In the past two weeks I have written a series on what I call “Fire Service Myths”. Before continuing, let me pause this week to discuss a related issue, public service pensions. Everything else falls into place once we better understand the pension issue and the birth of unfunded liabilities for the people who provide our fire and other services.
Much of the information below on the history of California’s pensions is adapted from articles and reports done by Steve Malanga, senior editor for City Journal and a senior fellow at the Manhattan Institute.
How the California Public Employee Pension mess began
Pensions for California state government employees began in 1932 and were modest by today’s standards. Employees could retire at age sixty-five, and their pensions equaled 1.43% of the employees last five years pay times the number of years worked. This worked out to a little over 50% of the average workers’ pay and the average worker lived to age 66.
In 1961 as Public Sector unions power grew, California enhanced non-public safety workers’ retirement by enrolling those workers in Social Security; in 1968 the California State legislature added annual cost-of-living adjustments to CalPERS pensions. In 1970 the pension formula was changed to 2% at sixty from its original 1.43% at sixty-five. In 1983, public safety pensions were increased to 2.5% at fifty-five.
In 1991 CalPERS was having difficulty funding pensions during the recession at that time and created a second “tier” pension that paid employees less, but required no contribution by employees. Employees received 1.25% of their final average salary at age sixty five and continued receiving social Security benefits.
Public Sector Unions take control; unfunded liabilities skyrocket
Public Sector unions virtually gained control of CalPERS in the 1990’s when six of CalPERS 13 Board members were chosen by government workers and, as such, are union leaders. Two members are California’s Treasurer and Controller. In 1999 union backed Gray Davis became Governor and union backed Phil Angelides became State Treasurer.
Immediately CalPERS wrote proposed changes to employee pension plans to take all the post 1991 state employees and retroactively putting them in the older, more expensive pension system. The plan also lowered the retirement age for all state workers: public safety workers could retire at fifty with 90% of their salaries and other state workers could retire at fifty-five with 60% of their pay. CalPERS wrote the legislation for the legislature and wrote an analysis that promised that State contributions would not climb due to the changes.
The bill was signed into law by Governor Davis in 1999, and pressure grew to allow counties and cities to match the benefits provided to state workers. Contra Costa joined the “gold rush” in 2002.
And thus was born our “unfunded liability” issue. Thousands of public safety employees who were granted 3% at 50 pensions, but had not paid into the fund at that rate during their careers retired immediately. The tech market stock bubble burst in the year 2000, followed by the terrorists attack in 2001, both causing the stock market, and CalPERS investments, to lose more than a quarter of its value. As its investments declined, CalPERS quickly raised contributions into its fund.
Throughout the State pension costs have soared. State pension costs rose from $611 million in 2001 to $3.5 billion in 2010; San Jose’s costs have gone from $73 million in in 2001 to $245 million in 2010. Vallejo, Stockton and San Bernardino have all filed for bankruptcy (with Vallejo on the verge of filing again) due to high pension and other retirement costs, among other bad management decisions. Many other California cities, including San Diego and Los Angeles, have seen pensions climb drastically and speculation that other cities would declare bankruptcy have recently focused on Desert Hot Springs.
The California Public Employee Pension mess continues unabated
David Twa, Contra Costa County Administrator, has recently reported to the Board of Supervisors that the County’s pension costs would rise by more than $55 million this year, with the unfunded liability for pensions, pension obligation bonds and OPEB exceeding $3.12 billion dollars.
Looking at my Fire District, the pension obligation for the East Contra Costa Fire Protection District in 2013-14 is $3,173,795 on a budget of $12 million. Of that amount, $1,088,612 is for normal retirement costs and $2,085,183 are for past, unfunded liabilities. The district is also budgeting for a 47% increase in pension costs for the next year.
For the County’s largest Fire district, ConFire, pension costs, reports Daniel Borenstein of the Contra Costa Times, cost taxpayers $1.19 for every dollar of payroll, or approximately a quarter of the District’s budget.
Vince Wells, President of IAFF, Fire Fighters Local 1230, has pointed out to me that the employees of Local 1230 are hard hit by the current pension plan, paying 24-27 cents of every dollar they earn. I reminded Mr. Wells that the taxpayers are also hard hit by the current pension plan, and we don’t like paying for unfunded liabilities either.
At a Statewide level, CalPers is adjusting its actuarial projections and rate of return and has announced an employer rate increase of “less than 50%.” The increase will be implemented over five years to ease the transition to higher contributions for city and county plan participants. CalSTRS, the retirement fund for teachers in the State, is demanding the State pay an additional $4.5 billion in contributions this year to keep it whole as its unfunded liability grows by $22 million per day and is now at $80.4 billion.
To jump on the bad news band wagon, on March 6, State Controller John Chiang announced the State has an unfunded liability for retiree health dental benefits of $64.6 billion.
On September 12, 2012 Governor Brown signed “pension reform” legislation known as PEPRA or the California Public Employees’ Pension Reform Act of 2012. The legislation primarily applies to individuals hired after January 1, 2013 and will have little effect on pension costs for decades, other than changes in what could be included in pension calculations (“spiking”) for current employees. The Governor has promised to attack the pension issue during the current year, but there is little to report on as progress to date. Then again, according to the Huffington Post, the Governor has reported campaign contributions of more than $17 million to date and may have less need for union support for the next election.