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 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