Public pension shortage too dire to leave unresolved

August 2, 2009 

The state budget agreement reached last month did nothing to begin reforming the public pension system, which is underfunded by billions of dollars because of overly generous benefits promised over the past decade.

In late June, Gov. Schwarzenegger proposed rolling back retirement benefits for new state hires to levels that existed before 1999, when the Legislature and former Gov. Davis began a round of increases that have significantly added to the cost of state and local pensions. But Democrats pushed back, and Schwarzenegger agreed to set the issue aside during budget talks.

But this issue is too important to leave unresolved. Schwarzenegger should resume his push for reform.

Fortunately, some local governments are going ahead. Orange County is moving toward a two-tiered pension plan. New employees would have the option of a less-generous plan -- a lower amount at a higher age -- but wouldn't have to contribute so much out of their current salaries. It is expected to appeal to employees who don't intend to remain with the county long or who want a larger take-home check.

Stanislaus County soon will invite proposals from actuarial firms to analyze what kinds of savings might be available if it went to a two-tiered plan. Any change would have to be negotiated with the unions, so nothing is likely to happen for more than a year.

Some retirees are interpreting this reform push as a personal attack. That's not the intent. Reform advocates are spotlighting those with extravagant pensions -- $100,000 or more -- as a way to get the public's attention and emphasize that the current system is unsustainable.

It would be illegal, and unconscionable, to reduce the promised amounts retirees receive now. The point is to rein in future costs. They are high for several reasons:

Public pension plans are all defined-benefit, meaning the pension amounts are guaranteed. If retirement investment funds run short -- as they are doing now -- then the government agencies have to make up the difference from current budgets. In contrast, most private-sector employees participate in defined-contribution plans, in which the employee and employer contribute to a retirement fund. There's no guarantee what the final payout will be. That's determined by how much money is contributed over time and how well the retirement investments perform.

Age. Public safety employees are allowed to retire at 50 and most other public employees at 55. (For educators, 60 is standard.) Many of the reform suggestions call for raising these ages to be more in line with those in the private sector.

Pay spiking. Many agencies base the pension amount on the last year's income, which might include not just salary but unused vacation, sick leave and other perks. The Wall Street Journal recently reported on the case of a retired Bay Area fire chief who earned $186,000 in his last year on the job. But by cashing out unused vacation, sick leave and holiday pay, he was able to boost his annual earnings to $241,000, and that higher figure was used to calculate his pension benefits. A more sensible way would be to base retirement on the average of the last three years' income.

Government salaries and benefits should be competitive with those in the private sector. There was a day when government jobs paid less but offered better benefits, including retirement. Now, in many cases, government compensation is higher in all areas.

Getting pension costs back under control will, in the long term, free up more money for current employees and for the services that government is in business to provide.

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