Pension Issue 1: The Pension Sustainability Risk Falling on Future Generations

Risks of underfunding current benefits could result in the loss of future jobs and government services and need for massive tax increases.

LA Times Opinion:California’s $500-billion pension time bomb

That’s the finding from a study released Monday by Stanford University’s public policy program, confirming a recent report with similar, stunning findings from Northwestern University and the University of Chicago.

Pension Issue 2: Perceived unfairness or unnecessarily excessive perks

On January 26, 2012 Democratic Governor Edmund G. Brown Jr. asked Los Angeles business leaders to stand with him on two major priorities for 2012: passing his balanced budget plan and persuading the legislature to enact his 12-point pension reform proposal.

“The numbers just don’t add up,” said Governor Brown of the public pension system. “Benefits, contributions and the age of retirement don’t reflect today’s realities, putting taxpayers on the hook for huge costs in the future. The cracks are showing and this dam will burst unless the legislature gets serious and takes urgent and decisive action.”

Governor Brown’s pension reform plan, introduced in October 2011, will apply to all California state, local, school and other public employers, new public employees and current employees as legally permissible. The plan’s 12 points are:

1. Equal sharing of pension costs between all employees and employers
2. Establish a “hybrid” risk-sharing pension plan
3. Increase retirement ages
4. Require three-year final compensation to stop pension spiking
5. Calculate benefits based on regular, recurring pay
6. Limit post-retirement employment
7. End felons’ pension benefits
8. Prohibit retroactive pension increases
9. Prohibit pension holidays
10. Prohibit purchases of service credit
11. Increase pension board independence and expertise
12. Reduce retiree health care costs

For full details of Governor Brown’s pension reform plan, click here.

From the LA Times coverage of Governor Brown’s request:

Reporting from Sacramento—Gilbert Robles retired as a state parole agent at age 53, able to collect a $101,195 annual pension — 94% of his final salary. Last year, six months after he retired, the Arcadia resident accepted a political appointment with the same agency that pays an additional six figures.

Scott Hallabrin took retirement as the top attorney for the state’s ethics agency on June 29, 2009. The next day, he went back to the same post, as he prepared to watch his pension checks roll in on top of a salary.

Los Angeles school administrator Norman Isaacs got a 35% raise in 2006, the year before he filed for his public pension. The increase sharply boosted his retirement benefits.

Robles, Hallabrin and Isaacs acted within their rights under California’s pension rules, which the Legislature’s independent budget analyst recently described as “among the most generous in the country.” That generosity comes with a price: The main pension system for public employees is expected to cost taxpayers $2.3 billion this year and has long-term obligations that it is $85 billion short of being able to fund.

There are many optimistic assumptions and very little transparency in the city’s recently adopted budget and six-year financial plan. The city projects an eight percent jump in sales taxes next year, for example. What assumptions justify this? Increased gas prices? A new Walmart? A general economic rebound? Neither the budget documents nor inquiries to city staff shed any light. Property taxes show steady and accelerating growth over the next six years. How much of the increase is new development? How much of it is rising property values?

A request to the city for records relating to revenue assumptions turned up nothing that would justify the big increase in sales tax revenues. We can only guess that the city is assuming a new Walmart in the vacant Home Expo site, despite concerns over inadequate parking. As for longer-term projections, the records request returned nothing at all that backed up the revenue forecasts beyond 2012.

The lack of public discussion about financial assumptions during a council meeting on the budget is as troubling as the lack of documentation. It seems the projections are made behind closed doors by staff and consultants and our elected representatives accept them at face value without question.

But most obscure, and most dangerous to the long-term financial health of Encinitas, are pension costs. In the hundreds of pages of budget and financial plan documents, nowhere are pension costs honestly and transparently addressed. A single table shows pension costs only as a percentage of payroll, not in dollar terms, and only for the first two years, not for the full six years of the financial plan. What is the city hiding? If the 15 to 35 percent increase in city pension costs in the first two years is any indication, the hidden third through sixth years are likely much higher. Is the city afraid to show these numbers to the public?

Still worse, the numbers the city is using assume that CalPERS will earn 7.75 percent on its investments annually forever. The staff report notes that “continued strong returns may lower future employer contributions,” but omits the obvious corollary, that lesser returns will leave taxpayers on the hook for much larger pension costs. With bond yields at extreme lows and equities at historically high valuations, the notion that we are likely to see continued robust returns forever is suspect at best. The city should plan for, and show, pension costs under a truly conservative scenario of investment returns.

As with revenue assumptions, there was appallingly little discussion of pension costs in the council meeting approving the budget. Discussing this large and growing liability is apparently taboo in polite Encinitas company.

Anyone can declare a budget balanced by playing games with the revenue and cost estimates. It is time the city had an honest discussion with the public about the city’s financial future.

