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Past pension boosts deferred costs

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POSTED March 11, 2012 6:13 p.m.

SACRAMENTO (AP) — The recent loss of tens of billions of dollars from California's public pension funds may have raised awareness about the high cost of guaranteed benefits for public workers, but reform advocates say the unsustainable system has been years — or even decades — in the making.

While Democratic lawmakers stall on taking up Gov. Jerry Brown's proposal to reform pensions, those who support rolling back benefits point to past political decisions that have left taxpayers facing billions of dollars in unfunded liabilities today.

In the early 1990s, a union-led initiative gave the state's main pension fund exclusive authority over management and investments, putting the interests of retirees ahead of taxpayers. During the dot-com boom, the state approved enhanced retirement benefits and raised pay for state workers, exposing taxpayers to greater liability.

The investment gains from the housing bubble allowed public pensions to mask what the system has been doing for decades: deferring the retirement benefit costs for current workers to future generations of taxpayers.

"We're in a place where we're promising taxpayers 30 years from now are going to pay. And it's wrong," said Dan Pellissier, president of California Pension Reform, a conservative group that recently suspended its campaign for pension reform after it failed to raise enough money to mount a signature-gathering drive.

Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, said it's inaccurate to blame the current pension problem on enhanced retirement benefits. He noted that the California Public Employees' Retirement System, or CalPERS, lost $69 billion, more than a quarter of its value, in the 2008 housing and stock market crash. He said many unions have agreed to roll back early retirement for new employees and current workers are contributing more toward their pensions as a result of recent labor negotiations.

"When people say it's not due to the stock market, it's really due to the benefits, that does not stand up to the math," Low said.

Reform supporters point to Proposition 162, a 1992 voter-approved initiative that gave the labor union-friendly CalPERS board complete authority over investments and administration, shifting the pension fund's allegiance from elected officials and taxpayers to public employees and retirees. Labor leaders who campaigned for the initiative say the change was necessary to prevent then-Gov. Pete Wilson, a Republican, and lawmakers from using the fund to help close the state spending gap.

Marty Morgenstern, Brown's secretary of the Labor and Workforce Development Agency, said if taxpayers are going to be on the hook for paying pension checks, they should have a greater say over how funds are managed and invested. Under the CalPERS board structure, six of the 13 members are union members. Brown, a Democrat, wants to add two independent members with financial expertise to the board.

Rosy economic times also gave state and local governments a false sense of security, since pension funds move up and down with the overall health of the economy. CalPERS, which was 71 percent funded in 1990, grew to be overfunded in the next decade, to as much as 116 percent in 2000. The fund was down to 63 percent in 2010, the most recent data available.

When government coffers were flush from the dot-com bubble of the late '90s, then-Gov. Gray Davis, a Democrat, and lawmakers from both parties approved enhanced retirement packages for state workers. At that time, CalPERS estimated the benefit increases would cost the system around $600 million a year, for an overall $8 billion cost over 20 years.

"It's probably one of the worst votes Republicans cast," said former Sen. Jim Brulte, a Republican who voted for the bill.

The bill, SB400, assumed the extra retirement benefits would be covered by investment gains and encouraged workers to retire earlier. The pension bump wasn't just handed out to current and future employees; those who had already retired received a boost as well.

At the same time, school districts, local governments and the state began lowering their contributions as investments performed well. From 1999 to 2002, school districts contributed nothing toward the pensions of non-classroom employees such as school custodians, nurses and bus drivers.

SB400 paved the way for public safety employees to retire as early as age 50 with 3 percent of their highest annual salary multiplied by the number of years they served. The "3 percent at 50" formula enabled highway patrol officers, firefighters and prison guards to receive up to 90 percent of their pay for the rest of their life with health care benefits. Financial advisers suggest striving for 70 percent of your income in retirement and for most workers, the retirement age is set by Social Security, which is now 67.

Morgenstern, who was then director of the Department of Personnel Administration, sent a memo dated July 23, 1999, warning managers and supervisors to negotiate carefully, noting that there was no guarantee CalPERS' record-high investment returns would continue.

Without them, he said, government is "ultimately liable and responsible for funding" the pensions.

But Davis signed SB400 a month later and his administration later agreed to significant pay increases — and larger pensions — for public employees.

In 2002, a top-scale correctional officer made an annual base salary of $54,888 before overtime and other perks. Under Davis' contract, guards got a cumulative 30.2 percent pay increase between 2003 and 2008, boosting some officers' base pay today to $73,728, according to the Department of Personnel Administration.

A highway patrol officer's base salary was $61,620 in 2003. It jumped 19 percent, to $73,464 in 2006, according to DPA.

Davis, who was heading into a re-election bid, reached contracts with unions like the California Correctional Peace Officers Association that donated millions to his campaigns. Davis did not return telephone and email messages left for him at his Los Angeles law office.

The Schwarzenegger administration later calculated that Davis's contract with CCPOA cost the state $2 billion in wages, concessions, overtime, sick leave and other administrative costs.

The combination of higher pay and benefits is hitting the state in spite of recent salary freezes and labor agreements reached since 2010 that require workers to contribute more toward their pensions. Retirees with 25 to 30 years of service saw their annual pensions grow from an average of $39,696 per year in 2004 to $53,184 in 2009 — up 34 percent, according to the Legislative Analyst's Office.

Local governments are experiencing the same pinch, leading some cities like Stockton to contemplate bankruptcy. The Legislature passed laws allowing cities and counties to negotiate enhanced benefits at the same level as the state. Some gave even more generous benefits.

Other factors, such as longer life expectancy, have made the problem more complex.

Carroll Wills, a spokesman for the California Professional Firefighters, said the union supports some reforms like ending pension abuses but feels public employees have been maligned in stories about public executives who game the system. Robert Rizzo, the former city manager of Bell, was set to receive a pension of about $600,000 a year until a CalPERS audit slashed his benefits in the wake of that city's salary scandal.

"The notion that pension funds are an unmitigated drain on tax dollars, that's sophistry," Wills said. Labor leaders like to note that the average CalPERS member receives $2,332 a month in benefits, but workers today are retiring with better pensions.

The average CalPERS member who retired in 2010-11 receives a monthly benefit of $3,065.

 

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