Pensions a Crisis at the Local Level Not the State Level

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pension-reform-stockWe took up the public pension issue primarily based on what was happening to local governments as the result of increased pension plans in the early part of the last decade, and rising public employee salaries.

From the standpoint of local government, the need for statewide pension reform exists because local government cannot roll back their pension obligations or change the rules under which they and CalPERS operate, but the legislature can change many of those things.

The City of Davis, for instance, is facing millions of dollars in increased costs, perhaps up to $7 million within a few years.  That kind of rate increase is devastating to a local budget, as it represents a sizable chunk of the general fund.

The state does not have the same issues, however, as direct employee costs are a much much smaller percentage of the budget.

Within that framework then, the need for reform of pensions seems obvious.  However, from the standpoint of the statewide budget, the pension issue has been more problematic and contrived.

LA Times columnist George Skelton once again does the math, and concludes, “State employee pensions are not to blame for Sacramento’s budget deficit. Not by any math.”

However, he does add, “Down the road, the current state pension system probably is not fiscally sustainable, as some studies have reported. It could burn a hole in the state vault — some time in the future. But not now or any time soon.”

However, and this backs up our earlier point, “Yes, some local governments are suffering financially because of their politicians’ short-sighted largess in negotiating overly-generous pension schemes with public employee unions.”

He cites an article last week that found that 180 local governments “in California kept sweetening employee pension plans even after the state’s economy began tanking, sinking the entities further into debt. Now they’re forced to lay off workers and reduce public services.”

So here is the math.  In the next year, the general fund is roughly $85 billion dollars.  The total payment that goes for pension is: $3.7 billion.  That is not chump change to be sure, but it is not even five percent of the state’s budget and not even a significant chunk of the deficit.

Mr. Skelton breaks down that $3.7 billion.  $2.4 billion goes to state employees through CalPERS (California Public Employees’ Retirement System).  The other $1.3 billion goes to teachers through CalSTRS (California State Teachers’ Retirement System).

There is also about a $1.8 billion payment to CalPERS that “will come from special funds that don’t figure in the deficit.”

Writes George Skelton, “So, hypothetically, even if the governor and Legislature eliminated all payments to the state and teacher pension funds, they still would face a budget deficit of nearly $12 billion. And, of course, that’s not a realistic scenario. They’re not going to completely stiff public employees and provide them with no retirement benefits at all.”

“It would not have a significant impact,” Mr. Skelton quotes former Republican Assemblyman Roger Niello of Sacramento County, who is pushing a pension initiative for the 2012 state ballot. “Frankly, I don’t know of anything that can be done [with pensions] that would have a significant impact on this or next year’s budget.”

“Maybe state employees could pay more into their pension system? Most already have agreed in collective bargaining to do that,” George Skelton rights.

He continues, “The point is this: When Gov. Jerry Brown says he needs to extend higher tax rates for five years to honestly balance the books, it is not a legitimate retort to claim that if the state merely whacked away at pensions, it could operate in the black.”

He adds, “Public pensions in California — state and especially local — not only are unsustainable fiscally, they’re doomed politically. There’s a lot of pension envy by private sector  workers who have been stripped of the retirement benefits they once had banked on. Why, they ask, should they contribute tax money for a level of pension generosity denied them?”

As Mr. Skelton points out, the Governor is right in the middle of the two sides, he has not gone far enough for Republicans and other reformers, but he has gone two far for unions.

“Actually, he probably went about the right distance, considering the stormy political climate. There’s still much, after all, to be negotiated,” he writes.

The top three proposals include capping pensions at $106,000 annually.

“We think that’s a very reasonable pension, a very adequate amount for people to live a fine life on,” Governor Brown’s veteran labor director, Marty Morgenstern said. “Beyond that, we think it’s excessive.”

Second, it would prohibit pension spiking by basing benefits only on base wages and for an average of three years rather than the final year.

Finally it would offer an hybrid system which would reduce the public pension portion but add in a 401(k) type plan.

But while the impact statewide is small, the impact locally is very different.  This year we are projected to pay just above $6 million to furnish pensions.  That number could jump significantly by 2014-15.  Right now that number is projected to be around $9 million in two years, but could rise significantly higher should CalPERS eventually reduce their expected rate of return from 7.75 down to 7.5% where most people think they should be.

