Commentary: Commonsense Pension Reforms Watered Down by Politics

pension-reform-stockThere are a couple of noteworthy editorials in this morning’s Sacramento Bee pertaining to the issue of pensions and state workers.  I have long supported both unions and public employees.  However, we have allowed, particularly at the local level, the pension system to run out of control.  Local entities simply cannot support the rate and length of pension benefits, particularly to non-unionized upper management and those otherwise rank-and-file making over $100,000 per year.

My fear has been from the start that if we do not fix this problem, the voters, as they have in the past, will pass the first and most draconian “reform” package that they get their hands on.  The typical state worker and public employee is not the problem here.  The typical state worker makes less than $40,000 per year and gets 2% at 60.  Do the math and, even working for 35 years, such a worker would get no more than $28,000 per year in pensions.  That is a healthy retirement, but not the type of pension we are fearing.

The problem is when people retire at age 50, meaning they may live another 30 to 40 years, they retire at 3% and their final wage was over $120,000.  Now they could be making between $84,000 and $108,000 per year.  Worse yet are the managers who are making $200,000, $300,000 per year, and then get a couple hundred thousand each year as part of their retirement.

One problem with the PERS formula is that it is based on the final and/ or highest year of salary.  So let us suppose we need to cut the budget in the short-term. One incentive is to give workers a golden parachute, spike their final salary, and suddenly instead of retiring on $120,000, they are retiring on $180,000.  Moreover, they can add all sorts of vacation time, sick leave, and other pay categories to the final year salary as part of the pension calculation.

How damaging is that to PERS?  Well, neither the employee nor the employer paid into PERS at that rate, and so the rest of the fund has to make up for that last year of salary.  When a lot of people are spiking their final year of salary, that stresses the entire system.

The Assembly this year had a chance to pass a bill that at least would have reduced some of the abuses.  The Bee reports, “Administrators in the city of Bell have been caught padding their salaries, leaving them eligible for pensions of up to $600,000 yearly. Former fire chiefs in Contra Costa County have been found to be earning pensions of up to $284,000 annually – far more than their final-year salary.”

As the Bee editorializes, “These sorts of golden retirement packages couldn’t be justified when times were good, and they certainly can’t be tolerated as public services are being slashed and employees, public and private, are facing pay cuts or layoffs.”

So, as the Bee reports, there was an Assembly Bill that could have dealt with some of this.  “Lawmakers this year had a chance to pass a bill that would have halted or reduced pension spiking. In its original form, Assembly Bill 1987 would have banned the practice of adding unused sick time, accumulated vacation days and other pay categories to an employee’s final-year salary as part of a pension calculation.”

However, public employee unions objected, arguing that such changes needed to be determined through collective bargaining.  I do not completely disagree with that either.  But the result was the bill was watered down, Controller John Chiang has withdrawn support, and the Governor will now veto the bill that is now rendered useless.

Do the unions have a point?  Yes.  And if the unions had stepped up, we might not be here.  However, my problem is that at some point the voters are going to approve something a whole lot worse.

Now, retiree Bob Allen wrote his own piece in the Bee , arguing that the public employees have been made scapegoats for the state’s current fiscal problems and the economy in general.

I agree.  I have shown that, at the state level, public employees are not the cause of our fiscal problems.  The cause is a reduction of revenue, not that we have paid too much for employees.  That is not as true at the local level, however, where salaries make up 71% of all general fund spending and they have risen at rates far higher and faster than at the state level.

And so, yes, I understand Mr. Allen’s point, “Bell is not only extremely rare, but is not by any means indicative of the 99 percent of government workers who get up each day and go to work and attempt to provide the best services possible to their respective communities.”

He continues, “The overwhelming majority of government workers do not retire with massive pensions or earn astronomical salaries during their careers. The average pension for a state of California retiree is approximately $25,000 a year, half of all retirees receive $16,000 a year or less, and 78 percent receive $36,000 a year or less. Those retirees who make $100,000 or more are less than 2 percent (usually law enforcement, fire, etc.) of all retirees in the state of California and are usually retiring with more than 30 years of service.”

However, where I think Mr. Allen misses the point is that just because the typical retiree does not make a six digit salary, let alone pension, that does not mean we should not attempt to fix the problem at the top with the employees who are.  Just because the typical state worker does not have their pension spiked, does not mean that pension spiking is not a serious problem.

Public employees at the state level did not cause this problem.  Nor for that matter did they at the local level.  But guess who is going to pay the price at the end, either through draconian reforms or if the city of Davis and half the cities in California end up going the route of Vallejo?  The people that will pay the most for the excesses of those at the top are the average worker.

