The CalPERS chief actuary says pension costs are “unsustainable” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.
So, are the critics right? Do overly generous pensions threaten to eat up too much of state and local government budgets?
A historic stock market crash wiped out a quarter of the CalPERS investment fund last fiscal year. Some experts are forecasting limited investment earnings in the years ahead, making it difficult to replace the losses.
Now “sustainability,” a term used in environmental discussions, has become a common label for a big question about public employee pensions: Will the current level of benefits be affordable in the future?
The question of pension sustainability emerged as a hot topic during a seminar in Sacramento last week sponsored by the Public Retirement Journal.
Ron Seeling, the CalPERS chief actuary, described the process used to “smooth” the rate increases that will be imposed on the 1,500 local government agencies in CalPERS in 2011 in the wake of the stock market crash.
Instead of a rate increase of 4 to 20 percent of pay, the smoothing will reduce the rate hike to a more manageable 0.5 to 2 percent of pay.
“I don’t want to sugarcoat anything,” Seeling said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”
Anne Stausboll, the CalPERS chief executive officer, told the seminar that the CalPERS board talked about the “cost and sustainability of pension benefits” the previous week and decided that the system should take a “proactive role” on the issue.
“They asked us to formulate a way to convene our stakeholders — employers, labor, legislators and other stakeholders in our system — to convene everybody and start having a constructive dialogue on sustainability of pension benefits,” Stausboll said.
Dwight Stenbakken of the League of California Cities told the seminar that pension benefits are “just unsustainable” in their current form and difficult to defend politically.
“I think it’s incumbent upon labor and management to get together and solve this problem before it gets on the ballot,” he said.
Public pension advocates worry about a drive to replace the “defined benefit” plan, a guaranteed monthly check for life, with the “defined contribution” 401(k)-style individual investment plan increasingly common in the private sector.
Four years ago Gov. Arnold Schwarzenegger briefly backed an initiative proposed by former Assemblyman Keith Richman, R-Northridge, that would have switched all new state and local government hires to a 401(k)-style plan.
But Richman has since called a switch to a 401(k)-style plan “politically” unfeasible. He and the California Foundation for Fiscal Responsibility have talked about extending retirement ages and capping pension payments at two-thirds of final pay.
(See Calpensions 26 Jan 09: “Pension intiative via internet”)
Last June Schwarzenegger, calling current benefits “unsustainable,“ proposed that pensions for new state hires be rolled back to the formulas used before CalPERS-sponsored legislation, SB 400, enacted a major benefit increase in 1999. (See Calpensions 30 Jun 09: “Arnold: cut retirement benefits for new hires”)
The governor dropped an attempt to make his “two-tier” pension reform proposal part of state budget negotiations. But he added pension reform to the list of issues he plans to pursue with legislative leaders later this year.
Schwarzenegger’s plan is similar to a proposal made four years ago by a League of Cities task force, which also referred to “dramatic benefit enhancements” made in the late 1990s.
The legislation, SB 400, only increased benefits for state workers. But the same higher benefits are now widespread among local government pension systems.
“The excuse that I’ve always heard is, “We don’t want to adopt these retirement formulas, but I have to because our neighbors adopted it and we have to be competitive in the labor market,” said the League of Cities’ Stenbakken.
He said eliminating all options and returning to pre-SB 400 retirement formulas for new hires would eliminate the competition between local governments that have increased pension benefits.
“I think this is one of the major mistakes we made with the PERS system,” said Stenbakken. “STRS, the State Teachers Retirement System, doesn’t have this problem. If you’re a teacher in Eureka or you’re a teacher in Los Angeles Unified, you get the same pension.”
In California, attempts to cut pension benefits are usually two-tier plans, cutting benefits only for new hires. Pensions bargained under labor contracts are said to be protected by court decisions, which allow cuts only if something of equal value is provided.
“In terms of dealing with pension cost currently, I only know of two ways to do it,” said Stenbakken. “That’s lay people off or reduce salaries.”
A retirement actuary, John Bartel, told the seminar that two-tier plans do not save much money, even after several decades. He said costs from the untouchable high-benefit first tier, a vested right protected by contract law, continue to grow.
“Unless that vested right issue changes, and I’m not expecting it will, that second tier is not going to save money,” he said.
Bartel said his clients tell him that the main motivation for switching to a two-tier plan tends to be “political in nature,” rather than an expectation of significant savings.
“It’s because a board member or a council member can stand up and say, “We think there’s a lot of bleeding here and we need to stop that bleeding, and we are going to do it on that basis,’” he said. “That’s what I’m hearing from my clients.”
Labor union officials told the seminar they worry that statewide pension reform legislation might bypass local collective bargaining.
They said the Richman group’s list of 5,000 pensioners that receive $100,000 or more a year is less than 1 percent of total public employee pensions.
“I actually think it is sustainable,” said Terry Brennand of the Service Employees International Union. He said the basic problem is investment losses, not high benefit levels.
“What is sustainable?“ said Lou Paulson of the California Professional Firefighters. He said proposals to extend the retirement age for firefighters from 50 to 55 would result in more injuries with advancing age, driving up workers’ compensation costs.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com.