Unlike Critics Are Arguing Pension Reform Compromise Hits Most Needed Reform Points
Critics on both sides of the public pension reform debate have and will continue to attack the compromise, but the Vanguard will not be one of them. After careful analysis, the Vanguard concludes that the compromise hits on the key elements needed for pension reform while preserving the defined benefits plan.
Despite strong criticism of PERS (Public Employees’ Retirement System) and the city of Davis’ pension formulas, the Vanguard has always supported continuation of the defined benefits plan – as a system that continues to provide public employees with a secure and predictable retirement.
We believe that the system needed to be reformed, not ended. And while we understand that the public employee unions wanted to be able to bargain their way to change – not only had many of the changes already been agreed to at the bargaining table but they have had four years to do so on other elements and have not.
Our only regret is that this reform will not help in the immediate short term. That help for state and local governments will have to come at the bargaining table. What this compromise should do is reduce the risk into the future that the system will become unsustainable.
Yesterday, CalPERs chief actuary, Alan Milligan, estimated that state and local government could expect to save between $40 and $60 billion over the next years. That is based on a quick and preliminary fiscal analysis.
“We’ve had limited time in which to review the provisions, so this estimate will change as we continue to delve in to the language of the bill,” Mr. Milligan said on Tuesday.
CalPERs did not separate the savings, but it is clear from the analysis that local governments like Davis will save more than the state, which has already begun to adopt many of these reforms through collective bargaining.
More importantly, in our view this compromise hits on the worst excesses of the public pension system.
It caps pensionable salaries at a level of $110,100. This obviously will not impact most employees and, frankly, it should not. The typical employee only gets about $27,000 in pensions.
Second, it will ensure that employees and employers equitably split the costs of their pension benefits. Furthermore it will eliminate current restrictions that prevent local employers from having their employees help pay for pension liabilities.
That is critical, as we have discussed, because when the city of Davis increased its pension formula it created a huge unfunded liability. But because of the way pensions are calculated, every wage increase either at personal level by promotion or through collective bargaining will create its own unfunded liability. Now the city can ask employees to pick that up.
Most of the rest of the benefits will happen down the road. Incresaing the retirement age will not only save money on their pensions, it saves them money on OPEB (Other Post-Employment Benefits). Non-safety employees will now retire at 62 rather than 55. That will cut not only into the pension costs but also into OPEB. They can retain the 2.5% per year pension.
Safety employees will now, instead of retiring at 50, will retire at 57 and the 3% reduces to 2.7%.
None of this will affect current employees, so it may take 20 to 30 years to fully realize the savings.
Finally, this ends most of the worst abuses. The three-year final compensation which is based on regular recurring pay will stop the worst spiking abuses.
It limited post-retirement employment for all employees, so you will no longer see the 50-year-old getting his full public safety enhanced benefits while working as a consultant or even double-dipping into the pension system.
Moreover, it prohibits retroactive pension increases for all employees. So, unlike in 2000, when the city went to 3% at 50 for public safety employees and they received 3% backdating to the start of their employment, now even if a city increases the pension formula it can only apply prospectively, thus eliminating unfunded liabilities.
In short, from the Vanguard‘s perspective, this was a home run. It got rid of the worst abuses, it preserved defined benefits, and it will help to fix the city’s pension system and also save the city in the long term on OPEB – retiree health.
It is important to note that the impact of this reform will not be fully realized until the current employees are all retired. However, as the city rotates out older employees and employs new hires, more and more people will fall under the new system.
In the meantime, the city is in fiscal crisis now and in the midst of collective bargaining that is now at least two months past the expiration of the previous contract.
As we have noted time and again, the city desperately needs to fix the current structural problems.
We know about what that will look like. First, it will contained increased employee pick-up of CalPERS. Moreover, the city’s reduced second-tier retirement benefit begins as early as July 1, 2012.
The city also is looking to reduce the amount of cafeteria cash-out an employee can take, reducing that amount to about $500 per month.
It is our hope that the new rules imposed by the state will help with the city’s ability to collectively bargain with the bargaining groups, and avoid the need for impasse to cut more than $4 million in annual expenses from employee compensation.