And that’s the part I really do not get.  If the average working is not getting $100,000 per year in salary or pensions, why are they fighting so hard to prevent commonsense reforms?  Why not stop pension spiking when it is only going to hurt the workers in the rank-and-file that you purport to support? 

Nearly a year ago I met with a couple of union officials who told me I needed to stop my fight to curtail wages and benefits for the firefighters.  They told me my efforts were aiding and abetting those who wish to kill the pension system. They argued that the union movement is based on solidarity and that all workers need to support each other, regardless.

I could not disagree more.  By going down this path, they are only going to hurt themselves in the long run.  The public will rise up at some point if these problems are not addressed.  The real question is whether the unions would prefer the Fiona Mas, John Chiangs, and Jerry Browns of the world to re-write the rules, or if they would prefer Meg Whitman or Steven Grennhut to do it.  To me the answer is obvious and it calls for a bit of strategic thinking and a bit of pragmatism.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. Dr. Wu

    I am a CALPERs member but I have to say the public employees unions are one of the main sources of the long term structural deficit, which is our real problem. The fact that our health care system is out of control is another source of the problem. So is California’s dysfunctional tax system which started with Prop 13.

  2. davistownie

    [quote]or if the city of Davis and half the cities in California end up going the route of Vacaville?[/quote]

    I think that you mean Vallejo. Vacaville has no shortage of problems (urban sprawl, big box pox, lifted pickup trucks, etc..), but Vallejo is the local city that has been much in the news for it’s bankruptcy.

  3. Rich Rifkin

    [i]”The real question is whether the unions would prefer the Fiona Mas, John Chiangs, and Jerry Browns of the world to re-write the rules, or if they would prefer [b]Christie Whitman[/b] or Steven Grennhut to do it.”[/i]

    Christie Whitman? The former governor of New Jersey?

    I doubt the actual policies of Jerry Brown, regarding the unions and pension reform, will actually be any different from those of Meg Whitman, regardless of who wins the gubernatorial election. Keep in mind that the governor of California has very limited power.

    Whitman talks a big game. Her ads make it sound like Brown is a union stooge (the way Gray Davis truly was). But the union card is played out. Fiscal reality will take our state where it will, regardless of who wins in November.

    Brown, if elected, will have to continue the reforms that Arnold has begun with the half-dozen unions he has made deals with. Whitman, despite her big talk, won’t have unilateral power. We will still have a Democrat-dominated assembly and senate. Those Dems, who are with rare exceptions stooges for the unions*, won’t allow Whitman to do anything extreme. But she will follow the reforms that Arnold has already begun.

    *Why are the Dems in the legislature almost all union stooges? Ask Mariko Yamada ([url][/url]), who is among them: the unions (and the lawyers and the casino Indians) fund their campaigns. The unions work for their elections. The unions decide which committees the Democratic legislators get to sit on. The unions decide who gets to be in leadership in the legislature. The unions decide who gets kicked off of committees when they don’t tow the union line. The unions write the bills which affect the unions. The unions even pay CalPERS executives when they want CalPERS to testify on behalf of union interests.

  4. hpierce

    “spiking” is one issue… it should not happen to serve as a “golden parachute”, in my opinion. The 3 year vs. 1 yr highest compensation is another issue… I don’t know how many people remember double digit inflation (10% or somewhat more)… I do… if we lock in 3 yr average (and once retired from PERS, most agencies have a “cap” that equals inflation or 2%, whichever is LESS), retirees from the City will have less protection than SS benefits (which many long term city employees never participated in). So, if inflation is 8% per year (maybe, but not unknown), retiring employees will have their pensions reduced 8% from what they would have otherwise, if we go to the 3 yr average concept. Even if we stick to the highest year, if after retirement, inflation exceeds 2% per year, retirees will need to ‘downsize’. Currently this does not occur with SS.

    Many (most?) state workers are covered by both. Their PERS pension could erode with inflation over 2%, but their SS benefits wouldn’t, under today’s rules.

    We should “hash this out” sooner than later, so that employees ‘on the cusp’ of retiring can know if they need to delay retirement, and younger employees can adjust their savings/deferred comp. to make up the difference… the rule of thumb I’m familiar with is you need 80% of your ‘working life’ comp. to see you thru retirement.

    Also, I wonder if the “average” PERS pension includes those who are also receiving SS benefits, as many/most State workers do. That might make the average benefit quoted in this blog (and elsewhere) deceptively low as far as how much the average public employees get in retirement, based on both systems.

    To save you some time, Rich, I do not belong to a union (hate most of them) but you’re free to call me a stooge… as you often do with folks you don’t agree with.

