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Public safety pension shortfalls vex candidates, taxpayers

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Many of the loudest calls for California public pension reform point to law enforcement retirement plans as Exhibit A in showing that the state is too generous to police officers and other public safety employees.

So it is interesting to note that the Republican gubernatorial nominee Meg Whitman has said that pensions for new public safety employees should remain essentially the same.

"New government employees, not public safety employees but new government employees beyond the public-safety realm, are going to have to come on under a different deal," Whitman said at a campaign event earlier this year, as quoted by the Los Angeles Times’ PolitiCal blog.

Whitman’s opponent, Democrat-nominee and state Attorney General Jerry Brown, argues that pension reform must apply to all California employees. Brown’s spokeswoman dubbed Whitman’s pension position "a political ploy."

The Times blog noted that Whitman has picked up a handful of law enforcement union endorsements.

The calculations underlying public pensions are hugely complex. General statements about retirement plans are often proven inaccurate by hyper-technical details. And more generous benefits provided to one job type (say, police officers) are often offset by something else (many officers don’t get Social Security).

There is no doubt, however, that promised retirement payouts [PDF] to public safety employees (police officers, firefighters, etc.) make up at least $13.7 billion of the state pension’s unfunded liability. With California Highway Patrol officers accounts included, which are short $3.3 billion, these pensions are roughly a third of the entire $48 billion shortfall, according to a report by the California Public Employees’ Retirement System.

The true amount could be ten times larger.

Earlier this year, the Stanford Institute for Economic Policy Research concluded [PDF] that CalPERS' unfunded liability was more than $500 billion [PDF].

Changing new employees’ pension plans, as both Brown and Whitman propose doing, is unlikely to deflate the existing liabilities. That said, avoiding such liabilities in the future could pose very difficult without also addressing the cost of public safety pensions.

In addition to moving back the retirement age from 55 to 65, Whitman proposes that all new state employees (excluding public safety workers) would need to pay into a 401(k)-style retirement account, called “defined contribution.” Retirees get back what they and their employers pay in during their working years (plus whatever gains are made from successful investments).

That differs from the current CalPERS plan, called “defined benefit,” which bases retirement payout on a formula including years of service and annual salary.

CalPERS certainly isn’t the only public retirement benefit in the red. In 2006 and 2007, even before the Great Recession took a huge bite out of retirement savings, the Los Angeles Fire and Police Pension System had an unfunded liability of more than $100 million.

Public safety pensions are sometimes very generous, paying out retirees well in excess of $100,000 a year.

But few police officers retire at age 50 with nearly full pay and health care.  As the state pension system details in its “CalPERS Responds” website, to secure that early retirement:

Our records indicate that over the last seven years, safety workers who retired at age 50 with 30 years of service represented 1 percent of all those retired. The reason very few ever would receive this level pension is that they would have had to start working age 20 to earn 30 years. Most start their safety careers at age 27, 28, or 29. 

Twelve percent of all public safety members are subject to the 3 percent at age 55 formula. They would need 37.5 years of service at age 50 to get 90 percent, and would have had to start working at age 12.5 to earn 37.5 years. And 7 percent of all public agency safety members are subject to the 2 percent at age 50 formula. They would need to have 45 years of service at age 50 to get 90 percent, and would have had to start working at age 5 to earn 45 years.

 

(Update: I've added more of the retirement system's statement above to provide better context.)

Firefighters and police officers sometimes face dangers far beyond what most other public employees encounter during their years of service.

However, there is another reason why [PDF] their state retirements are a little sweeter than those received by other California public workers: A significant number of California safety employees aren’t part of the federal Social Security system. 

As explained by the CalPERS benefits primer:

“The remaining one-third (34.3 percent) of CalPERS members that participate in an uncoordinated plan (generally safety members) do not contribute to Social Security, and are not eligible to receive its retirement, death and disability benefits.

Therefore, these members depend entirely on their CalPERS benefits and individual savings for their retirement needs, unless they or their spouse have qualified for Social Security by working for a covered employer for the required number of quarters.

 

