Give each state employee a $1 million lump sum at retirement

The governor’s Public Employee Post-Employment Benefits Commission is focused on the means to fund public-employee pensions and other post-retirement benefits. It’s quite a confusing area for public debate and of great interest to public employees. We’ll focus on the state government’s promises. As we’ve indicated before–these are on the only promises guaranteed, not by union contract, but by statute. That’s a very big difference.

The big promises come in two forms. The first is the pension and the second is the health insurance in retirement benefit. The state has liabilities in the $40-70 billion range for both. Only the pension portion is pre-funded at a rate of approximately 85 percent. That’s the money the state and employees have contributed to CalPERS along with investment returns. The money for pensions is basically there.

The real problem is the health insurance in retirement liability of $40-70 billion. The state has no pre-funding for this at all.

Pensions are pre-funded at 85 percent to 90 percent, but the equally big other half, health insurance in retirement, is pre-funded at precisely zero at the state level. That means, for the state, the whole retirement program is funded at only 42 percent 44 percent.

Most people try to confuse on the issue. Employee unions like to indicate the there is no “crisis” with the same language Sheehan used in the Sacramento Bee. William Pelote, a representative for the American Federation of State, County and Municipal Employees, told the commission’s first meeting “We can only ask that you deal with the facts. There is no crisis.”

Employers such as the state have a reason to confuse and ignore the deficit as well. Recently, the city of San Diego was sanctioned by the U. S. Securities and Exchange Commission for securities fraud. The SEC indicated that “the issuer (City of San Diego) omitted a material fact”–the extent of their “retiree health care” obligations. Public officials in other entities took note.

Currently, the state of California is funding its retiree health-care obligation at the rate of $1 billion per year on a “pay as you go” basis. Pre-funding the existing obligation over 20 years would require at least a $6 billion/year expenditure–a huge jump in expenditures everyone wants to avoid.

An average state employee with 30 years of service can expect approximately $2 million in pension payments over 30 years of retirement, along with $1.3 million in payments for their retiree health benefits. Pension benefits have a cost of living adjustment cap of 2 percent on the initial base annually. Health insurance in retirement is currently incurring a 9 percent cost of living adjustment due to continuing medical cost increases. There is no cap on a state employee’s health insurance in retirement payment–the state pays 100 percent of the cost for the employee and 90 percent for any dependents.

State employee unions can choose not to negotiate the benefits. They can just flat out say “no.” The subway workers in New York struck in December of 2005 and effectively forced New York to take pension changes off the table–for the same reason, they didn’t belong at the negotiating table as they were part of state law.

Ed Purcell, the California Faculty Association’s director of representation, said the same thing just last week during his union’s negotiations with the California State University system. He indicated to Daniel Weintraub of the Sacramento Bee, “that since health care and retirement benefits are set by the Legislature, they shouldn’t be part of the faculty’s collective bargaining negotiations.” That was a clear warning to the state that other unions will soon utilize the same logic.

Attracting younger employees and a possible fiscal solution. In the Governor’s Budget Summary issued in January of 2007, the governor indicated “the state is also moving toward a system under which all forms of employee compensation will be reviewed periodically to determine the best way to attract new employees and retain existing employees.” The fact is the state has a very high turnover rate with less than 20 percent of all state employees staying on the job until they qualify for a pension and health insurance in retirement.

The governor’s statement in the budget summary has been interpreted by state employee unions as another attempt at installing a 401(k) plan for state employees instead of the 85 percent funded “defined benefit” pension plan. Few include the equally lucrative “health insurance in retirement” expense in their analysis. However, let’s combine the two problems.

First, this extremely lucrative pension/health program is very expensive and the expense is increasing every day, particularly in the uncapped health insurance in retirement area. Second, the extremely lucrative pension/health program does not do a good job retaining employees–the state’s turnover rate is no better than IBM’s and IBM offers neither a “defined benefit” pension plan or health insurance in retirement.

In essence, the current systems fail on two key counts: cost and effectiveness. A better system would be to put a dollar value on the total value of the pension, and make it real for the employee. For example, a 30 year veteran of state service retiring at 63 effectively has a $2 million fund from which CalPERS provides an annuity, and a $1.3 million fund from which the state provides a health care annuity. That’s a total of $3.3 million over 30 years.

The retiree is a millionaire three times over–but they don’t see or feel it.
Let’s look at the problem from another vantage point. Just last month, over 20 state employees at the Department of Consumer Affairs won a $72 million jackpot with the state lottery. They, as most lottery winners do, declined to take a 20-year payout and reap $72 million. Instead, they took millions offered upfront.

To attract and retain employees, the state can set up a viable alternative to the “defined contribution” 401(k) plan and the “defined benefit” plan. It can set up a “Lump Sum” plan. The tag line can be “Work for the state for 30 years and be eligible for a $1 million lump sum.” In return, the employee exchanges his/her right to the state pension and health insurance in retirement (i.e. $3.3 million paid out monthly over 30 years). They would do that in the same logical manner as the lottery winners: a large upfront payment trumps a long-term payout.

Right now, state employees must perform extremely complex calculations to estimate their pension payouts over time–and CalPERS, in a public-relations effort to deflect public criticism of public pensions, publicizes how low the monthly payments are. In addition, few state employees can calculate the value of fully paid health insurance in retirement. Until they reach the age of 50, a normal employee calculates the value of fully paid health insurance in retirement at exactly zero!

Given the alternative of a complex calculation that few would understand and a lump sum of $1 million, normal state employees would respond the same way the lottery winners did: They would take the lump sum. The lump sum would be a powerful motivator to both attract and retain employees over time; and it would reduce the state’s pension and health insurance liabilities instantly. The reduction would be in the billions.

Ken Mandler teaches a monthly workshop on How to Land a State Job. The workshop focuses on a variety of tactics and strategies designed to make the state job process an effective one for you. The workshops are three and one-half hours and include over 400 pages of information for your review. The cost is $75. The next workshops are scheduled for Tuesday, April 24, 6:30-10pm; or Tuesday, May 15, 6:30-10pm. You can sign up at or by calling Ken Mandler at (916) 443-6788 today.

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