More Evidence Emerges That Shows Pensions Not a State Level Crisis

pension-reform-stockAs we have noted for some time, pensions really are not a crisis at the state level.  Nevertheless, the biggest push has been to fix them at the state level as though pensions were what was driving the current budget crisis.

We have pointed out numerous times that the current budget crisis is actually a revenue crisis caused by what some are now calling the Great Recession.  State spending is actually at its lower level in real dollars in decades.  Yet we retain around a $15 billion deficit, give or take for the latest adjustments.

But pensions are not driving the problem at the state level.  LA Times columnist George Skelton last month did the math, concluding, “State employee pensions are not to blame for Sacramento’s budget deficit. Not by any math.”

In a general fund of roughly $85 billion dollars, the total payment that goes for pensions is only $3.7 billion.

We continue to believe that if reform does not occur, the victims will not be the state government but local governments like the City of Davis.  The reason for that is simple.  Five years ago the City of Davis paid out roughly 3% of its entire general fund budget to retirement in the form of pensions and retirement health care. 

Within the next five years that figure is likely to rise to 25%.  And with less revenue and slower growth, that means that the city is going to have to cut services drastically in order to pay its retirement obligations.  But few analysts seem to understand the distinction.

And so, while Gov. Jerry Brown is putting forth his reform, at the state level the issue of pensions has become a political issue, pitting liberal union supporters against conservatives who wish to punish, particularly, public employment unions.

Whenever a fight turns partisan, the truth is lost.  And so I have two fears. One is that the real problems faced by local governments at the local level with be swallowed up in the partisan fight.  Democrats will dig in to protect union interests while Republicans will seize this as an opportunity to punish unions.

The irony is that this is not just a union problem.  In fact, there are two huge abuses.  The first is the enhanced public safety benefits enjoyed by firefighters and law enforcement.  And the second is the non-union managers who are receiving six digit pensions, spiking and loading and otherwise gaming the system to their benefit.

Real analysis like George Skelton’s is rare. 

While Mr. Skelton does not look at the local level, he does acknowledge the potential for problems down the road. “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.”

The California Budget Project analysis shows even down the road a crisis is unlikely at the state level.  Their analysis finds that as the result of the economic downturn, CalPERS took huge hits and “Consequently, the Public Employees’ Retirement Fund (PERF) – the largest ‘defined benefit’ pension fund administered by CalPERS – now faces a substantial long-term funding shortfall. “

However, they argue that the sky is not falling.

“The PERF’s shortfall does not pose an immediate crisis. Even if nothing were done to address the shortfall, the PERF has enough funds on hand to pay pension benefits for anywhere from 25 to 53 more years, depending on the fund’s level of investment earnings over time, according to the Center for Retirement Research (CRR) at Boston College,” they write.

They continue, “Even if the PERF were closed to new employees and existing workers could no longer earn benefits in that fund, the PERF would be able to provide the benefits already promised for 15 to 18 more years.”

Moreover, “because a large share of the benefits promised to state workers won’t need to be paid for decades – many state workers are years away from retirement – California has time to address the shortfall.”

Under standards developed by the Governmental Accounting Standards Board, which establishes governmental accounting best practices, states could gradually rebuild their trust funds over as much as a 30-year period.

They also find that there have been significant strides made to address the long-term shortfall.

“Changes made largely through the collective bargaining process – a collaborative process involving workers and employers, which in our view is the most appropriate way to address public pension policies – increased state worker contributions to retirement and scaled back retirement benefits for new hires. Existing and new state workers now contribute between 8 and 11 percent of their monthly earnings to retirement – an increase of 2 to 5 percentage points,” they write.

“In addition, the retirement benefits for new hires were generally rolled back to levels in place more than a decade ago. And benefits for all new hires will now be based on workers’ highest annual pay averaged across three consecutive years rather than on the highest pay workers received in a single year – a change that will not only reduce workers’ pension benefits, but also reduce the likelihood that former state workers will go back to work for the state at the end of their careers for the sole purpose of ‘spiking’ their pensions,” they continue.

Furthermore, the CBP argues, “CalPERS is in better shape than some public retirement systems because California has avoided serious mistakes made by other state and local governments.”

Experts argue that “the best way to maintain the fiscal health of a pension fund  is to make regular contributions at the full required level.”

State and local governments that failed to do so were more likely to have pension fund shortfalls going into the downturn  and now face even greater shortfalls due to recent investment declines.

“After the recent financial crisis, most POBs [Pension Obligation Bonds] issued since 1992 are in the red,” according to a CRR report.

Writes the CBP, “The good news is that California never gambled with POBs (an attempt to do so during the Schwarzenegger Administration was blocked by the courts) and the state ‘has a long-term record of solidly funding its pension system,’ which means the PERF had a solid foundation before the stock market tanked.”

All of this is great and it is good to see support for the kinds of reforms we have been supporting for several years.  But none of this examines the crisis that exists at the level of local government.

