The saying there are two sides to every story seems particularly true for a heated topic like pension form. It isn’t always easy to cut through the rhetoric lobbed from opposing sides when half-truths frame the debate. So Governing Magazine has decided to debunk the fallacies, misrepresentations, and myths that float out there. In total, the truth -- or lack thereof -- of 12 common statements are examined to set the record straight:
U.S. Senator Orin Hatch has released a report on state and local public pensions that calls for greater involvement of the federal government due to fears about the impact of pension obligations on the nation’s credit rating and federal budget. Hatch is the ranking Republican on the U.S. Senate Finance Committee. The report argues it would be a mistake to blame the pension crisis on the recession or expect the issue to be resolved over time.
Hatch’s report states, “Unfunded public pension liabilities are a longstanding problem that existed well before the current economic downturn.” With respect to the debt facing state and local officials, the report notes that “This crushing debt load is ravaging state and local government budgets, and there are few options available to them for addressing this crisis – cuts in services, reductions in benefits, higher taxes, or some combination of the three.”
It is particularly notable that the report concludes that defined benefit plans are inappropriate for state and local governments. It states: “It is becoming increasingly apparent that defined benefit pension plans will never be financially sound enough over the long term for use by state and local governments. The financial risk associated with the defined benefit pension structure may be appropriate in the corporate setting, but it is inherently flawed in the state and local government setting.”
The report also blames poor fiscal discipline, overly generous benefits, and a lack of sufficient annual contributions as contributing factors for the pension crisis and posits that action is needed now and calls for a new public pension plan structure that is affordable and more transparent. The report concludes that “A legislative solution for consideration by Congress will be introduced in the senate in the near future.” You can read the full report here.
Back in November, the organization California Pension Reform filed two controversial initiative proposals with the goal of qualifying one for the ballot. Both are currently pending before they enter circulation for signature-gathering and their aim is to implement major reforms, such as requiring employees to increase their pension contributions, termination of abuses such as career ending spiking and retroactive benefit increases, and greater transparency. The Bee points out that “One measure would put future employees in hundreds of state and local pension funds into 401(k)-style plans instead of the current defined-benefit retirements guaranteed by employers. The other proposal puts future workers into "hybrid" plans blending the two types of accounts.” You can read fuller details about both proposals here.
The LAO recently released its analysis of both measures and noted that either one is likely to result in a legal battle if it’s passed by voters because of alterations that would be imposed on pension guarantees to current workers. The LAO’s analysis is somewhat muddled in that it points out clear effects are difficult to determine, but the analysis does argue that either initiative could potentially increase costs and force local governments to pay higher salaries to stay competitive. The LAO states the following about costs and investment returns:
“Under this measure, future employees’ hybrid plans would contain defined benefit pension components that are considerably smaller than those offered to current employees. Total contributions to pension systems for future employees’ defined benefits, therefore, will be much smaller than the total current contributions related to current and past employees. Defined benefit pension plans would experience a reduction in their incoming cash flow that would become more substantial over the coming few decades, as future employees grow to a larger share of the public workforce. These reductions in cash flow could cause many California pension plans to shift their allocation of investments to ensure they can meet existing benefit obligations, thereby reducing their average annual future investment returns. In general, when pension plans have to assume lower investment returns in this manner, their estimated normal costs increase, as do estimates of their unfunded liabilities. For these reasons, in the short and medium term (perhaps over the next two or three decades), these changes could result in public employers having to contribute over $1 billion more per year (in current dollars) to cover pension costs of current and past employees.”
In November, voters in the city of Modesto approved three advisory measures that called for reduced retirement benefits for city employees. The three (non-binding) ballot measures were introduced by Councilman Brad Hawn, who termed out of office in November. Now Hawn is looking to be the city’s next mayor. He will compete with former Councilman Garrad Marsh in a vote-by-mail runoff in February (ballots are set to go out next month). Hawn has made pension reform a top focus in his campaign and the three measures were intended to give local voters a voice in city negotiations with unions.
