The Coming Impact of Pension Payments on California’s Cities, and How Reforms Could Happen
AUDIO: Part One – Employer contributions to pension systems for state/local workers are set to double in the next six years, best case. Ways agencies are trying to increase taxes and cut services to find the money – 10 minutes on 1440 AM KUHL Santa Barbara – Edward Ring on the Andy Caldwell Show.
AUDIO: Part Two – A discussion of how California’s pension crisis began, what potential reforms could make pensions financially sustainable, and the organizations that could successfully push these reforms – 10 minutes on 1440 AM KUHL Santa Barbara – Edward Ring on the Andy Caldwell Show.
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Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
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When Mr. Ring says the pension will go from 60% to 90%, (with 30 years service),that —only— applies to those who actually retire at age 50. (Which would require beginning career at age 20, very unusual.)
The average age of CHP retires is 53-54. Slightly higher for local police.
(Partly because the average age of trainees in the CHP Academy is mid-to-late twenties.)
The 2% formula he referred to increased to 2.7% at 55, both formulas had a 90% max. If that employee retired at age 55 with 30 years service, his pension would be 81%, not 60% Even under the previous formula, many officers retired with 90%, So SB400 gave them no pension increase at all, nada. And not retroactive.
To be sure, many officers did get pension increases and/or were able to retire earlier, but to imply that all officers got a “fifty percent pension increase, retroactively” is just not true. And note this increase was almost exclusively for safety workers, not miscellaneous.
Thank you for your comment. None of this information was offered with the intention of misleading anyone. You’re right that there were differences between public safety and miscellaneous pensions. You’re right that relatively few public employees retire at age fifty.
Where we disagree however is on the fundamental point made, which is that these increases represented 50% increase to the value of pension benefits. When you consider how many public employees nearing retirement got in exchange for just a few more years of work, 50% isn’t nearly enough to describe the return in that context. Similarly, if you consider the impact this retroactive increase to benefits had on the required normal contribution and the size of the overall pension systems’ liability, it was, again, well in excess of 50%. These impacts were masked by complex accounting practices and by the fact that the internet bubble had put the systems into a surplus position at the time the enhancements began to be granted.
Most analysts agree the primary cause of the problems California’s public employee pension systems face today is the ill-considered decision to enhance benefits, retroactively, starting in 1999. This is not to say there aren’t plenty of other contributing factors. But I believe that if pension systems had not enhanced their benefits back then, they would be in sustainable financial territory today.
Hi Ed!
It has been a few years since I took the time to pull your chain. The world has not caved in yet! What would you think of the following to fix the system, and bring ‘fairness’ to it?
1) Limit the maximum non-safety retirement to the California average household income
2) Limit the maximum safety (remember they don’t get SS) to the California average household income + $24,00 per year
3) Any amount that the member would qualify for about that, have a TSP (like the Fed) with an employer match of 5% for up to $40,000 contributed
4) Make all classifications, regardless of retirement type, contribute 50% to the CalPERS pot
5) Remove judges from their special plan, and put them in with the rest of CalPERS
6) Cut current retirees to the above mentioned limits in bullet points 1&2, with the following exception
6b) For each $10,000 increment above the California average household income, the retire loses 10%, with percentages going up another 10% on each $10,000 until a 50% point per 10k is hit. An example is as follows:
Retire 1: Has a 50k/year retirement, the average California income is $57k per household – this retiree sees no difference.
Retire 2: Has a 87k/year retirement. The first 57k is protected. The next 10k, the retiree loses $1000, the next 10k $2000, the next 10k $3000. This means the retiree has gone from a 87k/year retirement to a 81k/year retirement
5) Has a 157k/year retirement. First 57k is protected. 57K-67K Loss of 1k, 67-77 2k, 77-87 3k, 87-97 4k, 97-157 30k (5k per each 10k). This retiree has gone from 157k retirement to 117k.
This protects the basic needs of all individuals, while having a progressive loss of benefits. This would quickly correct the under-funding of CalPERS while not causing anybody undue financial hardship.
Curious as to your opinion.
Remember, you can’t say pension without saying….
BOPRN – as always it is good to hear from you. I belatedly try to archive my favorite posts from other places here, on my own website. But there’s a backlog. A few from March went up today, backdated of course.
As for your solution, are you serious? Nobody will support it. Well, I would, but I’m nobody. The unions won’t support it. The pension systems won’t support it. It’s too reasonable and fair to the taxpayers.
On a serious note, here are two comments relating to your solutions:
1 – Your #4 item requires clarification. We need to determine an equitable way to allocate the payments on the unfunded liability to each active participant, and include that in their “50%” contribution. Because today the unfunded payment is bigger than the normal payment. Thanks to underpaying all those years. Subject to that, a great idea.
2 – There needs to be some way to implement this in a manner that doesn’t cause an exodus of active employees. I think you may have done that with your item #6, which modifies 1 and 2, but would it be enough? Another way to handle it, probably in conjunction with this, is to make it take longer to max your pension by reducing the rate of accrual for future work, not just for new hires but for veteran active employees.
Great stuff, BOPRN. Our take on the situation is not so far apart. As you know, I have always advocated keeping the defined benefit, which pushes me out of the mainstream of reformers.