If you have read the analysis, most are not happy with the pension reform. We can understand why, but I think the Sacramento Bee editorial nails it: “Given the political realities under California’s Capitol dome, the pension measure awaiting final action in the Legislature today is probably the best reform package that could have been achieved.”
They actually come up a bit short on that, because they forget that the courts have ruled that pensions are a vested right.
CalPERS defines a vested benefit as follows: “A ‘vested’ benefit is one that has matured into an irrevocable contractual right, which cannot be taken away or otherwise impaired without the member’s consent, except in extremely limited circumstances.”
They add, “The fundamental doctrine protecting California public employee pension rights is succinctly stated: “A public employee’s pension constitutes an element of compensation, and a vested contractual right to pension benefits accrues upon acceptance of employment. Such a pension right may not be destroyed, once vested, without impairing a contractual obligation of the employing public entity.”
And they note: “This doctrine has been applied and refined by dozens of California appellate cases since the 1940s.”
What does all of this mean? It means that there was a limited amount that the legislature and governor could do to change present liabilities.
And so, the Sacramento Bee writes: “A preliminary calculation by state pension official actuaries pegs the savings in the reform measure at $40 billion to $60 billion over the next three decades. That’s not nearly enough to erase the unfunded pension liabilities for the state and local governments, conservatively estimated at $164 billion.”
In our view, that is correct. Our unfunded liabilities were not solved by this legislation – but in our view, we should not have expected that they would be.
I think the view of the League of California Cities expresses this well: “While not perfect, the League views this legislation as a substantial step forward in implementing pension reform largely in keeping with the League’s own comprehensive pension reform principles.”
Of the complaints that this did not go far enough, the biggest seems to be the disappointment that the legislation failed to establish a hybrid plan.
As we have mentioned, we believe in defined benefits and believe that that system can work as long as we have realistic limitations. Reducing 3% at 50 is huge. Raising the retirement age is vital. Capping most of the loopholes that have allowed some to benefit at the public expense is critical.
In our view, the biggest problem with the legislation is the problem that the legislation could not address – the now. Even a hybrid system would have been grandfathered in for new employees.
As the League points out: “AB 340 makes changes to public employee pensions including establishing a cap on the amount of salary that can be used to calculate a retirement benefit, raising the retirement age for both public safety and miscellaneous employees, implementing cost-sharing, using the average of the final three years to calculate final compensation, implementing a 180 day sit-out period for retired persons to return to work in the retirement system in which they receive a pension, defines ‘pension compensation,’ a pension forfeiture requirement for public employees convicted of committing a felony in connection with their job, the elimination of airtime, pension holidays and pension spiking.”
There are still four provisions that apply to current employees, which include “cost sharing, the six month sit-out requirement, and the elimination of airtime and pension holidays”
For cities like Davis, now we know what the second tier will look like. That part will be easy. The question is what the now has to look like to get to the second tier.
First, we need to fully implement that cost-sharing plan. For all of the talk about the need to end defined benefits – why do we need to do so if the employees are bearing both the costs and risks? Even a defined contribution plan would require outlay from the municipalities.
Second, we need to control costs. Of all of the things that we need to do, I think this is most problematic. Why? Look at the salaries of people like Davis’ and Sacramento’ City Managers. If the top salaries continue to rise, it is only a matter of time before the bottom rises as well.
The whole situation reminds me of sports contracts. The National Hockey League is probably going to have a lockout and it’s likely that the season will be lost. One of the things owners and management want are limitations on the cost and length of salaries.
And yet, even as they utter that out of their mouths they continue to sign players for as long as 13 and 14 years. It is like they want to be stopped from doing things that they are choosing to do.
If cities want to contain pension costs, they need to stop escalating salaries.
Some have lamented that this is legislation only deals with pensions and not OPEB (Other Post-Employment Benefits). But that’s not completely true. One of the problems that cities like Davis face is that their employees retire at 50 or 55 and they offer full coverage until 65 when Medicare kicks in and then offer supplemental coverage on top of Medicare. One cost reducer would be to delay the time between retirement and Medicare. This does that for them – of course not for 20 to 30 years from now, for most employees.
Finally, Davis, in addition to capping salaries, sharing costs of pensions, and fixing OPEB, needs to deal with the cafeteria cash-out. We agree that reducing the benefit from $1500 per month to $500 is preferable. We wonder if that should happen in one fell swoop.
