As the deadline approaches for the Legislature to place a pension reform measure on the November ballot, taxpayers should know what’s at stake and what’s necessary to fix California’s pension crisis.
For all the angst in the debate on this issue, the fix is easier than you might think. The Legislature should ask the voters to amend the state Constitution this fall, enacting once and for all the three most important features of Gov. Jerry Brown’s 12-point pension reform plan: requiring all public employees to pay half the cost of their retirement plans; requiring future employees to share the risks associated with their plans with taxpayers; and tying state and local retirement ages to federal retirement ages.
According to Stanford’s Institute for Economic Policy Research, even if it’s assumed that pension fund investments perform reasonably well, the unfunded liabilities of California’s largest state and local pension systems stand at about $500 billion. One intrepid reporter did the math: that amount of pension debt amounts to $30,500 for every household in the state.
Largely because of that debt, pension costs are the fastest-growing expenditure for city and county governments and will consume 17% of city budgets this year. Again according to Stanford, pension costs grew 11.4% a year between 1999 and 2010, twice the spending growth rate for education, public safety, parks, health and sanitation. While other services are cut, pension costs go nowhere but up.
Public employee unions are right to complain when their members are lumped together as pension gluttons. Research conducted last year showed that teachers earn retirement benefits that are only marginally more generous than those offered by California’s largest companies, and they seem stingy when you consider that state prison guards and California Highway Patrol officers can retire seven years earlier than teachers with benefits that are 77% more valuable.
A study commissioned by the California Foundation for Fiscal Responsibility found that state public safety employees collect more in benefits than FBI agents. A 53-year-old CHP officer, for example, with 26 years service and an annual salary of $140,000 is entitled to retirement benefits valued at $2.2 million. An FBI agent’s benefits are valued at $1.6 million.
The same study found that retirement benefits paid to local government employees are significantly higher than the benefits provided to teachers or to employees of large corporations. A city employee who begins a career at age 27 with a $45,000 starting salary and receives typical wage increases can retire at age 57 with retirement benefits valued at $1.2 million. A similarly compensated teacher will receive benefits valued at $500,000, and an employee of a large corporation less than $400,000.
Teachers and most state employees already pay close to half the cost of their retirement plans. The same cannot be said for many thousands of city and county employees who pay nothing. Local governments would save billions every year if employees split the cost of their retirement benefits with taxpayers.
Only 10% of employees in the private sector participate in a “defined benefit” retirement (pension) plan, compared to 87% of state and local government employees. Taxpayers assume 100% of the risk of defined benefit plans because in these plans, the benefit payments are guaranteed irrespective of the plan’s investment performance. In a “defined contribution” plan, such as a 401(k), employees share the risk of their plan’s investments. In a compromise hybrid plan, which is what a pension reform ballot measure should call for, employees may participate in a defined benefit plan, subject to limits, and augment their benefits with a defined contribution plan.
In November, the voters deserve a chance to enact a ballot measure that would once and for all reform the system so that all public employees split the cost of their retirement, share the risks rather than leave them entirely to taxpayers, and set retirement ages in line with federal rules.
But once the Legislature puts the measure on the ballot, it must also attend to passing laws to curb the system’s worst abuses, such as spiking, in which compensation for things like vacation pay and uniform costs are used to inflate pension checks; double dipping, in which public employees retire, collect their pensions and return to work as “consultants”; and airtime, which allows employees to buy credit for service they didn’t perform.
The Legislature should also repeal what is arguably the most expensive mistake in California history. In 1999, it passed SB 400, which gave retroactive benefit increases to employees and retirees and made it possible for public employees to retire with a higher income than they made while working. According to the Los Angeles Times, 4,000 retired Los Angeles County employees earn more in retirement than they did while working.
Public employees in California earn salaries similar to their counterparts in the private sector, but generous retirement benefits push their total compensation costs significantly higher. Those costs are crippling state and local government.
By putting a ballot measure before the voters in November to address the most crucial systemic pension issues, and by following that up with appropriate legislation to reform the worst pension abuses, the Legislature has the opportunity to solve one of California’s most vexing problems and reassure a skeptical electorate that it can serve as a responsible steward of public resources. Let’s get it done.
Marcia Fritz is president of the California Foundation for Fiscal Responsibility and a member of the Pension Committee of the Government Accounting Standards Board.
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