—David M. Greenwald reporting
I need to spend more time reviewing this, and also hear from Mr. Rifkin. From my cursory review, it is an improvement, but still far from sustainable and far from fair considering what 90% of the population have to do saving for their retirement. I give Brown a D+ at this point.
Jeff: It does not fix the short-term, but it fixes most of the longer term problems.
Jeff… to compare apples and oranges… between Social Security and employer matches for 401k’s, what is the ‘going rates’ for [b]employer[/b] contributions towards employee retirement? In your opinion, should those %-ages be the same for public employees?
David, is this more kicking of can down the road?
This article covers my general considerations.
[url]http://www.manhattan-institute.org/html/miarticle.htm?id=8349[/url]
I am so unhappy with my generation and what we have done and are still doing to our kids. We have screwed up their economic future so bad. Here is another example that says: “Kids, your parents will get their early retirement and fat pensions after screwing up the economy, and you will pay higher taxes to fund it, and expect much lower benefits when it comes your time to retire.”
Where the heck is the shared sacrifice and acknowledgement that our CURRENT public-sector pay and benefits are unsustainable and unfair? Why not pull back on existing committments to put them in line with the rest of the population? Take a bigger cut out of these things now, so the long-term cuts do not have to be so drastic.
This is something, but it is far from enough in my opinion. We screwed up making the committments. Everyone in the private sector has had their retirement plans impacted. There is no reason that existing public-sector employees should demand special treatment especially when we are laying off teachers, failing to maintain our roads and raising taxes.
hpierce, this from an article in statebudgetsolutions.com:
[quote]In New York, the Census Bureau recorded that the average private sector retiree was receiving an annual pension of $13,100 in 2009. State and local employees earned over twice as much in annual benefits, resulting in $27,600. For public sector retirees, this number is free of state and local taxes–a luxury that private employees don’t have.
[/quote]
From the BLS database, in 2012 for Management and Professional employees 79% of private-sector employees had access to company-provide retirement plans versus 91% of public sector employees.
Also from BLS…
[quote]Total employer compensation costs for private industry workers averaged $28.78 per hour worked in March 2012. Total employer compensation costs for State and local government workers averaged $41.16 per hour worked in March 2012.[/quote]
Here is a report from CalPERS on the impact for moving from a DB to DC plan. [url]http://www.calpers.ca.gov/eip-docs/closing-impact.pdf[/url]
I am working on a private-sector versus public-sector retirement comparison and will post later.
[i]”I need to spend more time reviewing this, and also hear from Mr. Rifkin.”[/i]
Alas, my work schedule has me bogged down. So I too need more time to review the deal now being floated.
That said, I have a few comments regarding what David has written, today.
[i]”… the Vanguard has always supported continuation of the defined benefits plan – as a system that continues to provide public employees with a secure and predictable retirement.”[/i]
Although next to no one in the private sector has a “defined benefits plan,” I am not in principle opposed to it for government workers. I think the key to making it work for taxpayers and for the agencies which we fund is to control the costs of funding those defined benefits. In other words, if (as has happened over the last 6 years) the funding costs go up dramatically, the share of that increased funding cannot all or even mostly be borne by the employers. Effectively, doing so increases labor compensation at an unsustainable rate, and the result of that is layoffs and loss of services.
The solution is to presubscribe to an affordable plan for funding a defined benefit pension system when costs rise dramatically. That needs to be a combination of cutting base salaries (which itself reduces the funding needs) and increasing the share paid by employees.
[i]”Alan Milligan estimated that state and local government could expect to save between $40 and $60 billion over the next ___ years.”[/i]
How many years, David?
[i]”It caps pensionable salaries at a level of $110,100.”[/i]
I agree with the Vanguard that this is a smart idea.
[i]”The typical employee only gets about $27,000 in pensions.”[/i
As I have told you in the past, this $27,000 figure is bogus. It’s a number put out by the unions. Not only is it old and out of date, but it is distorted by large numbers of “pensioners” who only worked a few years in government service, but worked 30 or 40 years for non-PERS agencies or in private sector jobs.
