Legislative Leader Promises Public Pension Reform By End of Session

One of the biggest issues facing the city of Davis is the fate of state legislation that would reform the public pensions system, which, along with retiree health care, is crippling the ability of cities like Davis to get out from under an economic downturn.

Senate President Pro Tem Darrell Steinberg, meeting with reporters on Monday, promised public pension reform “definitely by the end of four weeks.”

Last year, Governor Jerry Brown put out a 12-point plan – a list of reforms and some sort of hybrid plan that included raising the retirement age, three-year final compensation and a cap on pensions, among other proposals.

Back in June, the legislature balked at some of the proposals, preferring a softer approach.  Now it appears that language is moving forward toward a compromise.

Senator Steinberg was asked what issues still need to be hammered out, and he said: “Same issues really, the kind of cap, whether or not you have a hybrid, the extent to which all of these changes apply to local governments, what parts and what is left to collective bargaining at the local level. Pre-emption is not an issue.”

Senator Steinberg warned that labor allies will not like the comprehensive reform package.

“Will it cause some discomfort and unhappiness? Yes. Do you sometimes disagree with your allies and friends to do what you think is the right thing? Yes,” Senator Steinberg told reporters during the press conference. “I never expected that we’d get high-fives for doing any of this.”

The change, the senator said, will not just deal with the abuses of the system, but also the formulas.  He said that they must be changed in order to prevent the state’s retirement system from imploding on itself.

The senator acknowledged this would be the way they would seek to “not have this issue of pension reform be front and center every year and every session. The only way to accomplish both goals is to deal with it.”

Labor groups, while supporting some reform, are not happy.

“We’re already disappointed with where Democratic leadership is headed with the so-called compromise” with Brown, said Steve Maviglio, spokesman for Californians for Retirement Security, a coalition of unions. “Polls say that Californians don’t want to take a wrecking ball to pensions. They want to rid abuses and the rip-offs of the system. Only 2 percent of pensions are more than $100,000 but they get 98 percent of the attention.”

Rob Feckner, President of the CalPERS board, argued that the media is wrongly hyping pensions as a cause of city bankruptcies.

He wrote: “Last fiscal year, CalPERS earned a 1 percent return on our investments. The news has caused some people, including the media, to claim that the sky is falling and to demand that CalPERS ‘get real’ and lower our investment assumptions. A few people have even personally blamed our investment staff.”

Instead, he argues that the news and editorials demonstrate a misunderstanding of the CalPERS investment strategy and “mischaracterizes how a single year return will actually affect pension costs for taxpayers.”

“As one astute financial editor put it, the reporting and short-term views of our investment returns is largely what’s wrong with our financial industry and the media who breathlessly cover it,” he continues.

He then argues that CalPERS is a long-term investor, which is a fact that media ignores and misinterprets.

He argues, “Historically, CalPERS has regularly outperformed our long-term 7.5 percent goal over a 20-year average. Our 30-year average even exceeds 9 percent.”

“If the media and our critics insist on looking at returns on a single-year basis they should tell taxpayers the full story – we posted gains not just in excess, but in significant excess of our goal of 7.5 percent 14 times in the past 20 years,” he continues.

Mr. Feckner goes on to argue that the problem with cities like Stockton and San Bernardino is not pensions but rather the economy and housing market, coupled with poor financial decisions made by city officials.

He is in part correct, but misses that pensions are part of that fiscal mismanagement of the city.  The cities, aside from the earnings of PERS, are stressed because of poor decisions they have made with their pension plans.

By increasing their pension obligations retroactively, cities created an unfunded liability.  That becomes further stressed with lower retirement ages and increased salaries which change the base rate.

Much of the pension reform efforts are aimed at these problems.  Raising the retirement age reduces the stress on the system through a reduction of the number of pension payments.

By imposing a three-year average and regularizing the definition of wages, the reform would reduce spiking, which also creates huge unfunded liabilities by increasing the base rate for the pension without funding it.

Mr. Feckner is correct that CalPERS is a long-term fund and, over the long term, the peaks and valleys tend to smooth out.  He is also right about past investment returns.

However, as Rich Rifkin has pointed out, past returns are only a portion of the story.

Back in March, Mr. Rifkin noted that Chief Actuary Alan Milligan’s recommendation to reduce the forecasted earnings is based not on the anticipation that the rate of return will be lower than in the past, but that expectations for inflation will reduce what we can expect the rate of return to be.

As Mr. Rifkin wrote, “If general price inflation goes up more slowly, it is logical to think public employee salaries should inflate more slowly also, saving agencies money and reducing future pension costs. However, GRS thinks otherwise.”

He continues, “Currently, PERS expects employee salaries to grow 3.25 percent per year, which is 0.25 percent higher than its CPI assumption. GRS advises that, despite financial pressures on local governments, a more realistic assumption is that employee salaries will grow 0.50 percent faster than the CPI.”

“Over the past 10 years, many public employees saw their salaries inflate at twice the rate of inflation,” he writes.  “So if the new CPI figure is 2.75 percent, PERS should expect salaries of public employees to grow 3.25 percent per year, exactly what is now assumed.”

It is complicated stuff and Mr. Feckner is correct that the media does not always appreciate the nuances.

That said, it becomes rather obvious that pensions will be a huge pressure on a city like Davis with a relatively small general fund.  Mr. Feckner is correct that pensions will not cause a city like Davis to go bankrupt, but they are not helping matters.

—David M. Greenwald reporting