Hawn wrote the following op-ed for the Modesto Bee about the passage of the non-binding measures and what he sees as the next steps:
“In the November election, you spoke firmly when voting "yes" for my pension reform measures that three City Council colleagues joined me in putting on the ballot for your consideration. Thank you. It was an important message that you sent: you want your elected officials to challenge business as usual inside City Hall.
Despite uncalculated thousands of dollars spent by union special interests, all three pension reform advisory measures passed with enormous majorities. The effort to convince you that these reforms would be "too costly" or have "already been implemented" failed because neither is the truth.
The facts are this: Any reforms that we have previously passed only apply to future city employees. These future reforms will not fix the current problem of Modesto not having enough money to pay for lavish, and sometimes abusive, payouts. With your backing on these measures, I now can, and will, challenge defenders of the current system who support draining the city treasury, even worse roads, fewer police on the street and increased taxes on you.”
In the aftermath of the November election, the outcome of the pension measures in Modesto were pointed to as proof that voters would be keen to support further reforms in other battlegrounds, not only in other cities but at the state level as well.
Around a year ago we relayed that Stanford University Professor and former Democratic Assemblyman Joe Nation had released a report on the huge unfunded liabilities of the state’s pension systems. At the time, the report, released by the Stanford Institute for Economic Policy Research, concluded that local pension systems alone were nearly $200 billion short. Nation has now released a new report in conjunction with the Stanford outfit and the organization California Common Sense. The latest report posits that California’s three major pension systems (CalPERS, CalSTRS, and UC System) under a low-risk discount rate have a total unfunded liability of $500 billion, which is 17 percent higher than the $425 billion shortfall that was projected back in 2010.
The report states that the “annual cost to the state of delaying pension solutions is $3.4 million per day.” Here are some other highlights from the report:
Even at a 7.75 percent discount rate, the funded status for CalPERS and CalSTRS remains below 80 percent. Private-sector pension plans are labeled “at risk” if their funded status falls below 80 percent.
The combined unfunded liability for CalPERS, CalSTRS, and UCRP under the 6.2 percent discount rate is $290.6 billion, equal to more than three state General Fund budgets. That figure represents an unfunded amount per household of nearly $24,000.
Simulations of asset growth indicate that the probability of CalPERS assets falling short of obligations is 82 percent
CalPERS must earn an annual average of 9.0 percent for the next 16 years to achieve even odds that its assets are greater than or equal to 80 percent of liabilities.
Assuming a 6.2 percent discount rate and other minor demographic changes, current state spending on pensions is likely to increase from $4.8 billion in 2011-2012 to $14.6 billion, or the equivalent of 17.3 percent of current General Fund expenditures
You can read the full report here. In terms of solutions, the report argues that “pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.” The report also criticizes the governor’s pension proposal as too modest in the savings it will provide.
CalPERS responded to the study with the following statement:
“The study is written from a perspective that is intended to exaggerate perceived costs and the instability of pension systems. The report's findings were based on low discount rates to artificially magnify unfunded liabilities. It is important to remember that CalPERS invests in a highly diversified portfolio that includes stocks, real estate, and other assets that have historically earned significantly higher returns than the rates assumed in the study.”
CalPERS also argued that over the past 20 years through June 30, 2011, the pension fund has earned an average annual investment return of 8.4 percent in excess of the pension fund's actuarial rate of return assumption of 7.75 percent needed to pay long-term benefits.
The study’s methodology also received criticism from State Treasurer Bill Lockyer. In fact, as a sign of Lockyer’s distaste for the study’s conclusions and process, he resigned from the institute’s pension advisory panel. The LA Times reports: “’When it comes to public pensions, maybe SIEPR should stand for 'Stanford Institute to Eviscerate People’s Retirement,' ‘ said Joe DeAnda, the treasurer’s press secretary. Lockyer said the study did not adequately consider the legal impediments to reducing benefits for current employees and ignored research indicating that retirement systems perform better when their boards include members of the retirement plan.”
