Your eyes on California Government

NOV. 11, 2011

By JOHN SEILER

The California Legislative Analyst’s new report on state pensions is a thorough and sobering look at what’s really going on. The report points out that the plans are “Not Just One Pension System…But Many.” So generalizations are imperfect. Nevertheless, the LAO found:

* “Generous” pensions:

“We believe that the data shows that defined pension benefits offered to California’s state, city, county, and special district employees have been among the most generous in the country in recent years. While there have been some reductions in these benefits recently, some California governments still offer among the most generous defined pension benefits available anywhere in the United States public or private labor market today. In many cases, California public pension benefits for career public employees—coupled with other sources of retirement income—can replace far more than the 65 percent to 75 percent income replacement ratio described earlier.”

* $100K club growing:

“In recent years, there has been considerable public attention related to retired California public employees receiving annual pension benefits of $100,000 or more. These individuals are a small, but growing, segment of California’s public sector retirees. About 2 percent of CalPERS and CalSTRS retirees currently receive such payments. Payments to these retirees now equal around 7 percent to 9 percent of total pension payments from the two systems.”

* Pensions still high:

Despite changes since 2005, the LAO notes, “Nevertheless, some local governments have continued to offer particularly generous pension benefits, including ’2.5 percent at 55,’ ’2.7 percent at 55′ and ’3 percent at 60′ for miscellaneous employees, as well as ’3 percent at 50′ benefits for public safety employees. In pension parlance, for example, 2.5 percent at 55 means—in simplified terms—that a retiree can receive a benefit equal to 2.5 percent (the benefit factor or multiplier) of his or her final compensation multiplied by the number of years of service if retiring at 55.”

* Above replacement level:

“As we suggested in our 2005 report, these kinds of generous benefit levels result in some career public service workers receiving pension benefits above—and in some cases, well above—the 65 percent to 75 percent replacement ratio described above, particularly when Social Security and other sources of retirement income are considered.” The replacement level is the amount of retirement income it takes to replace a salary during one’s working years.

* Benefit formulas still generous:

“While the state and some other public entities have negotiated with employees for reductions in these generous benefit formulas, CalPERS’ most recent annual report shows that a few governments were still switching to some of these particularly costly benefit packages as recently as 2009–10.”

Praise for Brown Reform

The LAO report praised Gov. Jerry Brown’s reform proposal as “a bold starting point for legislative deliberations.” However, “it leaves many questions unanswered. In particular, we do not understand key details of how his hybrid benefit and retirement age proposals would work. Moreover, the Governor’s plan leaves unaddressed many important pension and retiree health issues, including how to address the huge funding problems facing the state’s teachers’ retirement fund, the University of California’s (UC’s) significant pension funding problem, retiree health benefit liabilities, and other issues. In making significant changes to pension and retiree health benefits, we would urge the Legislature also to tackle these very difficult issues concerning the funding of benefits.”

Basically, what we’re seeing here, from both the governor and the LAO, is the opening salvo in a battle to rein in the overly “generous” pensions the state pays to retirees. It’s going to be a long slog against the ultra-powerful government-workers’ unions.

But as the state’s revenues drop again, reforms will be necessary to keep the pensions from eating up state and local budgets entirely. Tax increases, even if they are enacted, only will deal with part of the problem, and likely will make the problem worse by killing the businesses and jobs that support the whole system.

The Voters Speak

Fortunately, voters across the state signaled Tuesday that they are ready and eager for pension reform. In Modesto and even San Francisco, voters passed pension-reform ballot measures.

People finally are waking up to how public-sector pensions are “generous,” in the LAO’s phrase, while the private sector continues to get hammered by the Great Recession. The general public, seeing its incomes drop or even evaporate, and prices at the gas station and grocery store rise, is showing little sympathy for tax increases to fund the “generous” retirements of state and local functionaries.

Tags: $100K Club, Jerry Brown, John Seiler, LAO, Legislative Analyst, pensions