Will public pensions really cause a fiscal ‘tsunami,’ or do critics have a case of pension envy?
Firefighters, cops and teachers. Not so long ago, these public employees were among the most admired American workers.
“Now it’s like they’re the scapegoats for the problems of government. The cops and firefighters, the public-health nurses—they’ve become the bad guys,” says David Miller, a scientist with state Department of Toxic Substances Control.
It’s happening in places like Wisconsin—where Republican lawmakers have tried, and sometimes succeeded, to strip public employees of the right to collective bargaining.
It’s happening in Sacramento, which is ground zero for the pension-reform movement in California and its attempt to roll back generous benefits for folks like Miller, to raise retirement ages, or even make them give up the security of a guaranteed pension in favor of 401(k) plans.
While the stock market was booming and people’s retirement accounts were booming along with it, no one much begrudged the state worker, his or her public pension at the end of a career plodding along through civil service.
“Today, I think a lot of people don’t have that retirement security anymore. And they’re wondering, ‘Why should some public employee get it?’” says Miller. “And I think it plays really well to the tea party folks. ‘Look at those hogs at the trough, getting the kind of retirement you aren’t!’ Of course, the corporate executives are still getting it.”
Miller makes decent money. He’s a senior scientist with the state, with advanced degrees and 20 years of service under his belt. He grosses more than $70,000 a year, but he could easily be making six figures working for a private company or the federal government.
Public-employee unions can point to a stack of studies that show government employees tend to make a little less than their private-sector counterparts. And waves of pink-slipped teachers and cops show that public employees are just as vulnerable as anyone else, if not more so, to the unemployment crisis.
Now government workers are clinging fiercely to the security promised by those government pension plans. And their critics are trying just as aggressively to strip them of those rights.
Local governments in particular—the city of Sacramento among them—are trying to trim pension costs in order to balance budgets and save government services.
Most of the public employees SN&R talked to agree that some reform is needed. Miller—who has joined up with some fellow state workers to form what they call a pension truth squad—just wants to let people know they aren’t the enemy.
Secret history of public pensions
No one gets better retirement benefits than cops. That’s something Brent Meyer, head of the Sacramento Police Officers Association, has been hearing incessantly. He’s been hearing it from the city council, from other unions and from the editorial writers at The Sacramento Bee.
And he says it’s true that the “3 at 50” formula—meaning a police officer can retire at 50 years old and earn three percent of his most recent salary for every year he’s served—may be unsustainable, especially when top managers “spike” their pensions and manipulate the system to get six-figure retirement benefits.
“The intent of that benefit was to take care of the guy whose body was taking a beating, who was out there year in and year out getting spit on and fighting with people,” Meyer explains. “It was not really for the guy who’s been sitting behind a desk.”
But pension benefits have expanded—even compared to a decade ago. It’s not so surprising—folks like Meyer have been fairly effective at lobbying on their members’ behalf for a long time now.
A century ago, President Theodore Roosevelt warned against what he believed were the evils of collective bargaining by public employees. In 1902, he signed an executive order forbidding federal workers “individually or through associations, to solicit an increase of pay, or to influence or to attempt to influence in their own interest any legislation whatever.”
Subsequent administrations weakened that order, and legislation by the progressive Wisconsin-governor-turned-U.S.-Sen. Bob LaFollette instituted collective bargaining rights for federal workers in 1912.
A century later, of course, another Wisconsin governor, Scott Walker, would try to eliminate collective bargaining for public employees in that state.
In California, Gov. Jerry Brown is often credited and or blamed for giving California state workers the right to unionize. Brown did sign the Ralph Dills Act in 1978, bringing the union to state workers. He also gave teachers and college professors the right to bargain by signing other legislation.
But it was actually Gov. Ronald Reagan who opened the door to public-employee unions, signing legislation that gave collective bargaining to city and county workers in 1968.
Along with collective bargaining came better pay, better benefits and—of great importance to almost all the public-employee unions—some security in old age.
Marcie Launey, former head of the Sacramento City Teachers Association, puts it this way: “We didn’t go into the profession for money. What we did expect was that if we stuck it out, we’d have a secure retirement.”
For a long time, that seemed like an acceptable bargain. But somewhere along the way, the deal changed. Former Assembly Speaker Willie Brown recently wrote in his column in the San Francisco Chronicle:
“The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians—pushed by our friends in labor—gradually expanded pay and benefits … while keeping the job protections and layering on incredibly generous retirement packages.”