According to the results of the latest Field Poll, a plurality of California voters feel pension benefits for most state and local government workers are too generous. Back in the fall of 2009, around 32% of voters felt that benefits were too generous and now that number stands at 41%. Thirty-five percent view current benefits as just right. The difference in views between Republicans and Democrats is also worth noting, as 58% of GOP voters say pension benefits for state and local government workers are too generous in comparison to 34% of Democrats. The Field Poll indicates the following about the impact on views when a union worker is part of a household:
“There are significant differences in the Californians’ views about the level of public pensions between voters living in union vs. non-union households. Nearly half of voters living in households where a union member resides (48%) thinks that the pension benefits received by most state and local workers are about right, with about equal proportions saying they are too generous (27%) as not generous enough (22%). By contrast, a plurality of voters living in non union households (45%) see these pensions as too generous, while 32% think they are about right and 13% say they are not generous enough.”
And when it comes to the governor’s pension plan proposals, Brown may be pleased to learn that a little over half of voters say the plan strikes the right balance and 24% think it doesn’t go far enough. Overall, there was uniformity in voter reactions to Brown’s proposals among Democrats, Republicans, and non-partisans. Read the Field Poll’s full results here and a table from the poll’s report can be seen below:
The city of San Jose appears to have set itself up for a fierce (and inevitable) legal battle if voters approve the controversial ballot measure the council agreed this week to place on the June ballot. The divided 6-5 vote gave Mayor Chuck Reed the initial victory he has been looking for since May, despite the objections of labor leaders who earlier this week pleaded with the council for more negotiations and a request to settle reform at the bargaining table as opposed to the ballot. Residents, city workers and retirees flooded the council’s chambers during discussion of the pension measure and debate lasted as long as 3 hours.
Unions deemed the pension measure unnecessary and premature and have called on the council to hold off on the issue until further talks can occur. Notably, the city did put off the declaration of a fiscal emergency because new figures indicated the city’s retirement bill would be smaller than projected and its budget shortfall fell from $80 million to $25 million. Council members who voted against the measure, as well as other opponents, have pointed out that the legal costs the city is likely to incur from the measure’s passage are alone reason enough to think twice before putting the issue before voters.
Labor leaders contend the measure is simply unlawful, but Mayor Reed has emphasized that savings are necessary as costs continue to balloon. Here are key proposals from the measure, according to a fact sheet disseminated by the mayor’s office:
“New Employees would be placed in a new, lower-cost, hybrid retirement plan; New employees would pay for at least 50% of the total cost of the new plan and the City’s contribution would be capped at 9% of an employee’s salary
Current employees would be given the option to either: a) pay more to keep their current retirement plan or b) opt-in to a new, lower-cost retirement plan
Retirees would have their Cost of Living Adjustments (COLAs) temporarily suspended during a fiscal and service level emergency
Disability retirement rules would be reformed to prevent abuses
The City Council would be prohibited from enhancing retirement benefits without voter approval”
Mercury News points out that “Employees argue that forcing them to pay more toward existing pension benefits and suspending promised cost-of-living raises to retirees violates their legally ‘vested rights.’ Reed said such provisions are needed to ensure significant savings over the next couple of years and avoid further layoffs.”
You can see the full text of the ballot measure here. ABC News filed the following report:
So far the Joint Conference Committee on Public Employee Pensions has held two hearings to examine the governor’s 12-point pension proposal. With two meetings under its belt (and little in the way of consensus), the newly formed committee could hold a few more hearings well into the new year. Co-Chair Sen. Gloria Negrete-McLeod commented that “This cannot be a two-hearing answer.” The panel was originally created to speed up consideration of the heated issue prior to the time the Legislature reconvenes, but preliminary consideration of the governor’s plan has proven to be intensive.
The second hearing was most recently held last week at the Capitol and a special guest was in attendance: Governor Brown. The governor was on hand to defend his proposals, as it has already been met with skepticism as well as harsh criticism from unions. Brown commented, “Without pension reform I don’t think we will have the credibility to ask the people to do other things that are very much needed.” The governor was referencing his other major proposal, which is that he plans to ask voters to raise taxes in November. The governor’s pension plan will reportedly save $4 billion to $11 billion over 30 years. However, the Bee points out that the Governor’s plan was met with a tepid response by the committee and comments fell short of an endorsement:
“Some public employee unions have argued that the hybrid plan would undercut retirement security for future workers, while groups proposing pension overhauls of their own for the ballot say Brown's plan would not go far enough. The state's two major pension systems, as well as the nonpartisan Legislative Analyst's Office, have questioned the legality of parts of the plan, particularly provisions affecting current workers. Brown and officials testifying on his administration's behalf defended the legality of his proposal. [...] Brown will need the support of both Democrats and Republicans in both houses to place the parts of his plan that require voter approval on next year's ballot.”