Ed Wagner
President
Encinitas Taxpayers Association

California taxpayers would save billions of dollars that would flow to public schools, community colleges and universities if state and local public employees retired with benefits comparable to those provided to employees of Silicon Valley’s top companies. Teachers’ jobs would be saved and school programs spared.

California Foundation for Fiscal Responsibility will release a study soon that shows California’s largest and best companies typically spend one-third what the state spends on employee retirement benefits. If California spent the same percentage on retirement benefits as large private employers, taxpayers would save nearly $3 billion this year alone, enough to pay the salaries of 40,000 teachers. The savings achieved by school districts and local governments are an added bonus.

Teachers’ retirement benefits aren’t the problem. Our report shows that teachers contribute more of their salaries and collect less in benefits than other public employees. Prison guards, for example, retire seven years earlier than teachers with benefits that are 77 percent higher. Since teachers aren’t covered by Social Security, their lifetime retirement income is about the same as retirees from large Silicon Valley companies who participate in their employers’ 401(k) plans, earn similar annual wages and retire at the same age.

The problem that teachers and taxpayers must resolve is the lack of a sustainable funding mechanism for CalSTRS, the teachers’ etirement system, which carries $56 billion in unfunded liabilities — $127,000 for each of CalSTRS’ 440,000 members. Pension reform will give teachers better benefits than they have now and deliver them through a system that isn’t run by the bankruptcy courts.

Read the rest at SJM

You can help. Please give us your input at the first Encinitas Project citizens’ workshop to be held:

Citizens have already proposed a diverse set of candidate initiatives:

Open Government

Increased access to public information and decision making. Ensure accountability for open government law violations.

Competitive Management Practices

Require competition and oversight in contracting. Require competitive appointments to top city positions.

Pension Reform

End the practice of passing all the risks of pension debt to our children.

Upzoning (Increasing Development Rights to Allow Higher Building Density)

Ensure taxpayer subsidized developments benefit the public’s interest.

City Council Organization

Term-limits and rules for council appointments.

Low Income Housing

Increase access and oversight of mandated programs. Ensure taxpayers are not being cheated in related development schemes.

Current project participants span the political spectrum and have come together to achieve common goals. The objective of this first workshop is to identify and select which issues should be tackled first.

For more information or to suggest other issues and solutions to be considered email encinitasproject@gmail.com.

The multi-term members of the Encinitas Council bring a lot of experience to the table in establishing long-term financial risk in the form of pension liabilities and salary schedules.

Coming out of backroom negotiations in 2005:

Stocks, Houlihan, Guerin and Dalager approved a pay package that would give a staggering 35 percent raise to city workers in the form of a lavish, lifetime boost in their retirement incomes. For good measure, ordinary wages would rise 3.2 percent annually for three years. All this while state government wrestles with billions of dollars in projected deficits, a precarious condition that threatens the fiscal health of local governments.

One year later the city declared it was unable to pay for all its priority projects (library, Hall park, fire stations, & public works yard), and would take out $20 million in loans.

Food for thought: Only the Library and the public works yard have been completed to date. The Hall park phase I is still officially underfunded.

Coming out of backroom negotiations in 2008:

Barth, Stocks, Houlihan, and Bond approved a 15% pay raise over four years right as structural problems in the economy became more difficult to ignore. It had been conventional to approve 3 year contracts. The pay raise resulted in a proportional increase in pension liabilities.

Several citizens asked the council to rethink a four-year agreement because of the housing slump, unemployment and other economic uncertainties. It was too late, the decision had already been deliberated and endorsed behind closed doors.

At the time, “If I were in private business, I would not lock in the kind of increase you’re considering now,” said Gerald Sodomka of Cardiff.

Kevin Cummins suggested a shorter contract or a contract with a clause allowing the terms to be revisited if the economy didn’t hold up. The public comments were blown off. It was already a done deal.

Council Member Bond did point out that the city has a notable stabilization fund that can be tapped if revenues come in short due to a short economic recession. Regrettably, the council doesn’t seem to realize that avoiding a budget squeeze is not the only reason to have gone with a shorter contract.

It was unclear what the labor market was going to look like in 1, 2, 3 or 4 years, but there was good reason to think things were structurally unsound in the economy. The private sector was already pulling back on benefits, salary, and staffing and parts of the public sector would follow.

In hard times it is tougher for the unions to bargain for raises exceeding salary increases found in the private sector. The union probably knew this and they wisely “negotiated” a contract that will got their union members (and, in practice, management) through the rough spot unscathed. That is probably why there were audible, but restrained, cheers from staff when the council gave them 4 years of unconditional raises. It should be sobering to the taxpayer that staff actually cheered the council’s unanimous decision.

No one on the council applied business sense to that decision. The negotiation process did not result in a wise or fair process or result.

This week Jerome Stocks made a sturdy effort to make pension reform part of union contract negotiations.