If that happens we are looking at $11 million from our budget going to PERS.  To put that into perspective, our payroll is roughly $30 million and the general fund is right around $40 million.

So, unlike the state pension hit which is less than 5% of the state’s general fund budget, our current pension obligation is about $6 million out of a $40 million budget, and an increase of $5 to $7 million would push the obligation over 25%.

Remember, these pension increases are occurring at a time when we are not expecting revenue growth.  We have a flat budget expectation for the next few years.

That is why the pension issue matters to Davis far more than it matters at the state level.

—David M. Greenwald reporting

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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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21 thoughts on “Pensions a Crisis at the Local Level Not the State Level”

  1. hpierce

    [quote]our payroll is roughly $30 million and the general fund is right around $40 million.[/quote]Clarification… is the 30M figure payroll supported by GF only, or is an “all funds” number?… if the latter, what is the number for payroll supported only by the GF? 75% of GF going strictly to payroll costs looks huge.

  2. E Roberts Musser

    dmg: “So, unlike the state pension hit which is less than 5% of the state’s general fund budget, our current pension obligation is about $6 million out of a $40 million budget, and an increase of $5 to $7 million would push the obligation over 25%.”

    So for the state, the pensions represent 5% of the budget. For Davis, the pensions represent 15%. I’m not quite following what you mean by “an increase of $5 – $7 million would push the obligation to 25%”. Are you talking about the change in assumptions as to rate of return that will cause the possible increase? Wouldn’t the same hold true for state pensions as well? A different assumption would push that percentage of the budget up too? Or am I missing something here?

    Also, I need some clarification. The pension reforms Brown is suggesting – why would they apply to city pensions? I would assume Brown’s pension reforms would only refer to state pensions. I don’t understand how Brown could reform city pensions…

  3. Alphonso

    The pension reforms Brown is suggesting – why would they apply to city pensions? I would assume Brown’s pension reforms would only refer to state pensions. I don’t understand how Brown could reform city pensions…

    I think it is safe to say some, if not most, of the pension rate “excesses” began at the State level then trickled down to the local level. Therefore, State pension reform (reductions) will follow the same path. Local governments follow the direction of the State.

  4. Dr. Wu

    [quote]I think it is safe to say some, if not most, of the pension rate “excesses” began at the State level then trickled down to the local level. Therefore, State pension reform (reductions) will follow the same path. Local governments follow the direction of the State.[/quote]

    I’m not sure this is true. The biggest abusers have been police officers and firefighters who are primarily local.

    THese pension liabilities are huge for State and local government.

    [quote]From the standpoint of local government, the need for statewide pension reform exists because local government cannot roll back their pension obligations or change the rules under which they and CalPERS operate[/quote]

    DG: You might want to add local government cannot roll back pension obligations except possibly under Chapter 9 (municipal bankruptcy).

    I don’t want to be semantic or engage in hairsplitting, but that is an important consideration and ultimately imho how many cities will work this out (which will put further pressure on solvent cities like Davis to reign in these costs).

    Of course the other issue is that CALPERS projections severely underestimate the actual unfunded liability by seriously overestimating future returns.

  5. E Roberts Musser

    To Dr. Wu: I don’t think you are “hairsplitting”. My understanding was the same as yours – bankruptcy is the only way there is going to be pension reform at the local level. Anything Brown does for state pensions really has nothing to do with local city pension reform – that has to take place at the local level.

    I also agree w your assessment that CALPERS projections severely overestimate the projected rate of return. But AFAIK, Brown’s pension reform will have nothing to do with that either, or am I missing something?

  6. Alphonso

    [b]I’m not sure this is true. The biggest abusers have been police officers and firefighters who are primarily local. [/b]

    The largest Fire agenty in California is Cal Fire and the largest Police agency is the CHP. I know the 90% max retirement benefit started at the State level and I think the 3% annual step came from the State also.

    Also I think the word “abusers” idicates police and fire people have done something wrong. All they did was point to State benefits and ask for an equal benefit – nothing abusive in that. If there was any abuse, it was the community leaders who agreed to give them the benefits.

  7. Dr. Wu

    [quote]I think the word “abusers” idicates police and fire people have done something wrong.[/quote]

    Yes. I think potentially bankrupting cities is wrong. Perhaps Alphonso and I will agree to disagree.