I don’t have a current, reliable number. But if you count PERS retirees who worked 30 or more years in PERSable jobs, the figure is probably triple your number. Keep in mind that even those who work most of their careers in relatively menial jobs, but at the end of their 30-year careers advance to supervisorial positions which, say, pay $70,000 per year, will get a starting pension of $52,500 (under 2.5% at 55). And if that pensioner retired 12 years ago, his yearly pension will now be $66,582.94.
[i]”… it will ensure that employees and employers equitably split the costs of their pension benefits. Furthermore it will eliminate current restrictions that prevent local employers from having their employees help pay for pension liabilities.”[/i]
This is what I need to study.
[i]”Safety employees will now, instead of retiring at 50, will retire at 57 and the 3% reduces to 2.7%.”[/i]
Of the nearly 200 local agencies in California which have created a second-tier pension plan for their public safety employees, the vast majority have gone to 2% at 55. There is a HUGE cost savings from 2% compared with 2.7%.
DON SHOR — could you fix my italics error above? Sorry, and thanks.
“David, is this more kicking of can down the road?”
A little but until the courts relent on the vested rights, I’m not sure how much more we can go for that.
Rich:
Are you sure 2% at 55? That seems low. Not necessarily opposed to it, but seems a little on the low side.
[i]”Are you sure 2% at 55? That seems low.”[/i]
I don’t mean to say that all agencies which have adopted a lower second-tier for public safety have chosen 2% at 55 (or I should have said, 2% at 50 in some cases). Some have not gone as low as 2%. But I believe that most who have made the change to a second tier in the last 4 years have chosen that 2% level. Here are some recent examples:
*Glendora police ([url]http://glendora.patch.com/articles/pension-reform-council-approves-cuts-to-officer-retirement-benefits[/url]).
*Morage police and fire ([url]http://www.mercurynews.com/news/ci_21122881/moraga-at-odds-grand-jury-pension-report[/url]).
*Riverside County public safety ([url]http://temecula.patch.com/articles/multimillion-dollar-makeover-for-county-pensions[/url]).
*Citrus Heights public safety and misc ([url]http://www.citrusheights.net/docs/15558262011item_19.pdf[/url]).
Of course, my list is haphazard. I suppose that someone at CalPERS could confirm all the agencies which have adopted new, second-tier formulas and what most have adopted for new public safety hires.
So is this a cap? I assume the law is not a floor.
Just did a little back of the napkin calculation for a public-sector versus private sector retirement benefit comparison…
This is for a common professional job [b]Accountant III[/b] in Berkeley.
Go here [url]http://swz.salary.com/SalaryWizard/Accountant-III-Salary-Details-Berkeley-CA.aspx[/url] to get the pay and benefit averages for the entire job market.
Go here [url]http://jobs.universityofcalifornia.edu[/url] to search for the Accountant III job at the Berkeley campus.
The private-sector median pay is $74,450 including bonus. The UCB job pay using the average of the min and max pay (51,000 – $100,400) is $75,700. These are remarkably the same.
Assuming a 3% annual salary increase and a 40-year career beginning at age 22 and retiring at age 62.
Assuming a typical private sector defined contribution 401k retirement plan with a 4% matching incentive. (4% from employer and 4% from employee).
Assuming a 6% rate of return.
At retirement the private-sector employee would have $474,447.60. Note that this requires the employee to contribute 4% out of pocket every month for 40 years.
Go here [url]http://www.ssa.gov/retire2/AnypiaApplet.html[/url] to calculate the Social Security defined benefit monthly payment. I get $1,482 per month. (Note that this rises to $1,994 if retiring at age 65 instead of age 62).
To calculate the pension for the public sector job, go here: [url]http://atyourservice.ucop.edu/applications/ucrpcalc/estimator.html[/url]
Using this calculator the annual pension payment would be $75,700 per year (100% of the highest annual salary). The lump sum payout would be $11,812,295.
See here if you think I am pulling your leg:
[img]http://www.cscdc.org/miscjeff/ret1.jpg[/img]
But, hell… we can afford this! And as to the question “Is it fair?” As Sarah Palin would say “You betcha!”
