Public Employee Pensions Are Not the Problem

pension-reform-stockby Buddy Magor

The economy is picking up steam. State, city and county employees have willingly accepted millions upon millions of dollars in cuts to their pensions. California’s largest pension fund has recouped every single investment penny it lost from the Great Recession.

So I thought perhaps California police officers, teachers, firefighters, and other public employees could finally exhale. I hoped we could finally enjoy relief from daily attacks for the modest pensions we count on for retirement security.

Unfortunately, that’s not the case. Far from it.

For more than five years, pensions have been used by critics as the scapegoat for all of government’s budget problems. But now that the California Public Employees’ Retirement System (CalPERS) and other pension systems are healthy and yielding double-digit returns, they’re not getting an equal share of positive attention.

In fact, the same wealthy and extremist factions who categorically have attacked public employees are regrouping, poised to step up the battle on our retirement security. Texas hedge fund manager John Arnold, a billionaire who began his climb to the 1 percent at Enron, is leading the charge, offering support and funding to anti-pension soldiers in California.

These same folks failed to collect the needed signatures and support for a statewide ballot measure containing illegal and radical pension changes, and California lawmakers enacted sweeping pension changes a few short months ago. Still, they are hinting they may try yet again to dupe voters into slashing pensions even more.

Public workers have saved taxpayers hundreds of millions of dollars by agreeing to concessions in more than 300 California counties, cities, and local districts. These savings have been achieved at the bargaining table, not in the pages of newspapers. We have foregone raises, accepted pink slips, and dealt with increased workloads using fewer resources. We have faced unemployment, organizational reshuffling, and, in some cases, local bankruptcy charges.

The statewide pension changes approved by lawmakers in the fall have eliminated many of the headline-grabbing problems with pensions. The fact remains that 98 percent of retirees earn far less than pension critics would like the public to believe. The vast majority earn $30,000 or less.

Critics continue to assert that the retirement system is somehow dragging down the entire state government. How do they explain a 12.2 percent return on investments in 2012 or an 8 percent average return over the past 20 years despite the recession? Today, CalPERS is back to pre-recession strength. It has earned back the $97 billion it lost during the recession, and then some. Meanwhile, the California State Teachers’ Retirement System (CalSTRS) portfolio returned 13.45 percent for calendar year 2012.

We have sacrificed to do our part, all while listening to right-wing politicians and Wall Street insiders claim that we are the root of the state’s fiscal problems. Ironically, now that the stock market is booming again, Wall Street executives continue to get richer while working-class people do not.

I don’t begrudge anyone the salary he or she has negotiated or earned, but a study that came out last year from the Economic Policy Institute found that CEOs saw their pay — salaries, bonuses, benefits, etc. — increase by 725 percent since 1978. That’s in stark contrast with average American workers. In fact, it’s 127 times more than what the average worker saw during the same period even though, I’d guess, we’ve all been working harder and faster since then.

We’ve worked through this recession, experiencing the worst of it, while Wall Street sat back on its hands, doing nothing. And we’re painted to be the bad guys?

It’s actually the opposite.

Meanwhile, pension critics, including San Jose Mayor Chuck Reed, are telling only half of the story about pension changes. Shrinking benefits for public workers is bad for the economy, will force more Californians to turn to other taxpayer-funded social services, and will result in untold short-term costs with no guarantee of saving taxpayers in the long run. This is beginning to play out in places that have passed so-called pension reform. In Reed’s San Jose, the city was forced to scramble for new police recruits as officers fled because of politically motivated pay and benefit cuts.

I sincerely hope that those with considerable means for change, such as John Arnold, would focus their efforts on the real problems our nation faces and leave those who serve alone to carry out our duty.

Buddy Magor is San Diego region executive director of Peace Officers Research Association of California (PORAC)

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. growth issue

    First off one of PORAC’s mission statements is to:
    “To represent and protect the rights and benefits of peace officers;”
    so is it surprising that they would come to this conclusion.

    Here’s an article that states it much differently using a study from California Common Sense, a nonprofit and nonpartisan watchdog group:

    “California’s major retirement systems now have $222.2 billion in unfunded pensions, up from $211.4 billion five months ago. The report says that number was $110 billion in 2007-2008, meaning the state’s unfunded pensions have doubled in six years.

    Some observers think those numbers are actually underestimating the state’s unfunded liabilities.