Bottom line here – in the long term, I think the legislation fixes most of the problems. We do not support eliminating defined benefits, and so long as these changes are implemented it should be manageable. But what the city needs to do in this contract has not fundamentally changed.
—David M. Greenwald reporting
If the employees share the cost and bear the risks of their DB plan, the the only difference is that the employee is spared from having to make investment decisions, and the pension fund benefits from all the upside. If you like this type of thing, you are probably a bigger fan of central planning and big government. Personally, if I am going to have to pay for the risk of loss, I would like to make my own decisions and also benefit from any upside I can provide myself.
Jeff… the only risk the employee would have is their share of premiums during employment. That is the only area they would be exposed to poor investment results… because it is a defined benefit, once they have vested a benefit, there is no future risk.
Most people underperform the market. You are exceptional if you outperform it. Unless you are lucky or really smart with money and spend lots of time studying finances chances are you are better off with a defined benefit plan that allows you to calculate your benefits into the future. The freedom to choose includes the freedom to go with a defined benefit program that gives you an annuity. Whether its public or private is not as important as if it is solvent and run by fiduciaries with the smarts, integrity and resources to guarantee their promises. Much to your chagrin JB, because Pers and Strs can go to the state to make up shortfalls, the solvency of the big pension funds have excellent underwriting security. Thanks to Jerry Brown and the legislature, excesses in the system are starting to be addressed, better insuring the long term solvency of the defined benefit plans for state workers.
Mr. Toad
Thanks for expressing this much more concisely and eloquently than I could have. Some of us who have spent our lives working really hard, whether in the private or public sector, have had jobs that do not entail or facilitate a strong knowledge of finances. Does a contribution outside the financial sector mean that we should just “take our chances” because we have not chosen to focus on economics and money management ?
Mr.Toad wrote:
> Most people underperform the market.
True, but like “most” people, most “pension funds” also underperform the market (and California pension funds underperform “most” other large pension funds).
We have all heard the ads that say “past performance is no guarantee of future success” and it is sad to say that the “past performance of the stock market (and California) will probably not be much different in the future”.
If you invested in the “market” five years ago the Dow was in the high 13,000s, just a little higher than it is right now (for about a -.10%) return (Calpers did a little better over the past five years with a +.10% return).
> Whether its public or private is not as important
> as if it is solvent and run by fiduciaries with the
> smarts, integrity and resources to guarantee their
> promises. Much to your chagrin JB, because Pers and
> Strs can go to the state to make up shortfalls,
We are in a different world than we were in the past China is not a poor country with mostly farmers trying to survive and California is not growing like it was in the past (does anyone think that the population of Davis will almost double in the next 30 years like it did in the last 30 years?).
As I have mentioned before I have friends that are getting pensions of about $10K a month (while working for other departments building up second pensions) who will “retire” in their 60’s making more per year that California lottery winners who just won $5 million on the big spin.
I truly wish it was possible to give everyone that worked for the government that much money, but sadly it is not (without say WW III that wipes out most of the factories in the industrialized world like WW II did).
> The solvency of the big pension funds have excellent
> underwriting security. Thanks to Jerry Brown and the
> legislature, excesses in the system are starting to be
> addressed, better insuring the long term solvency of
> the defined benefit plans for state workers.
Almost no one in elected office wants to talk about the pension problem, so they basically kicked the can down the road without even addressing the fact that with the almost 0% returns for the past 5 years they will need close to a 15% return per year for the next 5 years just to get to the funds 7.5% discount rate (I think the odds are that the voters of Davis will vote to let developers double the population of Davis in 10 years are better than CalPers averaging a 15% return for the next 5 years).
As has been mentioned in this thread most people don’t have even a basic understanding of finance or compound interest and that is why so many people (including both Democrats that don’t want to fund more money in to pension funds and the Republicans that agree with the BS “Ryan Budget”) will buy off on anything they see in print and forget that we almost never see a string of years with positive returns (while almost all “projections” show this).
Davis could double over the next 30 years if we had a 2.4% growth rate, something I think would be great.
The returns on the pension funds have been poor over the last five years but longer term they have done much better around 11% as an annualized long term rate of return. It all depends on your time frame so your 15% annualized rate over the next five years is arbitrary. Just as the S&P 500’s one year return is around 17% and its year to date return is about 9%.
Something else, Jerry Brown got this done without the bluster of the pugnacious Chris Christie or the division generated by Scott Walker. Yes, the unions complained a little bit but the can do the math and know there was a reality that couldn’t be denied. This is a big difference between the style of governing of the major parties these days where one party seeks to work with working people and the other seeks to demonize and bash them. Where Chris Christie proudly touts his union busting prowess Jerry Brown quietly makes deals that seek to deal with our fiscal realities.