    Not sure on exact history vis a vis whether it was state or local first–my understanding is that both fed off each other and although State CHP maybe larger than individual departments collectively there are more local police I believe. (Haven’t checked the numbers.)

  8. Rifkin

    [b]Pensions a Crisis at the Local Level Not the State Level[/b]

    You could not be more wrong. You mistakenly looked at the underfunding to CalPERS. The real HUGE problem for the state regards CalSTRS: [quote] CalSTRS’ investment losses have left the system underfunded by $42.6 billion, with almost double the unfunded liabilities it had estimated 19 months ago.[/quote] That $42.6 billion deficit is coming right out of the state budget. If not, CalSTRS goes bust.

  9. Rifkin

    I forgot to post my source ([url]http://www.pionline.com/article/20100127/REG/100129854[/url]) for that quote above.

    Here is another article ([url]http://calpensions.com/2010/01/29/calpers-calstrs-funding-levels-plunge/[/url]) on CalSTRS.

  10. David M. Greenwald

    “You could not be more wrong. You mistakenly looked at the underfunding to CalPERS. The real HUGE problem for the state regards CalSTRS”

    For the most part CalSTRS is like CalPERS, it’s not direct state funding.

  11. E Roberts Musser

    erm: “”The pension reforms Brown is suggesting – why would they apply to city pensions?”

    dmg: “Because we use CalPERS.”

    So let me try and understand. Are you saying that if Brown achieved his version of pension reform, pensions for city employees, including upper mgt, police and firefighters, would be capped at $106,000; be based on base wages averaged over last 3 years of employment; and have part of pension reduced and substituted w 401k plan?

  12. Rifkin

    [i]”For the most part CalSTRS is like CalPERS, it’s not direct state funding.”[/i]

    No. You are not right, here. There is a very big difference. CalSTRS cannot change the rates it charges districts or teachers. It needs the legislature to authorize rate changes and the legislature to fund the higher rates.

    Furthermore, all of the marginal money which funds CalSTRS comes from the state. That is, the state sends the school districts money and out of that a portion goes to CalSTRS for the teacher and disteict rate funding.

    So when we say CalSTRS is $42.6 billion in the red, that really means the State of California will have to pony up that money. That is a huge difference from the CalPERS problems, which are really the problems of cities and some counties.

  13. Rifkin

    From a recent Bee article on the mess at CalSTRS:

    [i]CalSTRS’ pension funding shortfall has ballooned to $56 billion, a development likely to intensify the political debate over public employee retirement costs.


    Separately, Gov. Jerry Brown said a plan to address CalSTRS’ shortfall is “under development.” He made that comment as he unveiled a broader package of pension reforms.


    [b]The increase in the gap underscores CalSTRS’ need for higher contributions from state taxpayers[/b], school districts and teachers.

    [b]CalSTRS officials say they need more money from taxpayers, not less.[/b]

    “We can’t invest our way out of it,” said Ed Derman, CalSTRS’ deputy chief executive.


    Teachers and school districts contribute more than $2 billion each. CalSTRS officials believe their fund will need far more than that eventually to become healthy. Aside from the automatic trigger, [b]CalSTRS needs the Legislature’s permission to raise taxpayer contribution rates.[/b]

  14. davehart

    I think you’re wrong about the implied nexus between state and local funding for CalPERS. CalPERS administers literally thousands of pension plans. The state component accounts for about half of the public employees covered, but the actual retirement benefits are actuarially unique and accounted for jurisdiction by jurisdiction. So, if Woodland public employees pensions are overfunded, that overfunding can’t be used to help out Davis employees. That’s why you see such a large range of pension formulas. In general, local agencies have been more generous with their employees than the state. My theory is that city councils and county boards work more closely with their employees and are therefore more interested in meeting their recruiting and salary demands than the state legislature is relative to state employees. It’s a matter of scale and a feeling of how you treat your employees. The closer you are, the more personal it is.

  15. davehart

    What I’d like to see discussed is how we can set up a pension system for everyone. Maybe what we’re talking about it Social Security Plus. As it is I and my employer pay 6% of payroll into the fund. It’s in trouble you say? Okay what if we each pay 10% or 12%. That would erase the deficit, by anyone’s calculation. 12% matched contribution would mean 24% of my payroll amount is put aside for retirement security. I am interested in what can be done to create a well-financed retirement and medical support system for everyone. Anything less puts us all into the pension envy game. A loser for everyone.

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