    In January, Sacramento Bee columnist Dan Walters used figures from Moody’s to estimate that California “could have unfunded pension debt approaching $300 billion, plus another $100 billion for retiree health care.”

    1. Tia Will

      When two sets of numbers tell such a different story, it seems that each is missing some nuances. I think the missing piece here is encapsulated in the true statement

      “Shrinking benefits for public workers is bad for the economy, will force more Californians to turn to other taxpayer-funded social services”.

      Mr. Magor then goes on to discuss short term costs. What both sides seem to be underemphasizing is what happens in the long term. What happens when the workers with reduced salaries, those who are not at the top rungs of the pay scale but the teachers and other relatively low paid professions and workers reach retirement age and are not able to meed their costs of living, not because they have been profligate, but because our society has not been willing to provide them with an adequate salary to both live and save, and an inadequate pension on which to live post retirement. Do we not believe that these folks will then need economic assistance in the form of public benefits provided by our children ?

      Some are going to say that many in the private sector also do not receive pensions. To that I say, shame on the private sector for not being willing to provide living wages and old age security. I am not talking about mom and pop operations making just enough to get by, but about our corporations that pay as little as possible while enriching top executives and share holders to ridiculous amounts that no one could possibly need.

      Some will argue that this is not the problem of the government which should be as small as possible. I would argue that the government would be much smaller if the private sector were meeting the needs of the population.
      Think what could be accomplished if each side would stop hiding behind its favored set of numbers, stop shouting at each other, and actually work together to ensure that all of our citizens are able to live without fear of hunger, cold, or death from a treatable illness because of inability to pay.

      1. growth issue

        My numbers came from a non-partisan non-profit group where PORAC’s numbers come from an entity that has as one of their mission statements “to represent and protect the rights and benefits of peace officers”. So I think most objective people would tend to believe the non-partisan findings.

          1. growth issue

            Again, one of PORAC’s mission statements is ““to represent and protect the rights and benefits of peace officers”.

          2. Phil Coleman

            Well said! Thank you.

            I suppose a truly neutral group–if one exists–would manifest their neutrality by saying nothing. Nothing wrong with advocacy, but the very term in application means that opposing thoughts are diminished, distorted, or ignored altogether.

          3. SouthofDavis

            David wrote:

            > Non-profit, non-partisan does not mean disinterested and neutral

            True, but just last week the partisan pro union Governor Brown said:

            “massive pension liabilities that threaten the state’s fiscal well-being. Retirement benefits for public employees are underfunded by $218 billion”

  2. SouthofDavis

    Buddy wrote:

    > I hoped we could finally enjoy relief from daily attacks for the
    > modest pensions we count on for retirement security.

    The former Davis fire chief (who was able to retire in her 50’s) has a pension of OVER $10K a MONTH when you add in her husband’s pension they are making about $200K. Pensions that are worth MILLIONS and put a couple in tot he top 1% are not “MODEST”. The LOWEST pension possible for a California firefighter retiring at 50 after 30 years is still worth MILLIONS and is only “modest” if you can say with a straight face that MILLIONS are “modest”…

    Almost 9,000 retirees in the California Public Employees’ Retirement System receive at least $100,000 in annual benefits, more than quadruple the number getting that much during 2005, according to a Bee review of CalPERS data. Just these 9,000 people will receive ~ $1.1 billion in benefits this year (roughly TRIPLE the general fund budget of the Sacramento City Unified School District)…

    P.S. In the old days the pensions were “modest” so any numbers of “average” pensions make them look low (there are a lot 80 year old retired firefighters making almost nothing)…

  3. Frankly

    Public sector employees and recent retirees (in the last 15-20 years) are the new 1%ers. They win the lottery with a end of life fully paid vacation beginning at the same time that most in the private sector are just able to start saving for their retirement after having the crap taxed out of them and having to pay the full price of their children’s overpriced college education… and both of those hits are largely because of the previous.

    It is a one-two-sucker punch.

    My neighbor… he is a nice guy… retired firefighter captain. Retired at age 54. He is out in his yard digging out all the tree roots. So, why was he retired at 54? He is fit, smart, capable, skilled, experienced. But he is being paid (I assume 90% of his previous compensation which was probably boosted by overtime) and he is getting his healthcare covered while his employer had to go hire a replacement employee that also musts be paid and have his healthcare covered.

