NECESSITY BREEDING GOOD PUBLIC PENSION IDEAS

CALIFORNIA FOCUS
FOR RELEASE: FRIDAY, JULY 16, 2010, OR THEREAFTER

BY THOMAS D. ELIAS
“NECESSITY BREEDING GOOD PUBLIC PENSION IDEAS”

For many years, one justification for giving generous pensions and other benefits to public employees was that their pay was below what most of them could get in the private sector. Rich pensions were seen as a recruiting tool, one way to get top people into government and keep them there.

But times have changed. Despite the furloughs imposed on many state and local government workers, not only are most government jobs more secure than those at private businesses, but salaries for most are at least comparable to those in the private sector and pensions are far more generous.

That’s been accentuated over the last three years as company after company abandoned the style of pension plan that offers regular monthly payments for life, shifting to 401(k) accounts allowing employees to build savings for retirement but not protecting them from failed investments.

While some private pension plans that have been “grandfathered in” for longtime employees allow retirees to start collecting somewhat reduced benefits at age 55, many retirees from California government jobs – especially police and firemen – can start collecting full pensions five years earlier than that.

So taxes from people with inferior pensions are funding the fatter monthly checks going to folks who allegedly work for them. Something seems wrong here, and many have come to resent it.

These are some of the reasons behind a sudden flood of ideas that emanated from the campaign trail during the spring primary election. Another impetus: the miserable recent investment records of California’s two biggest public retirement systems – the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System – have forced state and local governments to fork over far more to fund pensions than they did, say, 10 years ago.

At the height of the dot-com investment bubble in the late 1990s, state government paid almost nothing to fund pensions because the funds’ results from investing employee retirement contributions were copious. Now the state pays more than $3 billion a year to fund those pensions. It’s the same for local government, where for one example, Los Angeles will use about 19 percent of its new budget to fund pensions.

One study by economists at Stanford University estimated it would take five consecutive years of 20 percent investment profits for the big state pension plans to return their assets to levels equal to their obligations.

Which has led almost everyone in politics today to conclude something has to change. Why should public pensions be based in large part on what an employee gets in his or her last year, when employees can arrange to pad their overtime hours during that year, a practice called “pension spiking?” Why should non-police and fire government employees be able to draw full pensions at 55 when almost no one in the private sector can get full payments before age 65? Why should police and fire personnel get full pensions starting at age 50?

Good questions all, and they have been asked in recent months by candidates on all political sides as well as figures like Gov. Arnold Schwarzenegger and Los Angeles Mayor Antonio Villaraigosa, a onetime union organizer. No one suggests existing employees who were promised benefits at today’s levels when they were hired should have the rug pulled from under them. That would be illegal. But changes affecting new hires are certainly legal and possible.

Schwarzenegger, for one, calls state worker pensions “the single biggest threat to the fiscal health of California’s future.” He endorsed a bill by state Senate Republican leader Dennis Hollingsworth of Temecula that would increase retirement ages for most new hires from 55 to 65 and for public safety workers from 50 to 57. Hollingsworth also would change the way benefits are awarded by using an average of workers’ three highest-paid years, rather than just their last year.

Public employee unions say these changes are not needed, that an economic recovery will restore the pension system to good health. They say only a relative few government retirees get six-figure pensions, with most receiving benefits of less than $30,000 per year.

Some of those assertions are true. But that doesn’t change the contrasts between defined-benefit public employee pensions and what’s happened to private ones.

The bottom line is that change will come soon to government pensions. They won’t disappear, but they will come to look more like what’s available to other workers. That will happen no matter who becomes governor next winter. It might, in fact, happen sooner if Democrat Jerry Brown, endorsed by labor and accustomed to working with public employee unions, wins the fall election than if it’s Republican MegWhitman, who would face a Democratic-controlled Legislature filled with lawmakers beholden to the unions that helped them get elected.

-30-
Email Thomas Elias at tdelias@aol.com. His book, "The Burzynski Breakthrough," is now available in a soft cover fourth edition. For more Elias columns, visit www.californiafocus.net