- Quick Facts
Yet another report released this week confirms the enormous liabilities that California taxpayers must endure to pay for pensions for public employees. The study, released at a Pension Boot Camp for elected officials held in Citrus Heights by the reform group Californians for Fiscal Responsibility, echoed the points made by the Little Hoover Commission, Stanford University and others: “Public pension funds in California face massive shortfalls,” which are the result of pension benefits that are much richer than those received in the private sector.
The reaction from the state’s muscular public employee unions has been as predictable as they are comical. Union spokesman and Democratic activist Steve Maviglio blamed Wall Street greed and argued that “Pension reform is a Trojan horse for an attack on public employees,” as if the half-trillion-dollar unfunded liabilities and fiscal problems faced by state and local governments are mere fictions trumped up by “right-wing” Republicans to diminish government workers.
The silliest response came from pro-union organizations that sponsored the www.DontScapegoatUs.com Web site, which features the type of heavy-handed ad hominem approach perfected by the state’s public employee unions, which are used to bullying and threatening politicians into obedience. The site puts the heads of prominent pension reformers on the bodies of farm animals, spins some conspiratorial yarns about out-of-state billionaires and Wall Street greed. It even depicts some Progressive Democrats as “right-wing zealots.” Apparently, anyone concerned about the effect of these unsustainable pension promises on government budgets and taxpayer wallets is a right-wing zealot. Don’t expect any serious arguments from this group.
Such fact-devoid emotionalism ignores the key findings of the CFFR study: “The combination of retroactive benefit enhancements, lengthening lifespan, and some weaker than expected investment returns during recent years has led to deterioration in the condition of public funds in California. As of 2010, the five largest public pension systems are only between 61 percent and 74 percent funded for benefits earned for past service, based on the actuarial assumptions used by those systems. These measures would be even lower if they instead reflected the assumptions mandated for use by private sector plans, or those used by the United States with respect to federal employee pensions. The funded status amounts also do not reflect liabilities, if any, for outstanding pension obligation bonds.”
The union pension defenders argue that pensions only comprise a small portion of the state budget, but they neglect to mention the enormous portion of local governments consumed by such benefits and they conveniently ignore the unfunded liabilities – the fact that the state should be paying much more to cover these promises, but is instead running up an unsustainable level of debt.
They depict Progressive Democratic pension reformers at right-wingers without addressing the core Progressive argument for pension reform – without it, pensions will deplete public services and destroy public budgets. Here’s a relevant passage from the Little Hoover Commission, a nonpartisan oversight agency that is part of the California state government:
“Pension costs will crush government. Government budgets are being cut while pension costs continue to rise and squeeze other government priorities. As the Commission heard during its hearings, the tension between rising pension costs and lean government budgets is often presented today in a political context, with stakeholders debating the severity of the problem and how long it will last. In another five years, when pension contributions from government are expected to jump and remain at higher levels for decades in order to keep retirement systems solvent, there will be no debate about the magnitude of the problem. Even with the introduction of two-tiered pension plans, barring a miraculous market advance, few government entities – especially at the local level – will be able to absorb the blow without severe cuts to services.”
Union spokespeople like to blame Wall Street without noting that the public pension systems – especially the scandal-plagued CalPERS – are the epitome of Wall Street. They are some of the biggest investors in the stock market and CalPERS’ scandals in particular point to some of the greediest and most despicable tactics we’ve seen on Wall Street. It’s beyond hilarious to hear defenders of CalPERS lecture the private sector on ethics in investing. But the problem goes far beyond some pay-to-play deals that even a belated CalPERS report suggests was inappropriate.
The real problem is that unions elect public officials who then granted them an unsustainable level of benefits without worrying about future debts. They used standards that would never pass muster in the private sector and engaged in the type of greed that rivals the worst of Wall Street. Little Hoover explained how the unions played the system and how these tactics, not Wall Street ups and downs, are the culprits for a pension system that is crushing governments and taxpayers:
“The 2008-09 stock market collapse and housing bust exposed the structural vulnerabilities of California’s public pension systems and the risky political behaviors that have led to a growing retirement obligation for state and local governments, the scale of which taxpayers are just beginning to understand.
“Treated like another speculative house during the boom, the state allowed public agencies and employees to pull equity in the form of increased retirement benefits from the pension funds whose value was inflated by optimistic market return estimates. The retirement promises that elected officials made to public employees over the last decade are not affordable, yet this is a mortgage that taxpayers cannot walk away from easily.
“When the economy crashed, another lesson from the housing bubble became just as important. A public pension, like a house, is not a get-rich-quick investment. As a house is for shelter, a pension is for longterm financial security. Even the ‘teaser rates’ reflecting aggressive investment assumptions are re-setting, revealing a higher cost to maintain a level of benefits that have become more generous than reasonable.
“Boom and bust cycles are natural, if unpredictable, but political leaders agreed to changes in the pension system at the peak of a boom, and as a major demographic event began unfolding – the start of the retirements of the Baby Boomers.
“Pension benefits promised to retirees are irrevocable, as are the promised benefits that current workers have accrued since their employment began. It also remains difficult to alter the theoretical, yet-to-be earned benefits for current workers. This situation, reinforced by decades of legal precedent, leaves little room for state and local governments to control mounting retirement costs, particularly when the only venue for change is the bargaining table.”
No wonder union advocates avoid the facts and instead focus on blaming mysterious billionaires (who support pension reform in California) and Wall Street greed.
They also use dishonest arguments about the average size of public employee pensions, which often are two-to-three times the number they use when one looks at recent retirees, who are retiring under formulas that have vastly expanded over the past decade. Note the $100,000 Pension Club, with a membership that’s growing by about 71 percent a year. Virtually no one in the private sector retires at age 50 or 55 and virtually no one in that sector receives $100,000 cost-of-living-adjusted salaries, plus fully paid medical care and that’s all before the various and unseemly pension-spiking gimmicks that are view more as an entitlement than a fraud by public employees, especially those in the public-safety sectors that claim heroism in order to enrich themselves.
New pension initiatives are in the works, which would cap pensions and increase employee contributions and in one case create a hybrid system that combines a 401/k-style system with a less-generous defined-benefit plan. One by former Assemblyman Roger Niello of Sacramento would:
• Set the retirement age for all California public employees, including current workers in every classification, at age 62.
• Limit retirement benefits for a public agency employee to no more than 60 percent of the highest annual average base wage of the employee over a period of three consecutive years of employment.
• Split the employer/employee contribution to pensions equally.
• Exclude unused leave time from pension calculations.
• Ends retroactive pension increases.
Speaking at the Boot Camp, Niello called his vote for pension increases as a county supervisor the “worst decision” of his career. He explained how the unions have been picketing the Niello car dealerships, even though he has a minority stake in the company and is not involved in managing it. He accused the unions of punishing fellow working-class citizens.
The California Pension Reform initiative would create the hybrid system. It would cap pensions when the pension systems are underfunded and would require that disability benefits be paid outside the pension system, presumably through an insurance-type system common in the private sector. New hires would receive “retirement savings accounts instead of taxpayer-guaranteed pensions.”
Recent polls show that Californians, even California Democrats, overwhelmingly support pension reform. So expect more emotionalism and claims about scapegoating by a union movement that has few facts on its side.
About the author: Steven Greenhut is the editor-in-chief of Cal Watchdog, an independent, Sacramento-based journalism venture providing original investigative reports and news stories covering California state government. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”
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