The chief executive of the trendsetting California Highway Patrol union told a CalPERS forum last week that he is thinking about negotiating lower pension benefits for new hires, a move to protect them from a greater rollback by a future initiative.
Jon Hamm, the CEO of the California Association of Highway Patrolmen, said he is concerned about “pension envy” among private-sector workers with dwindling retirement security as corporations switch to 401(k) individual investment plans.
Hamm said “public employee unions are becoming villains” because some are playing on public fears. He also said assuming that economic growth will return to “normal” and generate the big pension investment earnings of the past could backfire.
“I never thought that negotiating a ‘two-tier’ retirement system would be something that I would ever consider,” Hamm said.
“But I have come to the conclusion it’s a very strong likelihood I would be looking out for future employees by negotiating a second-tier retirement system,” he said. “The last thing we want to do is leave it to the initiative process.”
Creating a second tier of lower benefits for new hires is one way to lower pension costs. But significant savings can take decades, until employees with the lower benefits begin to retire.
Pensions promised current employees and retirees are regarded as vested rights, protected by contract law, that cannot be reduced without providing something of equal value.
“My feeling,” said Hamm, “is that if it is possible to negotiate pension reform, even if there is not something offsetting it …and something that I totally disagree with is negotiating a second-tier system so that current employees get a pay raise out of it — in other words, sell out future members. I think that’s a huge mistake, and yet it has happened in the past.”
Negotiations by the Highway Patrol union led to the passage of legislation that created a pension formula, since adopted for many police and firefighters throughout the state, that allows retirement at age 50 with 3 percent of final pay for each year served.
“That’s our group,” said Hamm. “We negotiated the ‘3-at-50’ plan.”
The legislation, SB 400 in 1999 that made other major changes, is cited by advocates of pension reform, who say the bill undermined a second tier of lower benefits for state workers enacted in the early 1990s and led to “unsustainable” pension increases.
Hamm remains a strong supporter of early retirement for law enforcement officers. As with the military, he said, law enforcement is not an old person’s job and accident scenes and other stress take “a toll over the years,” leading to burnout.
“If you called a cop and he came up to your door in a walker, would you feel very comfortable?” Hamm said, using an extreme example to make his point.
The Highway Patrol union was praised by nonpartisan Legislative Analyst Mac Taylor last year for becoming the first state worker union to begin prefunding retiree health, diverting two scheduled annual pay raises.
A governor’s commission recommended in 2008 that retiree health be prefunded. The state had set aside no money to pay for health care promised retired state workers, estimated by the commission to cost $48 billion over the next 30 years.
Prefunding retiree health care would allow investment earnings to pay for much of the cost, like pension systems that expect to get about 75 percent of their revenue from investments. And current worker costs would not be shifted to future generations.
Hamm spoke at a “California Retirement Dialogue” in Sacramento sponsored by the California Public Employees Retirement System to examine public pensions and “ideas for ensuring future retirement security.” Another forum is scheduled Feb. 12 in Los Angeles.
At the forum last Friday (Jan. 29) Gov. Arnold Schwarzenegger’s pension advisor, David Crane, clashed with David Low of the California School Employees Association, the spokesman for a union coalition defending public pensions.
The governor proposed last June that pensions for new state employees be reduced to the level in effect before SB 400. Unions opposed the proposal to return to the previous two-tier plan.
Crane and others think CalPERS is banking on overly optimistic investment earnings, an annual average of 7.75 percent. The state would have to pay for a shortfall, adding to cost increases already being phased in from the historic stock market crash.
Faulting CalPERS for failure to disclose, Crane said CalPERS did not tell legislators how SB 400 could increase state costs if earnings fell short and, currently, declines to say what impact earnings of only 6 percent would have on future costs.
“My biggest criticism of CalPERS is just that — shine a light on yourself,“ Crane said.
Low said in the governor’s statement last month that the state payment to CalPERS has increased 2,000 percent in the last decade is misleading. The state payment, now $3.5 billion, dropped to $150 million a decade ago because of a booming stock market.
Citing CalPERS figures, Low said SB 400 adds $500 million to annual state costs. State pension costs as a percentage of payroll are less now than in 1980, he said, and in the long run CalPERS earnings should continue their 30-year average, 8 percent.
Low said the average annual pension received by his union retirees, $1,134 a month for 16.7 years of service, is probably less than Crane earns in a month. He also said the investment firm where Crane worked 25 years, Babcock and Brown, went bankrupt.
“Huey Long couldn’t have done it better,” Crane replied, referring to the Louisiana governor who advocated wealth distribution during the great depression. He said he left his former firm because of mounting debt, an echo of his pension concern.
Low and several other union representatives at the forum said any pension changes should be negotiated at the bargaining table, not imposed by legislation or initiatives.
“All up and down California unions are going to the bargaining table negotiating in good faith and in many cases we are giving up benefits,” said Low. “We don’t like it. But we don’t have any great interest in our employers going under either.”
Similar remarks about givebacks being made during local contract negotiations throughout the state were made by representatives of firefighter, police and city employees.
Several persons said that unions are preparing legislation to curb “spiking,” the manipulation of final pay to boost pensions. Fire chiefs in Contra Costa County who retired with pensions far larger than their base pay have received national media attention.
A reform group is trying to put a two-tier initiative on the November ballot that would lower pension benefits for new state and local government hires and extend retirement ages.
A new poll released by the Public Policy Institute of California last week said two-thirds of Californians (67 percent) favor changing pensions for new public employees from monthly pensions to 401(k)-style individual investment plans.
“This level of support reflects a 6-point increase since we last asked this question in January 2005,” said PPIC. “Strong majorities across parties (particularly Republicans), regions, and demographic groups favor this proposal. Support increases with rising income.”