David wrote:
> “Alan Milligan estimated that state and local
> government could expect to save between $40 and
> $60 billion over the next years.”
Then Rich wrote:
> How many years, David?
I did a Google search and found it was 30 years (most of us will be dead by then).
Why go out 30 years when they could take the “savings” out 100 years and have a sound bite that says “unions give up one trillion dollars”?
This plan keeps things basically the same for most people and does little to fix the near term problems.
“This plan keeps things basically the same for most people and does little to fix the near term problems. “
The problem is that because of vested rights, you cannot make changes unilaterally to current employees. That limits the near term impact of the changes.
Re vesting: if you are 2% at 35 and you have been working for 20 years, you are only vested 40%. The last 30% could be cut.
Even so, I’m not sure “vesting” in this case is the same as a defined contribution vesting where there are actual dollars in account. This is only a committment for future payments… in fact an over-committment. Cities like Stockton have not only cut existing DB committments to employees, but they have also done it to retirees.
So, if [quote]The problem is that because of vested rights[/quote], do you propose that currently retired public employees, and/or public employees of 20+ years, should have to accept major changes in their retirement benefits? Would you advocate for a “do-over”, if legislation and/or the courts were ‘doing the “right things”‘? Should anyone in the private or public sector “vest rights”? Just curious…
My former employer in the private sector stopped the DB plans for new employees in 1999. At that time, anyone who was currently employed for more than 10 by the company had a choice of sticking with their DB plans (which only ever maxed out at 60% of the average of the last 5 years of employment, with no inflation adjustments) or switching to DC plan. THose working 10 years or less and all new employees were switched to DC.
Health care plans and employee contribution were also changed, depending on retirement dates.
The public employee plans are far, far behind in this matter. There is no doubt that it needs to change, and I doubt that the “Brown plan” went far enough.
Jeff – I haven’t run the UC website calculator, but it seems like there must have been some significant mistake. I simply ran a 75,000 annual salary, with 3% raises compounded for 40 years, and I come up with a 244,000 annual salary at retirement. The screen page you posted states that the MONTHLY salary at retirement would be 75,000, or $900,000 per year. Can that possibly be right?
Adam Smith wrote:
> Jeff – I haven’t run the UC website calculator,
> but it seems like there must have been some
> significant mistake
It looks like Jeff put in pay of $75K a month ($9 million a year)…
As the pensions get more and more under funded each year someone needs to sit down with the younger union workers and show them the math and explain that the (mostly older) union bosses don’t care about them and are sucking the pensions dry.
Just like Bernie Madoff the unions are making promises that they can’t keep. It works for a while, but you can’t pay out more than you take in over a long time. Most people understand that getting less is better than getting nothing and would hopefully vote to change their plans.
I just had the radio on (AM 910) and heard a story about pensions:
“San Joaquin County’s former superintendent of schools Frederick Wentworth and San Ramon Valley’s former Fire Chief Craig Bowen top the list, raking in more than $295,000 each. Former Santa Clara District Attorney George Kennedy is part of the club. So is Santa Clara County’s former superintendent of schools Colleen Wilcox and ex-San Jose/Evergreen Community College Chancellor Rosa Perez, both of whom left under a cloud. Former San Jose Police Chief William Lansdowne made the club, even though he’s the current police chief taking home another $200,000 a year in San Diego.”
http://www.mercurynews.com/california-budget/ci_21438816/bay-areas-250k-club-government-retirees-wont-be
“While the newspaper’s analysis found dozens of members of the $200K club in the Bay Area, nothing compared to the pension that Bruce Melkenhorst, a retired city administrator from the tiny Los Angeles County city of Vernon, takes home: $526,000 a year.”
I guess we should be happy that we are not paying over a half a million a year to anyone in Northern California?
The guy from Vernon did not put away enough money to pay him over $500K a year while he is working so he is living off the funds from the younger union members.
Over time the pension funds will run out of money and even in a pro union democratic state like California the “we need to raise taxes to pay the 50 year old retired cops and firemen $200K a year will not stay in office long”…