During one notable exchange, the governor critiqued CalPERS for suggesting that the elimination of the defined benefit plan for new employees “would threaten its actuarial soundness.’’ In response, the governor pointedly stated, “Well, that tells you you’ve got a Ponzi scheme, because you have to keep bringing in new members and the current system itself is not in a sustainable position. I don’t accept that, and we don’t want to close it off anyway.’’
One component of the governor’s plan that could cost local workers more is a provision that requires equal sharing of pension costs between employer and employee. State workers are less likely to be impacted because most state employees are paying more than or close to half the total normal cost. For comparison, nearly all local government employees are paying less than half of the normal cost. Ed Mendel at Cal Pensions writes, “A boost in what employees pay for their pensions would allow employers to cut their pension payments by a similar amount. So the governor’s pension plan could provide budget relief for struggling local governments.” Commenting on local governments, the governor stated:
“I don’t think we should limit local creativity, and I think we will learn a great deal by the different votes and measures that are going to be considered at the local level. So there is going to be a lot of battles, and that’s why I say this will go on over the next few years.”
You can read a preliminary analysis of the governor’s pension plan from CalPERS here.
You can hear testimony of the governor’s public appeal here:
In what has been called one of the most important cases in years for public agencies, the California Supreme Court heard arguments on October 3, 2011 in Retired Employees Association of Orange County v. County of Orange. At stake is whether or not local governments can take away retirement health benefits from former public employees who are currently retired. The court has now issued its ruling and basically sided with the employees, but with the following stipulation: clear evidence is necessary to show that the county promised lifetime health benefits. Ernest Galvan, an attorney for the retirees in the case, commented that “This opinion sets up a seawall around people who have already retired.” Orange County basically wanted to shift higher health insurance premiums to existing retirees as a way to rein in costs. CNBC reports the following background to the case’s beginnings:
“Orange County eliminated a subsidy it had been paying for retiree health benefits, amounting to a cash value of more than $3,000 per year for each of its retirees, according to court documents. The Retired Employees Association of Orange County sued in 2007, arguing that the county violated an implied contract with the retirees. The county disagreed, saying in court filings that an unfunded liability of $400 million is at stake. In its unanimous opinion released on Monday, the California high court said the right to benefits could be implied from a county ordinance or resolution.”
Notably, the high court was not consulted to decide whether or not the county in fact promised lifetime benefits; instead, the case will return to a federal appeals court with the high court’s ruling in mind to decide whether a clear promise was made. The central state-law question that remains in the case is whether retired employees have a contract right to receive the aforementioned benefit. The county is arguing it is not a vested right and that reducing unfunded liabilities is paramount. The Register points out that “The decision on the case could have significant implications for local governments across California, many of which are struggling to get a handle on ever-increasing unfunded liabilities.” From the perspective of cities and counties, attorneys for local governments posited they were pleased the court established that clear intent must be evident for the creation of a lifetime benefit.
This November the Comprehensive Pension Reform ballot measure qualified in the city of San Diego. It is believed that the measure will easily win voter support come election time, but labor is sure to put up a spirited fight in the meantime based on how heated just the qualification process became. The petition drive was billed as the most aggressive and contested in San Diego history. You’ll recall that the measure would switch most city workers to a 401(k) model instead of city-administered pensions; in addition, it would implement a five-year salary freeze for current workers and a cap on future police pensions.
Supporters of the reform point out that the measure could provide a national model for pension reform and that all eyes will be on San Diego to watch the outcome of the controversial measure.
Reason TV released the following video/interview with measure proponent and mayoral candidate Carl DeMaio and a local writer for the San Diego Union-Tribune. Both advocate for its passage:
