New Pension Initiatives Target Current Workers

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NOTE: An earlier version of this posting misidentified conservative pension activist Marcia Fritz as one of the members of the group behind the new initiative campaign.

Getty/David McNew

There's a temptation to dust off the quote attributed to an infamous bank robber when assessing two new and explosive initiative proposals to rework the pensions of public employees in California.

Why do the proposed ballot measures go after the pension system for current workers? Because that's where the money is.

That quote, of course, is credited to the late Willie Sutton (who apparently didn't actually say it) when asked why he robbed banks. Its usage here isn't meant to infer nefarious motives on any of the players involved in possible reforms to public worker pensions -- rather, it's an acknowledgement that a major element in the debate is the unfunded costs of pension promises made, but not yet delivered, to tens of thousands of men and women who work in government jobs across California.

The two proposals unveiled today (press release) by a cadre of Republican heavyweights -- former budget guru Mike Genest, pension crusader Dan Pellissier, former state GOP chairman Duf Sundheim, and former assemblymember Roger Niello -- could be called 'pension tough' and 'pension tougher.'

In 'pension tough,' the trip proposes a system that is modeled on the one unveiled last week by Governor Jerry Brown. His proposal (PDF) would place future local and state workers into a "hybrid" system where a smaller traditional pension would be married to a 401(k) style account. Brown also would require workers to stay on the job longer and would aim to limit their annual pension benefits to about 75% of their former salary.

But where the governor simply says current workers will ultimately have to split the annual contributions to their pensions with government -- and make no mistake, that's not a small issue -- the GOP 'pension tough' initiative would force workers, for the foreseeable future, to pick up the majority of the cost of their pensions.

Here's how it's put in a summary distributed to reporters:

Government employers and their employees will equally share the cost of retirement benefits, except while their pension funds are less than 80% funded using federal standards for private sector pension funds, when employees could be required to pay more for their same benefits and for a share of unfunded liabilities.

Note the section about the funding status of the pension funds -- that's the hammer.

Not only are both CalPERS and CalSTRS currently projected to be less than 80% fully funded for future retiree payments (thus creating the so-called "unfunded liability"), but the initiative says the funds will have to be measured by "private sector" accounting standards -- and those are significantly more conservative than the projections used by public sector pension funds.

That's not all. The initiative further says that until California'a pension systems are funded at a level above 80%, state and local government payments are capped at a smaller percentage (6%-9%) of a worker's salary. "Government employees," says the handout, "would have to pick up the remainder of normal cost until their pension fund exceeds 80% funding."

In other words, government pension payments would go down... worker pension payments would go up... and given how poorly the state's pension funds score on the private sector measurement, that system would be in place for a very long time.

The initiative would allow unhappy current public employees the chance to switch their future retirement packages to the 401(k) hybrid plan -- which would also shrink government costs.

Now for the 'pension tougher' initiative being filed today by the GOP quartet. It offers virtually the same system to existing state and local workers, but its approach for future workers is more intense. The initiative would ban pension funds from having unfunded liabilities... and thus says that a fully "defined contribution" pension (that's a 401(k) style plan) would likely be the only option for state and local workers hired after its presumed passage by the voters.

Yes, this is all presumed. Some would even say speculative... or highly speculative. The fact that the group (technically known as California Pension Reform) is filing two separate initiatives shows that they've not settled on which, if either, is more politically viable. It also shows that part of today's announcement is to get some news media attention and, perhaps, shake loose some coinage from the kind of big donors needed to actually qualify an initiative for the November 2012 ballot.

It also presents a very interesting set of questions about the politics of pension reform over the next 12 months.

Saying that public employee labor unions disliked Brown's pension proposal last week is like saying my Duke Blue Devils dislike the University of North Carolina Tar Heels. They consider it, it seems, a proposal from which to negotiate down to something they think is more fair to their employees.

But placed beside the two initiatives unveiled today, Brown's plan looks downright tame when it comes to current workers -- and that makes organized labor's next chess move hugely important. Already, labor faces the perception that they need to embrace Brown when it comes to pension reform, that as unhappy as they might be with the Guv's initial proposal, he's still largely on their side.

The initial attack from the leading labor group on pension issues is on the authors of these initiatives. "Pot, meet kettle," tweeted Democratic strategist Steve Maviglio. "Schwarzenegger GOPer's Pellissier & Genest, getting $100k+ pensions & airtime, to unveil #capension initiative. #hypocrisy"

That line of attack will also likely include jabs at co-author Marcia Fritz, a leading conservative critic of public employee pensions whose own organization has stirred debate over disclosure of some of financial backers.

The initiatives unveiled today may be the big November 2012 conservative shot at pension reform everyone's been assuming would happen. If so, the debate can now begin in earnest.

11:14 a.m. Update: In a conference call with reporters, backers of the initiatives say they'll make a decision in January about which proposal to push for November 2012, a decision based on polling and the title and summary issued to these measures. They estimate they'll need $3 million to qualify an initiative, and admit that they've not yet lined up enough donors to make that happen.

They also say that the increased pension payments for current workers would be phased in at no more than a 3% increase per year -- thus, they argue there would be no sticker shock for a worker who has to ultimately start contributing a lot more out of their paychecks. The group also says it feels confident that system (higher contributions for current workers, a cap on government contributions) can withstand legal challenge... though that's undoubtedly a huge issue, given how some analysts have interpreted the laws regarding promises made to workers already on the job.

11:30 a.m. The leader of a prominent union-led pension committee invokes the Wisconsin union saga in his emailed response to the initiatives. Dave Low says each is "a sloppy proposal, containing provisions that have already been determined illegal by the Supreme Court. We will continue to work with the Governor and Legislature to craft changes in the state's complex pension system rather than have extremist politically-motivated ballot box measures..."

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About John Myers

John Myers is Sacramento Bureau Chief for KQED Public Radio and "The California Report," heard daily on 23 public radio stations across the Golden State.
  • don novey

    This is going to be tough for the current employee becase they have already dumped on the new employees and will be facing reductions via this initiative. The issue revolves around enhanced contributions to meet the new threshold (80%). LAPD is currently at 90 +% but state peace officers are much less. This all started in 1999 when Ron Seeling the actuary for PERS took a gestimate (?) to the administration for the CHP for a 3.0 at 50 formula and all hell broke loose statewide with SB 400.-dln

  • don novey

    John: Also we must not forget the passage of proposition 21 in 1984 to lift the restrictions on PERS investiments.dln

  • http://www.campaignsthatmatter.com/ california political news

    Let me summarize California’s political problems – Everyone complains that they have less money, while spending like there is no tomorrow. You can’t have it both ways.

  • Tough Love

    Very interesting proposals. They get at the root cause of the financial mess we’re in …. these Public Sector pensions, with (a) extremely generous formulas, (b) very early full retirement ages with unreduced benefits, (c) inclusion of post-retirement COLA increases, (d) very liberal definitions of “pensionable compensations” ….. none of which is common to Private Sector Plans…… results in Plans that are VERY expensive and costly to fund, ROUTINELY requiring a level annual total contribution of 40% to 60% of pay.

    With the employees contributing AT MOST 10% of pay, that leaves 30% to 50% of pay on the backs of Taxpayers. This is easily 3-5 times more generous than the contributions Private Sector employers make towards their employees retirement Plans. And with Public and Private Sector “CASH PAY” now very close, there is ZERO justification for ANY greater Taxpayer contrition towards Public Sector Plans than what Private Sector workers get from their employers.

  • Tough Love

    Responding to don novey …

    I don’t know if the LAPD funded ratio is actually 90%, but if so, it’s on current GASB standards. Under the Private Sector FASB standard (which will require decoupling the interest rate used for discounting Plan liabilities from the asset return assumption, and use of an interest rate a full 2% less than that currently used for discounting Plan liabilities, that 90% will likely drop below 70%.

    Similar reductions will occur for all Public Sector Plans revalued on FASB standards.

  • Been There

    This statement “ROUTINELY requiring a level annual total contribution of 40% to 60% of pay.” is incorrect.

    Public Safety runs about 26% and others run around 18%. This is still a LOT of money, but nowhere near 40% – 60%.

    One of the issues is the way the pensions are funded, and this HAS TO CHANGE. PERS requires contributions based on their investment performance. So, in 2007, if their performance is doing well and a city has a $20,000,000 pension obligation, PERS may simply waive it. That’s right – no contribution from the city. What does the city do with this money? Do they bank it? No – they spend it. Then, in later years (say 2010), when PERS investments are down, the same city owes $20,000,000 and PERS wants to collect ALL of it. Of course, the city didn’t budget for this, so coming up with the money causes a “shortfall”, and the blame for this is placed on the backs of the employees.

    This is like racking up massive credit-card debt and blaming the banks for allowing you to overspend.

    Public pensions do need to change. The formulas need to change, how they are funded needs to change, and they need to shift from a defined benefit (today) to a defined contribution (like a 401K) – but we need ot be clear about how we got here. It really isn’t solely because of over-generous pensions. It’s because of government decision-makers who spent money like drunken sailors, and woke up the next morning blaming someone else for their lack of discipline.

  • Tough Love

    Been There, You are incorrect and here’s why.

    My 58% is what must be contributed to fully fund the pension over the officer’s working career. Pressure form the Unions and acquiescence from our politicians leads to paying LESS than what’s appropriate and funding the costs of an officer BEYOND his retirement. Doing the latter cheats future generations of taxpayers as they are paying the cost of services rendered in the past tp PRIOR generations of taxpayers.

    Also, by improperly minimizing the cost, it makes it easier for these grossly excessive pensions to perpetuate themselves. If transparency was the order of the day, the true enormous cost of these Plans would be obvious to taxpayers and those Taxpayers would DEMAND reform forthwith.

    And …. the root cause of the problem is DEFINITELY the grossly excessive pension plan structure currently in place. If it were cut by 50% it would still be far more generous than those afforded comparable Private sector workers by their employers.

    Taxpayers have been hoodwinked long enough . It’s WAY past time for SERIOUS pension reform.

  • hello

    Well, the other issue you need to look at (and this may not be a priority this year but it will be in the years ahead): what kind of public employee are you getting? Look, public employees make less than they would in the private sector. That’s well-documented. But in exchange for lower pay, these people signed on (that’s right, signed a contract) to get pensions down the road. What this proposition will do is change the terms of the contract these folks signed. So you will get fewer people working in the public sector. Maybe you think that’s a great thing. But if so, you need to change a lot of laws. Laws that have to do with (say) malpractice because there currently are not enough people to both investigate complaints and to process new applications for licensure; laws that have to do with contracting because there currently are not enough people to administer the private sector contracts; laws having to do with air and water quality because there aren’t enough people to make sure that either is livable; laws having to do with the proportion of licensed health professionals to client you need to have at a hospital (because there aren’t enough people entering the teaching profession at any level and not enough people processing the licenses for those lucky enough to have actually made it). You basically have to get used to a very different lifestyle; a lifestyle where your air, your health, your personal safety, your education is your business and if you can’t afford any of the above that’s too bad.

  • Tough Love

    Quoting Hello …”Look, public employees make less than they would in the private sector. That’s well-documented. ”

    Baloney …….. distraction and lies put forth by public sector Unions to delay and stop the very needed changes.

    Per the US Gov’t Bureau of Labor Statistics, even AFTER adjusting for education, with the exception of a few highly professional occupations (e.g., doctors, lawyers, etc.) the “cash pay” of Civil Servants exceeds that of comparable Private Sector workers and Public Sector pensions and benefits FAR exceed those of Private Sector workers.

    With greater “cash pay”, Public Sector pension & benefits should be LOWER (not greater) than Private Sector workers so that the 2 sector get equal “total compensation” (cash pay + pensions + benefits).

    Than hardly the situation now, with the Taxpayer paid-for share of Public Sector pensions typically 2, 4, even 6 times (for safety workers) greater in value at retirement than those given to Private Sector workers by their employers.

  • John Baird

    let us not forget that these Public Pensions were, “Mutually Negotiated” by the State and the Representative Associations.

    Don’t blame the “Unions” for this!

  • hello

    @ Tough: I will be more than happy to be proven wrong. Because the alternative this week in Oakland is calling 911 and not having anyoen show up.

  • hello

    @ John: Look, you should blame the unions and the employers (cities, county, state, school districts, water districts, etc.) equally for this. But blaming people isn’t going to get you very far. At least it won’t get you to a solution to the problem of how do you give enough people a level of income that makes them willing to stay in public service so that the public entities we all rely on can do their jobs. We know that’s a problem because when the furloughs (i.e., cuts in pay) were imposed so many people left State service that many State departments cannot (arguably) perform their tasks. Now the Governor wants to impose an even higher pay cut in the form of higher pension contributions on all public employees (local and State) while at the same time keeping all the laws on the books AND shifting a lot of responsibility to the local level. So you will have a lot of people working a heck of a lot more for a heck of a lot less. And it looks like the private sector may be beginning to recover. Well, why shouldn’t a lot of people (especially the younger, more talented people) leave public sector and go private? Because law enforcement agencies won’t keep the streets safe; because schools won’t teach; because water will not be drinkable; because criminals won’t be prosecuted… and why is it their personal problem?

  • Tough Love

    Responding to John Baird, who said …”let us not forget that these Public Pensions were, “Mutually Negotiated” by the State and the Representative Associations. Don’t blame the “Unions” for this!”

    Sorry john. More bull as nobody “negotiating” at that “bargaining table” appropriately represented TAXPAYER interests. Your Union traded campaign contributions and election support in exchange for favorable votes on pay pensions and benefits.

  • Tough Love

    John, if you like some “enlightenment” on the difference in actual “worked” hours and effort between Public and Private Sector ….. just follow a garbage truck for one day (one Private and one Public).

    The Private will actually “work” 50% more of the time and to double the work.

  • hello

    @Tough: Are you basically saying that police, fire-fighters, teachers and what not are all welfare recipients?

  • hello

    Oh.. and you may be interested in how the Tax Payers are looking after their own interests (quite well thank you):

    “The report also found that 78 paid zero — or had a negative tax rate — for at least one year due to nearly $223 billion in tax subsidies, 17% of which went to the financial services industry. Thirty companies went tax free for all three years, researchers found.

    “Wells Fargo alone took in nearly $18 billion in tax breaks over the last three years, followed by around $14 billion for AT&T and $12 billion for Verizon, researchers found.”
    http://latimesblogs.latimes.com/money_co/2011/11/corporate-taxes.html

    After all, corporations are now people and these particular people (who pay no taxes) are “too big to fail”.

  • Tough Love

    Hello, and what is anything in your last comment but more diversion from the issue at hand …. grossly excessive Public Sector pensions 80-90% of which are paid for by taxpayer contributions and the investment earnings thereon.

    Sure wall streeters are greedy …. but that’s no excuse or justification for the way Public Sector workers are financially raping middle class Private Sector taxpayers.

  • hello

    @Tough: You wanted to know who’s standing up for the Tax Payer and I told you. What you refuse to acknowledge is that everyone is (or should be) a tax payer. But the tax payers who are too big to fail expect you to pay for police (pensions, salary, benefits, equipment and everything) and expect to use police’s services free of charge. In other words, they are raising your taxes.

    Heck, we might not even be having this conversation if the Wall Streeters’ tax breaks didn’t exist for the simple reason that Wells Fargo’s tax breaks were higher than California’s deficit. Just Well Fargo’s.

    So you want to apply tough love? Fine–but don’t just apply your tough love to the ER nurses and the fire fighters and the police and the teachers and all the many, many people who make life just that little bit easier; apply some of your tough love to the people who are robbing you blind (in fees and what-not) and then raising your taxes: the Wall Street tycoons. In other words, spread the “love”, Tough–or I at least will not take your seriously.

  • Tough Love

    Hello, You said …”But the tax payers who are too big to fail expect you to pay for police (pensions, salary, benefits, equipment and everything) and expect to use police’s services free of charge.”

    Free of charge ? Where I live, the BASE cash pay of a patrolman with 6 years is over $130K. Add in family healthcare at $20k-25k, and about 50% of cash pay annually or another $65k towards fully funding their pension over their working career, we have $200+K patrolmen.

    This is completely absurd …. “free of charge “, even more absurd. They would be appropriately paid with HALF the total compensation…. and I doubt it would be difficult to full the positions with qualified candidates.

    Taxpayers have been hoodwinked by the Public Sector Unions and self-serving, contribution-soliciting, vote-selling politicians for WAY too long.

    Public Sector Unions are a CANCER on society.

  • Hello

    Tough please what I post prior to responding. I wrote that the corporations ( the people who are too big to fail) don’t pay taxes but use the police’s services. In my world when you don’t pay for something but use it anyway, that’s called using it free of charge. Of course I could have said that Wells Fargo is freeloading off of you but I was trying to be nice. You responded with some inflammatory rhetoric about unions which has sod’s all to do with the conversation we were having.

  • Tax Payer

    . . . to Tough Love
    Teachers pensions in California are funded solely teachers @ 8% of their pay with the district kicking in 4%. At age 62 they max out at 2.4 x years of service. This is nothing like government workers, city workers, safety workers or county workers. They receive far less and work much longer for their pensions. Plus, as a recently retired teacher I had absolutely NO SAY in my retirement plan. So don’t blame teachers or even place them in the same category as the others. Cal STRS is fully funded until 2045. Do some research! that is unlike my sister who works for a county government and hasn’t put a dime into her retirement. That one is paid for by the taxpayers and I would certainly agree that is entirely unfair to those of us paying for it. On the other hand you didn’t pay a dime for my retirement. I paid dearly for 40 years and had I kept my job as a sales rep I could have been making double what I make in retirement. There are some of us that have actually EARNED our retirement benefits!

  • Tough Love

    Dear “Taxpayer”, Here’s an education for you….

    Let’s take that 62 year old with say 30 years of service retiring at 62 with 2.4% per year of service or 30 x 2.4% = 72% of “pensionable compensation” (final average salary).

    Assuming that pension is COLA-increased at 3% annually, the “cost” of that pension (meaning the total funds that should be in hand on the date of retirement for this employee to fund all future expected pension payouts) is just about 20 times the initial year annual payout. So just as an example, if this employee’s final average salary is $100K with a $72K starting year pension, then the cost of that pension is roughly 20 x $72K = $1.44 Million.

    Now I know you won’t believe me, but the cost of this $1.44 Million pension (expressed as a level annual % of annual pay) is just about 47%. Now on “average”, total annual contributions need to be about 10 percentage points less because some workers don’t vest, some die before retiring, some work shorter careers, and some retire at later ages … all costing less (also as a level % of pay).

    So…. the 8% you put in is buying just about 8/(47-10)= 22% of your pension (even on an average-cost basis). The Taxpayers are theoretically on the hook for the balance ….. and to fully fund your Plan over the working careers of the employees, the taxpayers should be contributing the total (47%-10%) minus the 8% you are contributing = 29% of pay.

    So while your city may be only contributing 4%, it “should be” contributing 29%, and unless you are willing to take a really BIG pension haircut as some point, there is a BIG bill coming due in the future due to underpayments today.

    If it makes you feel better, the same story is playing out all over the country. Many many Plans will run out of funds, and if the total contribution into your Plan is only 8%+4%=12% of pay (over extended periods) you can be assured your Plan WILL be one that goes bust.

    Taxpayers are quite fed-up with the MUCH MUCH more generous Public Sector pensions and have no intention of making up for these shortfalls. While your Union has boasted of it’s successes in gaining such extraordinary pensions, in reality, they failed miserably because they failed to get the appropriate funding commitments to go along with those generous promises.

    One last thing …….. you can bet dollars-to-donuts that the pension Plan set up for your Union’s officials is ALWAYS fully funded.

  • Tough Love

    Dear “Taxpayer”, follow-up …

    I forgot to comment on your statement that …”CalSTRS is fully funded until 2045″

    From a 7/19 article in “Global Pensions” …

    “The pension fund targets a return of 7.75%. Despite the high returns, CalSTRS said the funding ratio will drop below the current 71% come spring because of the 25% loss posted in the 2008-2009 fiscal year.”

    This means that for already accrued pensions benefits for past service, which should be fully funded as earned, the Plan has less than 71% of what it should have in hand TODAY. And, this 71% is based on the very liberal GASB (Public Sector accounting Standards). Under the most more conservative FASB accounting standards required for Private Sector Plans, the 71% would likely be 60% or less, a level so poor that a Private Sector Plan would be required to freeze the granting of any further pension accruals. Bottom line …. CalSTRS is in the SH**hole.

  • hello

    @ Tough: So how much of a pay cut do you think an average teacher, fire fighter and police should take? What, in your opinion, is fair? I say pay cut deliberately–the more an employee contributes to their pension, the less they take home. The more the pension is a 401(k) the less certain it is that the person will ever see their money again and the more certain it is that these (hard-earned) dollars will benefit Bank CEOs.

  • Tough Love

    “Total compensation” (pay + pensions + benefits) of Public and Private sector workers in similar occupations, or with similar responsibilities and/or risks should be very close.

    Per the Us Gov’t Bureau of Labor Statistics (BLS) “cash pay” is very close in the Public and Private sectors in all but a few highly professional occupations (e.g., doctors and lawyers).  This being the case, there is no justifiaction for any greater pension accruals in the Public Sector.

    So to the point … Public Sector ZDefined benefit pension should be frozen (NOT taking away anything earned to date) with a switch for FUTURE service toa 401k (or 403B, etc.) Plan with a modest match …. just like is the common practice for Private Sector workers.

  • Tough Love

    Looked like I missed something ……..

    Since Private Sector workers almost NEVER get company paid-for retire healthcare, so neither should Public Sector workers.  If you want to retire before age 65 and eligibility for Medicare, that’s fine … but pay for your own healthcare.

  • Hello85

    @Tough: How much does a private fire fighter and police man make again?  I can’t seem to find the figures but perhaps you have them?  Thanks so much.  I ask this because in South America they followed your sage advice.  These days, you can tell when you’re in a welathy neighborhood.  That’s the one with the police.  The poor people can’t afford it.

  • Tough Love

    @ab4333b9f1f37dc0372213577627f9aa:disqus
    Not sure where you live, but in many CA cities and where I live, patrolmen with 5-10 years service have a total compensation of $200K+.

    Nope, no private cops, but do YOU think we should/need to be paying $200+k compensation for the lowest level officers ? 

  • Hello85

    @Tough: I am related to a few cops and while they do make a lot it’s nowhere near what you’re suggesting.  And one of my relatives is employed in the second highest paid city.  Please do some research.  The other thing I know is this little nugget: the higher-paying cities have a lot more cops.  I mean a LOT more and not only that but people are willing to wait on the wait list (be volunteers for the police department) to get into those jobs.  For whatever odd reason, people aren’t lining up to get jobs in the cities that pay more–with the result that those cities have fewer police on the streets.  In short, we’re already seeing the difference between the poor and the rich cities and neighborhoods: the richer your city and neighborhood the more polce the less crime.  You would like to aggravate that difference.  I also notice you never answered my question: how much of a pay cut do you think fire fighters and cops and teachers should take?

  • Tough Love

    Surprise surprise … as you said “you are related to a few cops.”

    You’ve been working awfully hard denying their ridiculous “total compensations” (pay + pensions + benefits), and suggesting their might even be a shortfall in applicants. 

    How preposterous .