    It is absurd.

    Social Security was enacted because wives were living to 67 and husbands were living to 65. The retirement age was set at 65 only to help ensure that wives were not destitute for the last few years of their life. The idea was that we would work up until about the day we died.

    Fast forward to a time when life expectancy for the average middle-class American is pushing 90.

    The source of the problem is this growing entitlement for being able to score a 30-35 year paid vacation at the end of working for 30 years. It is absolutely absurd. And it is absolutely unsustainable.

    The problem we have is that many people are dreaming about this same lottery win… it is the new “Lifestyles of the Rich and Famous” pursuit… because actually starting and growing a business to make a person rich is much, much harder work. Better to land that public-sector gig and rush to that golden retirement ticked at the end of a relatively short race!

    The solution to this problem is simple. It is to reset our expectation for how long we have to work before retirement. First, 62 should be the minimum base retirement age for safety employees and other jobs that require significant physical work, 67 for the rest. And to get to that point and be comfortable to the point of having material discretionary income, everyone needs to have their own personal retirement savings. Public pensions should be capped at 70% of compensation at retirement age… and precipitously decline if people retire early (for example, 5% per year).

    Sure you can retire earlier. But it would require fiscal discipline and delayed gratification.

    And here is the other consideration. With all the paid time off we supply government workers today, it is not like work should be considered this horrendous grind. I am fine with the practice of building a greater time off benefit with seniority. For example, maybe 5 weeks or 6 weeks per year of vacation after 20 or 25 years of service. This then should help a person as he/she ages to deal with the inevitable increase in health and energy decline. And then there is the 12-14 paid holiday days.

    At age 62 a person should have paid off their 30-year home mortgage. The kids should be done with college. Expenses should be at a point where 70% of compensation is more than enough to support the same lifestyle… especially with healthcare covered.

    If we do this, public-sector pensions would be affordable and sustainable. Otherwise they are public enemy number 1.

    1. Davis Progressive

      “Public sector employees and recent retirees (in the last 15-20 years) are the new 1%ers. They win the lottery with a end of life fully paid vacation beginning at the same time that most in the private sector are just able to start saving for their retirement after having the crap taxed out of them and having to pay the full price of their children’s overpriced college education… and both of those hits are largely because of the previous.”

      sure my pension of about $32,000 is not exactly winning the lottery. now what disgusts me is that the people whining the loudest here are the people getting 3% at 50. i get 2% at 60. big whoop.

      1. Frankly

        DP, certainly not all government employees “win the lottery”, but it is those that do that are the source of our fiscal problems. And there are many, many government jobs that pay much better retirement benefits.

        I have two friends that are retired federal employees… but retired at age 55 with 80% of their compensation and all of their healthcare costs covered.

        I have friend working for UCD that are gearing up for about the same… except retiring at 57.

        Is your healthcare covered? That would add about $15,000 – 24,000 per year or more in dollar value depending on the coverage.

  4. growth issue

    David, what was your purpose in posting this obviously biased piece? You yourself have been saying what a mess our pension systems are in and the burden they’re putting on the government and then you post this article? Sometimes I don’t get where you are coming from. You seem to want it both ways.

    1. David Greenwald

      Two reasons. First, it’s important to know what the other side is arguing. Second, I think it’s important to post multiple points of view. Same reason I posted Dan Carson’s piece even though I disagreed with portions of it.

    2. Frankly

      I am pleased that David posted this because it shows the extend of the selfish entitlement that has developed.

      Reminds me of Al Gore complaining because some of his maids just quit and he doesn’t know if his mansion will be cleaned well enough to impress his guests coming to the big party.

  5. WesC

    CalPERS has earned a 16.2 percent investment return for the 12-month period ending December 31, 2013. Many of the states with significantly underfunded public pensions also have a history of numerous pension holidays where the state was exempt from making their contribution for the year, borrowing from the pension funds, or using the funds as just another pool of money from which to draw from or borrow against from for pet projects. California has also had pension holidays in the 1990s when the fund was considered to be over 100% funded, and that is a large part of the current California problem. The recent California pension reform act forbids pension holidays, and has several other measures to ensure Calpers solvency.
    I think the biggest push to privatize public pensions is coming from Wall Street because they see potentially billions in management fees should they be able to convert civil servant’s pensions into some sort of self directed investment account.

