Local Governments Would Save $2 Billion Annually If Employees Shared Pension Costs

SACRAMENTO – California taxpayers would save $2 billion almost immediately –and billions more in the future — if local government employees paid half the annual cost of their retirement benefits, according to a study released today.

Local governments would save $4 billion annually if new employees are offered retirement benefits comparable to those offered by the federal government, but not until the current workforce retires. The benefits modeled to calculate these savings are still more generous than those offered by California’s largest private employers.

Similar reforms would produce significant but smaller savings to state government due to recent benefit reductions and increases in employee contributions.

Major savings at the state level are possible if retired employees pay half the cost of their healthcare coverage, although the savings will occur in the future when employees retire. California currently owes over $100 billion in unfunded liabilities for retiree healthcare benefits, an amount that grows by billions of dollars every year.

“California has more than its share of critical fiscal challenges, and pension reform is only one of them,” said Michael Genest, former state finance director and principal of Capitol Matrix, authors of the study. “Our analysis shows that substantial savings can be achieved if the state and local governments provide retirement benefits comparable to those offered by the federal government and share the cost and risk with their employees just as the federal government and private companies do.”

The analysis released today is the third and final chapter of a study sponsored by California Foundation for Fiscal Responsibility, a non-profit group that conducts research and education programs to inform lawmakers and the public about problems in California’s public pension systems. The study was funded by a grant from the Laura and John Arnold Foundation.

In May, CFFR released the first two parts of the Capitol Matrix analysis. Chapter 1 describes significant differences in the value of retirement plans among government employees. Prison guards, for example, retire seven years earlier than teachers with benefits that are 77 percent higher. A mid-level local government employee will retire at age 57 with retirement benefits valued at almost $1.2 million while a comparably paid teacher will receive $500,000 and an employee of a large corporation less than $400,000.

Chapter 2 found that salaries and benefits paid to local government employees are generally higher than the salaries and benefits paid to state government and private sector employees. State and local government employees in California earn similar salaries as their counterparts in the private sector, but generous retirement benefits push total compensation costs significantly higher than private companies.

“Equally important to the tax savings, the reforms we modeled would reduce taxpayer exposure to major future cost increases due to disappointing investment returns or other factors,” said Brad Williams, former chief economist for the Legislative Analyst’s Office and principal author of the analysis. “Savings could be much higher if investment returns fall short of the rates assumed by state and local public pension funds. For example, when we use CalPERS’ assumed 7.75 rate of return on investments, we project annual savings from CFFR’s modified federal program to be less than $1 billion. However, if we use the federal government’s assumed rate of return of 5.75 percent, the savings grow to $4 billion annually.”

Marcia Fritz, president of CFFR, said, “The findings of the Capitol Matrix study point the way to a fair and simple solution to California’s pension crisis: Provide public employees with retirement benefits that are comparable in value and cost to those offered by the federal government and large companies. CFFR’s plan fixes the major flaws in California’s public pension systems and delivers immediate and long-term savings that can fund vital services. CFFR’s plan is fair to taxpayers and it’s fair to public employees. There’s no reason the Legislature shouldn’t act now and show the public it is capable of solving one of California’s most critical problem.”


Editors and Reporters –

Call your city and county pension managers to learn what taxpayers in your area would save if public employees paid half their retirement costs. Ask what taxpayers will spend for retirement benefits compared to employees and if different employees contribute different percentages. For example, it is common for taxpayers to fund 100 percent of the retirement benefits for police officers and firefighters, while teachers contribute about half the cost of their retirement benefits.

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