Former state Assemblyman Roger Niello, a Republican, told SN&R that 1999—at the height of the dot-com boom—was a “seminal” year in creating the modern public-employee pension crisis in California.
Then-Gov. Gray Davis signed legislation that enriched retirement benefits and lowered the age at which it was possible for state workers to retire. “But it also created an incentive for local governments to do the same. There was this domino effect,” says Niello. He was a Sacramento County supervisor at the time. “And I’m sorry to say, I voted for that, too” for county workers.
The year 2001 was another important year—especially for the pension benefits for public-safety employees—explained Marcia Fritz, a Citrus Heights certified public accountant who heads the pension reform group Californian Foundation for Fiscal Responsibility.
“After 9/11, you couldn’t throw enough money at police and firefighters,” says Fritz.
Just how generous are these pensions? A lot of attention has been paid to government workers who get sweetheart deals and big raises in their last year of employment, in order to spike their pensions. And papers like the Bee regularly focus on a small (but growing) number of high-level bureaucrats who earn six-figure pensions.
“But that’s the executives. That’s the city managers and the fire chiefs. That’s not the rank and file,” says Miller, the hazardous-substance scientist.
In fact, most pensioners receive modest benefits. Better than Social Security, to be sure. Better than a depleted 401(k). But the average public-employee benefit in California is $2,200 a month. For Sacramento city employees, the average benefit is $1,700 a month.
“All you see in the media is ‘Public employees are getting too much money,’” notes Paula Weiss, with the California Retired Teachers Association.
“What we don’t talk about is how much those pensions contribute to the community,” Weiss says. “I would argue that it’s the local pensions from the state workers that are keeping this community together right now.”
Defenders of public pensions say it’s not the benefits, so much as the way the pension funds have been managed, that have caused today’s problem.
For example, during the go-go ’90s, the California Public Employee Retirement System offered payment holidays during which the state and local governments weren’t even required to put new money into the pension fund—because the investments were doing so well. Looking back, those payment holidays were a pretty bad idea.
The 2008 slide
In 2008, Wall Street destroyed much of middle-class America’s wealth within a few short months. Many workers who had been diligently contributing to a 401(k) are now reconciling themselves to a leaner retirement, or they are hoping for the market to make some of that money back or are figuring on working a few more years.
But it’s a little different for public employees, whose pension will provide a “defined benefit.”
They’ll get their check anyway, regardless of the stock market’s gyrations. But the funds, administered by CalPERS and CalSTRS, got absolutely walloped when the market tanked in 2008.
The funds now have enormous unfunded liabilities—meaning the amount of money the fund would have to come up with if it suddenly had to pay what it owes every living retiree and current employee.
There’s a lot of disagreement about just how big the unfunded liability is. A Stanford study last year put the collective unfunded liability for CalPERS, CalSTRS and the UC Retirement System at $500 billion.
Likewise, if the city of Sacramento were to just close up shop and have to pay everyone the pensions they’ve earned, the bill would be in the “hundreds of millions of dollars,” says Leyne Milstein, director of finance for the city of Sacramento.
In reality, that bill is never going to come due all at once. But consider that historically, local government pensions were funded in the 80-90 percent range.
Post-2008, CalPERS wants local government pensions to be at least 75 percent funded by the year 2043.
Right now, Sacramento’s main pension fund is only 58 percent funded. For public-safety employees, it’s about 61 percent.
All pension politics is local
“The fact is, the pension problem is much more acute at the local level,” says Niello.
Think the city of Bell. City and pension benefits tend to be more generous than what state workers get. Local government budgets are also more heavily weighted toward payroll—so pension costs represent a much bigger slice of the budget pie.
In Sacramento, payroll takes up 80 percent of the general fund. That has huge implications come budget time.
Since 2008, the number of public employees everywhere has been shrinking—the city has slashed 900 jobs in the last three years. But pension costs are still climbing—fast.
That’s because in addition to paying to cover the ongoing costs of funding employee pensions, the city is also on the hook for backfilling the losses of the stock slide of 2008, an extra cost to the city of about $4 million per year.
In fiscal year 2009/10, the city paid more than $60 million toward pensions. That’s about 13.5 percent of all labor costs and 7.8 of the city’s entire budget.
That extra $4 million “in our badly depleted general fund, that really hurts,” says Craig Powell, director of the taxpayer group Eye on Sacramento, and a proponent of pension reform.
Fritz, Niello and Powell all suggest some variation of the following set of reforms: First, make it harder to spike pensions by setting benefits according to the last three years of service, rather than just the last year; Second, move to some sort of “hybrid” pension system where current employees continue to get a defined benefit, but new employees would be put into some sort of 401(k); Finally, end the “free ride” and make public employees contribute something to their retirement account.