    1. paul brady

      The market return as measured by the indexes such as the Dow Jones [DJIA] or S&P 500 was 32+%!

      In 1998/99 CalPERS [in concert with its public employee unions] assured the Legislature that it could fund huge public employee pension and other benefit increases – as much as 50% in pensions. The 3%/year pension at 50 years of age for “safety” employees such as fire, police, prison guards, Calfire, etc., resulted.

      But CalPERS has been unable to achieve the required investment returns, so the State, cities, counties and other public agencies, via their taxpayers and ratepayers have had to make up the differences, costing billions per year. This has devastated the finances of city, county, and other public agencies who had quickly or eventually, adopted the enhanced State benefit formulas! And it is now decimating Davis city services. Our Community Pools complex was to be closed, had it not been taken over by the Davis Aquadarts, a community age-group swim club. who will pay for its summer operation and maintenance to teach 700 swimmer with about 75 instructors – paid as for a decent summer job..

      The corruption, greed and million-dollar kickbacks to CalPERS employees, or at least to its Board members, have been exposed in the Sacramento Bee. CalPERS has gotten involved and been ripped-off by private-equity investment houses, lost billions in ill-advised real estate investments and just failed in its other investments. thus costing taxpayer tens of billions and producing huge employee costs for employers [taxpayers] to pay.
      The unfunded liabilities of CalPERS are estimated to be at least several hundred billion dollars. The market, eg, Dow Jones Index [DJIA index], has averaged 12.3% per year over the past 30+ years. CalPERS has done what: 8%/yr ? Over 33 years a million would grow to 46 million in the DJIA index vs 12.7 million for CalPERS’s 8%. CalPERS incompetence is costing state taxpayers hundreds of billions!

      Annual costs for each employee are rising rapidly. Our Davis city manager recently gave us some numbers: retiree pension and healthcare costs rising to 50, 60, 70, as much as 80% of employee salaries! If nothing more is done we will be a shell of the City we are now! What havoc CalPERS, our dysfunctional Legislature and local politicians have wreaked on us!

      1. DavisBurns

        Paul, I enjoyed your recent article in the Enterprise but I disagree about CalPers being pushed to preform better in the market. That results in even riskier investments and a greater chance they will lose big in the next bust. I think it is a mistake to have them invest in the market at all because it is legalize gambling but I doubt we will ever put that genie back in the bottle. At the least CalPers must have a mandate to minimize risks and you cannot do that if you are pressured to maximize returns

  6. jimt

    I concur with Frankly’s viewpoints expressed above; and he makes some good observations; and I’d take it a little further–for non-physically strenuous work retirement age should graduallly ramp up to 70 over the next decade or two. Also, you are welcome to retire early (e.g. age 60); but not eliigible to collect any benefiits until the minimum retirement age (about 62 or 70); and I agree a cap of about 70% (high paiid employees) to 85% (low paid employees) is about right. Back to a modest retirement scenario–if you want a more ‘golden’ retirement; you are welcome to sacrifice and save for it on your own earlier in your life; should not be a burden on taxpayers, most of whom do not earn as much as a typical public service employee might get for kicking back during retirement!

    1. DavisBurns

      I might have agreed with your suggestion to raise the retirement age ten years ago but now I am 65 as is my husband and we are both surprised at the physical limitations that would make working until age 70 onerous. Neither of us would have predicted this outcome ten years a ago. I had health issues but my husband was physically active and we ran a small business that was quite successful and expected we could do that for another 20 years. Lets not assume everyone can work till 70 because you just don’t know what the future will bring.

  7. realchangz

    I still don’t get it. You all seem to be obsessed with the pension issue, when it is funded at close to 85% of target valuation both at the state and city level. In Davis, as of June, 2012 it was underfunded by maybe $15MM (represent an underfunding of some 15% before the 2013 market recovery.

    If you’re just sore about the amount of the pensions that’s one thing, but they are largely funded – assuming they can continue to deliver their target 8% return.

    Meanwhile, the OPEB account – the city’s other defined benefit account for health care benefits – sits at a net unfunded position of roughly -$58MM or 95% unfunded. To repeat my comments from today’s other discussion, how does this happen. How did we get to a place where our government and elected officials have the latitude to simply ignore the simple laws of finance and totally ignore their responsibility to put aside savings each year in order to pay for promised benefits down the road? Isn’t that a more important question?

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