Comments

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sidehiller's picture
If all new hires into State employment have to use a defined contribution retirement system, and do not pay into CalPERS, wouldn't CalPERS become even more underfunded? (No new contributions; no investment income on those contributions; no possible retention of employer contributions for people who leave before vesting.) Under Whitman's idea, what would happen to new hires in non-state agencies participating in CalPERS? There are a ton of those! The Social Security implications are also huge. What this article doesn't report is, when you change a defined benefit pension plan in the manner proposed by Whitman (and others), then the IRS will force the public agency back into full participation in Social Security retirement. That's anotehr 6.2% of payroll taxes that the government employer would have to pay, and also 6.2% more out of employees' paychecks (you can assume that the employees would negotiate hard for a pay increase to cover it). Most public employees whose agencies don't participate in Social Security figure out that they need to participate in their agency's deferred compensation plan to make up for the lack of SSA pension checks (the Windfall Elimination Provision and Government Pension Offset make it almost impossible to qualify for SSA by other jobs). How will the proposed defined contribution plan for new hires affect the existing deferred compensation plans that agencies have? Nobody seems to be looking into that, either. The sources of most public pension plans' problems come down to two main factors: 1. the public agencies took "pension holidays" and didn't contribute all their required share when investment returns were good, or even "borrowed" against their pension plans. That foolish practice ignored the fact that actuarial analyses are based on following the contribution rules, and keeping contributions up in good years was necessary to getting through the stretches of time when investment returns would be poor. 2. overly generous retirement benefits (typically amounts exceeding 2.7% pension credit per year of service) were negotiated, but in reality may not be affordable unless contribution rates (employer and employee) were increased...which they weren't because investment returns were so good for so long (see #1 above).
wmartin46's picture
Because of public sector labor unions, government salary and benefits tend to double every 10-12 years. In many cities and towns, public sector salaries now range between $100K-$250K, with pensions linked to the highest year’s salary. These lavish pensions insure that most government employees will make more in their retirement years than they made in their working years. Assuming a yearly 2% COLA, CalPERS retirees receive the following payouts:

Total Pension Payouts

Pension

$100K--10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.2M
$150K--10-Years: $1.7M | 20-Years: $3.7M | 30-Years: $6.2M
$200K--10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M
$250K--10-Years: $2.8M | 20-Years: $6.2M | 30-Years: $10.3M

There is simply no way that city governments are going to be able to pay the retirement contributions of their employees without increasing taxes/fees/fines for everything associated with government. Taxpayers are already seeing about 65% of their income subject to statutory taxes. Government at all levels has been diverting about 40% of GDP for its needs in the past. This year, thanks to Obamanomics--Government is taking about 50% of the GDP, and possible more in the future.

Public sector salaries must be reduced, and pensions delinked from salaries, and COLAs reduced, or terminated--to keep government finances (entirely funded by the private sector) from being overwhelmed by these post-retirement compensation demands of the public sector.

This will not be easy, but it must be done.

Examples: http://www.scribd.com/doc/32328630/Beneath-The-Palo-Alto-Business-Tax

http://www.scribd.com/doc/32328225/Msw-CA-Future-Calpers-Payouts

darenp's picture
wmartin46, Where do you get your figures?? There is not a single city or town whose average salary is $100k to $250K. Not one!! Not even Bell. Bad input in, bad output out. The average public pension is much closer to $50K/year, and that's in the large cities.
sidehiller's picture
I agree that "wmartin46" has inflated figures to make public pensions look more lucrative than they really are. The average white/pink/blue collar pension payment in our LARGE California city is about $24,000/year, out of which retirees too young for Medicare (IF they can get it) would have to pay about $11,000/yr to remain in our health insurance plan. While these people were working, their income levels were not high enough to put aside significant retirement. A “pay your own way” retirement plan would leave them destitute and without health coverage at the end of their careers, because sure as anything, there would not be any across-the-board pay increases for these people to start funding 100% of their own retirements. Why would anybody rationally suggest "de-linking pension rates from salaries? Paychecks without fringe benefits (insurance, defined benefit pensions) would not keep a qualified, motivated, honest workforce in the public sector. The pay for these jobs isn't worth dealing with the guff, the stress, the institutional insanity caused by polarized political leadership of their agencies, and (for police and fire) the hazards to life and limb. People who hate public employees or unions won’t be able to "offshore" public sector jobs to dollar-an-hour workers, because U.S. residents expect to find somebody to be there in person and be responsive when they call 911 or go down to City Hall to ask something. The pathetic efforts to "outsource" or "privatize" services in my agency have resulted in shoddy work, higher costs per unit of service, incomplete recordkeeping, and nobody to answer for the results once a contract was completed. By the time my agency figured it out, it was too late to fix it. I have no problem with a pension ceiling for highly-compensated employees (and I cannot understand how it was exceeded in Bell...or anywhere else, for that matter), but don’t threaten people at the middle and low ends of the pay scale. Otherwise, you won’t be able to find competent and honest people to take these jobs. Look at third world countries that don't have decent pension systems for their public employees: ever hear any travel stories about encounters with endless petty officials and even policia blatantly demanding bribes? That’s how those public employees fund their retirements! Are only corrupt people attracted to third world government employment, or are they corrupt because it’s the only way to financially survive and provide for their old age? I don’t want to push American civil service workers into a corner and find out.
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masini's picture
And in our country the same thing happens. It wants a balance in public sector pensions. But we forget that there are categories of cops who give their lives for us. There are others who stay in office as any of us. Here a distinction should be made. asigurari auto or piese auto import
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