If the unions only complained a little bit, you can bet that the changes were inadequate. As it stands, our young people will still be picking up the large bill for a small group of privileged adults that won the equivalent of the retirement lottery through corruption of the political process.
Chris Christie and Scott Walker are heroes of their repective states for taking a stand against the politically-connected unions and rolling back their pay and power closer to that of the average citizen. Old Gov’ Moonbeam is not in their league.
“Chris Christie and Scott Walker are heroes of their repective states for taking a stand against the politically-connected unions and rolling back their pay and power closer to that of the average citizen.”
Actually they are flamethrowers trying to incite people. The heroes are the people who can accomplish what is necessary without furthering the political divide.
[quote]…Jerry Brown quietly makes deals that seek to deal with our fiscal realities.[/quote]
You think this “pension reform” actually “deal[s] with our fiscal realities”? Clearly you didn’t read SouthofDavis’s response to you…
Ignore the strike through – a glitch in the software or a bug in my computer… let me try it again…
You think this “pension reform” actually “deal with our fiscal realities”? Clearly you didn’t read SouthofDavis’s response to you…
Elaine: I would suggest that the pension reform did what was politically and fiscally possible. Will it fix all of our problems? No. But it does fix the worst and most fixable problems with PERS.
[quote]Elaine: I would suggest that the pension reform did what was politically and fiscally possible. Will it fix all of our problems? No. But it does fix the worst and most fixable problems with PERS.[/quote]
Frankly I think bankruptcy is going to fix much of the problem if cities are not careful. Brown has made a mere dent in the overall problem, like it or not. Not saying there is much he could have done, but reality is reality…
If you put an ‘s’ in brackets, it makes everything that follows strike through. So if you want to indicate ‘s’ be sure to leave a space, like this; [ s]
“You think this “pension reform” actually “deal[ s] with our fiscal realities”? Clearly you didn’t read SouthofDavis’s response to you…”
Let’s wait and see what the actuaries tell us. Obviously if you reduce pensions for new hires it takes a long time before you see the benefits to the solvency of the system as a whole. Still eventually things will sort out. its the same with Social Security, small changes can have huge impacts far down the road.
Me: [i]”Chris Christie and Scott Walker are heroes of their repective states for taking a stand against the politically-connected unions and rolling back their pay and power closer to that of the average citizen.”[/i]
David: [i]”Actually they are flamethrowers trying to incite people. The heroes are the people who can accomplish what is necessary without furthering the political divide.”[/i]
Can you cite any quotes or comments that back this claim? I think you are confusing the union and left-media rhetoric with the words and actions of these two political heroes. Both states are solid blue states. Votes elected them to so a job. Instead of debating the substance of the goals of that job, their enemies immediately launch into character assassination. I think it is intellectual laziness to just run with that template without checking for validity.
The likelihood is that Wisconsin and New Jersey will address their budget issues way before California does using an apprach that continues to pander to the unions to prevent this thing called “political divide”. Frankly, the day of reckoning has only been delayed by Old Gov’ Moonbeam. The political divide will increase with every realization that more young people just had their futures mortgaged to pay for an elite few to retain their retirement lottery.
[quote]If you put an ‘s’ in brackets, it makes everything that follows strike through. So if you want to indicate ‘s’ be sure to leave a space, like this; [ s][/quote]
For some reason it strikes through, even when I don’t have an “s” in brackets. It must be a glitch in my software, since no one else seems to be having the problem. It is absolutely random, too… arrrrrrrggggggghhhhhh!
[quote]Let’s wait and see what the actuaries tell us. Obviously if you reduce pensions for new hires it takes a long time before you see the benefits to the solvency of the system as a whole. Still eventually things will sort out. its the same with Social Security, small changes can have huge impacts far down the road.[/quote]
You’re more hopeful than I am 😉
[quote]The likelihood is that Wisconsin and New Jersey will address their budget issues way before California does using an apprach that continues to pander to the unions to prevent this thing called “political divide”. Frankly, the day of reckoning has only been delayed by Old Gov’ Moonbeam. The political divide will increase with every realization that more young people just had their futures mortgaged to pay for an elite few to retain their retirement lottery.[/quote]
That’s pretty much how I see it – CA is dreamin’ if they think this pension reform is anything but a bandaid on a gash…