One reform that we do not support is a transition to a “hybrid” retirement plan which would combine current defined benefit plans with a 401(k)-style individual investment plan or a defined contribution.

“We are going to propose pension reform,” Governor Brown said last week. “That’s more contentious, and I’m told there is going to be a lot of pension reform on next year’s ballot, anyway. So, one way or the other, I think we are going to get whatever pension reform we need.”

I agree with the Governor that pension reform is inevitable, but it would benefit the Democrats to take the lead on this and avoid what would be unnecessary draconian reforms when, as all evidence indicates, there is no crisis at the state level.

—David M. Greenwald reporting

Author

  • David Greenwald

    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.

    View all posts

Categories:

Budget/Fiscal

7 comments

  1. [quote]While Mr. Skelton does not look at the local level, he does acknowledge the potential for problems down the road, “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.”

    The California Budget Project analysis shows even down the road a crisis is unlikely at the state level. Their analysis finds that as the result of the economic downturn, CalPERS took huge hits and “Consequently, the Public Employees’ Retirement Fund (PERF) – the largest “defined benefit” pension fund administered by CalPERS – now faces a substantial long-term funding shortfall. “
    [/quote]

    Talk about double speak. Down the road a crisis is unlikely at the state level; the current state pension system is probably not fiscally sustainable. You can’t have it both ways… let’s face it. This is nothing but a cynical attempt to stave off the type of pension reform that is occurring in Wisconsin… let’s not look at the truth, let’s just look at what I say is the truth…

  2. ERM

    I am reading this somewhat differently and so do not find the cynicism you see.
    “a crisis is not likely” and “current state pension system is probably not fiscally sustainable” are not contradictory, or even incompatible statements. All this means is that there is an acknowledgement that change in the current system needs to occur. It would seem to me that this is precisely the job of our elected officials, to determine when there is or is likely to be a problem and make changes to resolve it.
    In Wisconsin, the leaders on both sides chose a confrontational rather than collaborative problem solving approach with the foreseeable consequences. Hopefully, California will be able to resolve these issues in a more collaborative fashion without all the wasted time,energy,money and rancor.

  3. Rich Rifkin already dealt with this myth that the state pensions are not taking us to insolvency. The CalPers models used include unrealistic returns.

    Let’s also have some honesty here about the growing gap between public sector retiree benefits and private sector retiree benefits. Even if we manage to avert a crisis with another stock bubble, the dislike of public sector labor will grow with every new retiree. I think public employees unions might want to look down the road a bit to develop some PR strategy for this.

  4. The pension system isn’t some evil plan devised by public sector unions to impoverish tax-payers. Pensions for state employees have been treated as part of total compensation even before collective bargaining in 1981.

    Non-saftey (miscellaneous) public employee unions who account for the vast majority of state employees made significant concessions toward pension reforms last year when they agreed to contribute 5% to 8% of payroll toward their own pensions. They did that without any guarantee from the state that the state would never again pay zero toward pension funding in any given fiscal year. The unions also agreed to a return to the 2.0 at 60 formula that had been in place for at least thirty years prior to the 2001 formula increase and long before collective bargaining existed. So how is the current formula the “fault” of public employee unions and how is it suddenly unsustainable?

    I’m not convinced the facts will ever satisfy those who don’t want to see a decent retirement system exist for ideological reasons. Where does that leave us? Right where it should always have been: everyone needs a secure retirement who has worked for most of their adult life. Where is the expert and sage advice from the Rich Rifkins who profess expertise on how that can be made to happen? Come up with a plan you think may work and you just may find that unions are interested in your solution and willing to help you get there.

  5. 24/7 Wall St.: Ten States Where Pensions Are Running Out Of Money

    4/29/2011: [url]http://247wallst.com/2011/04/29/ten-states-where-pensions-are-running-out-of-money/3/[/url]

    California isn’t on this list. I half expected it would be there. There are some notable politically conservative states on the list — Kentucky, New Hampshire, Oklahoma, Kansas.

  6. Elaine it’s not double speak, their argument is that while there are long term shortfalls there is enough time to course correct to avoid most of it. You are also conflating George Skelton who thinks it is long term not sustainable with what the CBP thinks.

  7. [i]”The pension system isn’t some evil plan devised by public sector unions to impoverish tax-payers.”[/i]

    I don’t know who (owning any credibility) is saying that. It is just unsustainable. The Davis police used to have 1/2 at 55. Then it was 2.5 @ 55 (or something like that). Now it is 3% at 50. I say it should be 2% at 60 or something similar.

    It is nuts to think that tax payers can continue to fund a 35-40 year end of life paid vacation including 90% of a person’s salary and covering all health benefits for him and his spouse… when the very people having to pay for it are ones that will be working until they are 65-70 and also having to pay for all their own retirement and healthcare from retirement savings.

    It may may make us all feel warm and fuzzy inside to think that hard-working public-sector employees deserve it; but the point is that it is not sustainable. And the resentment caused by it will continue to grow until it is equalized with the private sector.

Leave a Comment