  5. Rich Rifkin

    [i]”To save you some time, Rich, I do not belong to a union (hate most of them) but you’re free to call me a stooge… as you often do with folks you don’t agree with.”[/i]

    I won’t call you a Stooge, Curly.

    FWIW, I think this “spiking” story is not really worth discussing. There are literally tens of thousands of public agency retirees in California and there have been less than a handful of cases where serious abuse took place. Per my suggestion of 4 years ago, the city is now making most pensions based on the final 3 years. But in Davis, I don’t know of a single case of “spiking.”

    hpierce, nonetheless, is a bit wild-eyed talking about inflation protection, because he forgets (conveniently) to include the most important part of it–the cost.

    If CalPERS employees would like to have their pension’s COLA precisely tied to the CPI, the amount it costs to fund their pension will roughly double. The stooge is right to suggest that a 2% inflator will lose real value over time, because historically the U.S. inflation rate has run around 3.25% per year and (given our huge debt load) it’s not unlikely that in the next 25 years inflation will at some point spike up for a while in a much higher range, when the dollar loses value (and imports cost more).

    For someone on the 2.5% at 55 plan (which is all Davis employees save sworn cops and firefighters), it presently costs about 21% of his base salary to fund his pension. So if he makes $100,000 per year, we have to send CalPERS $21,000 every year. But the rates CalPERS is charging is going to go up by around 10% over the next 4-5 years. So in 2015, for the $100,000 a year guy, it will cost us about $31,000 each year to fund his pension.

    Now along comes hpierce clamoring for inflation protection. But to get it, that $31,000 will have to be about $62,000 a year. In other words, we pay $100,000 a year for his salary; we pay another $50,000 for his benefits other than pension; and we pay $62,000 more for his pension. So the $100,000 a year employee costs $212,000 a year.

    And the same math is even worse when we are talking about firefighters and cops on 3% at 50 pensions. Right now, it costs us 35% to fund their pensions. (They at least kick in 9% of salary, unlike most on 2.5% at 55 who pay nothing.) That 35% will be 45% in 4-5 years. If they want hpierce’s inflation protection, that 45% will be 90% of salary. So under the hpierce program, we would be paying double for each employee on the 3% at 50 plan. And keep in mind, because they retire so young, we are already paying double. Hpierce just wants to up that even more.

    But hpierce forgets something even more important. Our city is deeply in the red right now. We are $6 million short just to maintain our streets. We are laying off park maintenance employees. We have a $65 million unfunded liability for retiree health care that we have no money for. Not only can we not afford his inflation protection racket, we are going to go bankrupt trying to pay millions of dollars a year extra as CalPERS starts raising rates.

    Nice try, Moe.

  6. hpierce

    [quote]Now along comes hpierce clamoring for inflation protection. But to get it, that $31,000 will have to be about $62,000 a year.[/quote]

    A reader with at least average intelligence would see that I said no such thing. All I attempted to point out was if an employee retired during a period of higher than average inflation (and Rich’s # for that average, during the last 10-20 years looks right to me), an employee’s pension would start out at least a year behind the curve with three year averaging. Most employees I know have factored the long term loss due to inflation into their retirement plans. I have not, nor expect to “clamor” for inflation protection for government employees.

    Rich appears to have the ability to never let facts get in the way of a good story. What’s you “epithet du jour” for me today, Rich?

  7. E Roberts Musser

    Avatar: “My guess is that ” Reverse Mortgages ” will be the new retirement plan of the future .”

    Scary thought. How about real pension reform instead? I know, I know, wishful thinking…

  8. Rich Rifkin

    [i}What’s you “epithet du jour” for me today, Rich? [/i]

    The worst I can think of, the most damnable and cruel is to call you hpierce. Sorry. That is mean.

  9. hpierce

    [quote]The worst I can think of, the most damnable and cruel is to call you hpierce. Sorry. That is mean. [/quote]

    Mais non… certainment pas… you have shown your true nature… why not equate hpierce to ‘devil incarnate’… you have “called me a ‘name'”, acknowledged it is “mean”, and said you are “sorry”… all in the same post. Well, on my part, I will not play your “game”… the proper response to a genuine expression of “sorry” (assuming it is an apology & sincere) is to forgive. Here and now I do… irrespective of whether it was sincere &/or genuine. If I have ‘hurt’ you in anyway, I sincerely apologize, and will do my utmost to not repeat that faux pas.

  10. hpierce

    Rich… perhaps you’d like to explain to Don Shor, the moderator, why that post should not be deleted? I suspect if I “exposed” what you said, my post would be redacted/deleted. Get help.

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