Unions are sure to scrap and fight against having their members tossed into 401(k) funds, and it would do little to save money in the near future. That’s because contract law makes it very difficult, perhaps impossible, to change benefits for existing employees. Such reforms could only apply to new employees.
Ending the free rides is a more likely, and perhaps more fruitful, reform for Sacramento. “If we can require employees to pay their full share, that’s really where the big dollars are,” says Powell.
State employees have about nine percent of their salary taken out of their check to pay toward the pension obligation. Local governments, like Sacramento, often offer to pay the employee contribution for their workers.
In fact, the city pays all employee share of pension costs for cops, managers, and, until very recently, for firefighters.
For other employees, like clerks and parks workers and planners, the city pays part of the employee contribution, while the employee kicks in 4 percent of their salary.
In all of these cases, the city also picks up the employer share of the pension contribution, which is an even larger amount. For every cop on the city payroll, taxpayers are contributing nearly 30 percent of that cop’s salary toward the pension benefit for that cop. For non-public-safety employees, it’s closer to 15 percent.
If all city employees were to contribute 5 percent of their salaries—still considerably less than what state employees contribute—that would save the city $10 million a year.
Of course, that’s effectively the same as giving everybody a five percent pay cut.
Joan Bryant is director of Stationary Engineers Local 39—which represents everybody from parks workers to city planners. She says her union already gave up pay increases the last two years, and workers get furlough days.
And Bryant didn’t sound too interested in opening up their contract for negotiation until it expires next year. “I’m never going to say no, we won’t talk,” Bryant told SN&R. At the same time, she wants to see other unions give first.
“We’ve been paying the 4 percent. Our people have been doing that, while the fire and safety people have been getting a free ride.”
In fact, the firefighters union recently agreed to have its members start kicking in 6 percent of their salaries toward pensions.
That part of the deal is supposed to save $3 million. But Marcia Fritz isn’t so sure. She notes the deal also includes a 5 percent raise for firefighters. “I don’t think the city is getting any savings at all.”
Still, she thinks getting employees to pay their share of their pension contributions is a great idea. Her group commissioned a study that found the statewide local governments could save $2 billion a year if employees pick up part of their pension costs.
There are already rumblings that Sacramento city managers will soon have to start kicking in for their portion of pension costs. Since top managers and exempt employees aren’t represented by the union, the city council has a lot more discretion to change their benefits.
“That’s the biggest thing they could do right now. I think that would really help set the right tone,” says Powell.
That would also put a lot more pressure on the cops. Meyers told SN&R that he thinks raising the retirement age to 55 for police may be “more reasonable.” And he says he’s open to the notion of cops paying more of the employee share, because it makes sense for employees to “have some skin in the game.”
But like other local union leaders, Meyers says he’s concerned his members will bear the brunt of reforms while other groups get away with doing less.
He says he hasn’t seen much movement by the city to curb pension spiking and other abuses. “Do they really want reform? Or do they just want us to pay more?”
Still Meyers says its better that his union be involved in pension reform. “I think our membership recognizes that if we don’t do it, the public is going to do it for us,” he told SN&R.
Like the public is doing in San Jose or San Francisco, both of which face local ballot measures next year that would make big changes to pensions—including ending free rides, and introducing hybrid pension systems.
“A ballot measure has always been discussed as the ultimate option,” says Powell. “I think people are sick of seeing their parks fall apart and seeing their fire stations browned out.”
Efforts for reform at the state level have been more stop and go. Gov. Brown has talked about the need for changes to the pension system, though pension-reform advocates have been frustrated with the lack of action from his administration. Brown did negotiate concessions from the public-employee unions, including higher employee contributions, and some curbs on spiking.
Earlier this year Niello tried, and failed, to attract money for a possible ballot measure this fall that would raise retirement ages and require employees pay the employee contribution.
But Niello says he found “little appetite” among likely donors for funding a ballot measure—one that would doubtless attract major opposition, and money, from state unions.
There is one statewide effort that seems to have a little bit of traction, run by another Sacramento-based consultant Dan Pellisier, who is working toward a pension-reform measure on the 2012 ballot.
If so, teachers and firefighters and cops are sure to fight it pretty hard.
Whether the two sides can come up with a pension system that local governments can live with—and one that public employees can live on—remains to be seen. “The consensus is that there has to be some sort of reform,” says Miller. “But the devil is in the details.”