent and remain at those levels for decades in order to keep retirement plans solvent, there will be no debate about the magnitude of the problem.

“Barring a miraculous market advance and sustained economic expansion, no government entity — especially at the local level — will be able to absorb the blow without severe cuts to services.”

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 28 Feb 11

5 Responses to “What crisis? Nearly 200 agencies raise pensions”

  1. Rex The Wonder Dog! Says:

    Gov is incompetent on virtually every level.

    Stop raising taxes, stop passing bond issues, stop giving gov VAST and HUGE sums of money that they squander virtually every time they get it.

    High speed rail-another boondogle waiting to happen.

  2. Bill Julian Says:

    Ed — Some questions. 1. How do recent pessimistic pension analyses take account of (a) the recovery of stock markets to pre-crash levels over the past 18 months, and (b) the enormous hoards of cash assets maintained by publicly traded companies that are now underperforming (because not invested) that may sustain growth in earnings once invested ? (2) The recent spate of studies that purport to show long-term shortfalls use assumptions about earnings on pension fund assets that may err on the low side (using just above a T-bill rate), just as they criticize earlier pension earnings forecasts as erring on the high side (7+%). Are we getting stampeded into destabilizing and ultimately reducing retirement incomes and living standards by campaign melodrama grounded in questionable arithmetic or dubious assumptions (because too anecdotal)? 3. Since claims on pension funds include health care benefits as well as retirement living stipends, what is the impact of health care reform on long-term pension fund forecasting ?

  3. john moore Says:

    According to the Calpers web site,it earned 12.5% last year,which is 4.75% above its’ investment rate. Because it is 35% unfunded,that deficit grew at the investment rate of 7.75%. So assets grew by 4.75% and the deficit grew by 7.75% for a slight net improvement. The hope had been that the fund would improve in line with the markets,but it did not.To date,I have not seen a study analyzing the basis for Calpers’ dismal performance,but what ever the reason,Calpers needs to go the way of Fannie and Freddie,i.e.,out of business. Since 3@50,it has decimated the financial condition of Ca. cities.

  4. OC Progressive Says:

    How far do you have to get into the Little Hoover Commission on pension reform to start questioning its results?

    How about the graph on page ii that shows the percentage of funding of major pension funds in California.

    It looks pretty bad, but then when you look closely, the numbers just don’t look right.

    CalPERS, the last time I looked, had around 230 billion dollar invested in a broad portfolio of assets, but the handy chart that shows that CALPers is only 61% funded has a value on the graph that looks like it’s around 180 billion.

    A quick check of the footnotes shows that the chart was based on numbers from the end of the fiscal year 2008-2009, not the most recent fiscal year.

    How important is that?

    Well, the value of CALPers investments as of June 30th, 2009 was $178.9 billion. By the date that the Little Hoover report was released, that number had increased by 50 billion dollars. Even using numbers from the end of FY 09-10 would have been much more honest, but the rebound from market bottoms is only mentioned in passing in the body of the report.

    This is not a trivial difference, and CALPers is not unique in posting large gains since the market bottom. CALStrs is the second largest pension fund in the state and covers teachers and community college professors. Since March 2009, when markets bottomed after a global financial Great Recession, the CalSTRS investment portfolio has rebounded by more than $34.8 billion to $146.4 billion.

    Little Hoover = Big Lie.

  5. One Citizen Says:

    OC Progressive (or ProExcessive?): good job at nit-picking. What about the overall unfunded portion of public pensions that will have to be picked up by the taxpayer? FYI: CalPers is not a money-making business; but a tax taking business. Why should public employees (who are forced into unions) get defined benefit pension plans (guaranteed benefits) when private employees get retirement based solely on contributions? Maybe becauses the unions have paid off the politicians? What about CA going broke do to excessive spending? It seems like the only argument for these excessive pensions is that “some day” they will pay for themselves by “some miracle”. I’d last about 60 days if I ran my household budget that way…

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