Five years ago, public pensions hit the spotlight.
Retirement systems saw their investment returns plummet as a result of the stock market bust and real estate collapse, making it painfully clear that the generous retirement benefits that had been added since 1999 were not affordable over the long haul.
Because the public agencies provide defined benefit plans, the recession pain wasn't falling on individuals like those Americans who saw their 401(k) plans plummet but on the government agencies, which have to make up the shortfall when investments don't produce what is expected.
As a strategy to draw attention to the problem, pension reform advocates zeroed in on the number of public sector retirees making $100,000 or more in some cases much more. The outrageous examples grabbed headlines, but many citizens didn't realize that their anger should be focused not so much on individuals but on unsustainable systems.
Stockton residents figured it out because extravagant public safety pensions were one of the things that drove that city into bankruptcy. Elsewhere, it seem to meld with a general anger toward government.
Last summer, the Legislature finally enacted some pension changes, affecting state and local government employees. Some union leaders decried it as a massive rollback that would irreparably harm teachers, firefighters, police officers and the state's economy.
More reasonable minds suggested it was a good first step. We agree.
Retirees will see virtually no change. The greatest impact will be felt by new employees, who will have to work later in life and will receive less. The biggest change for existing government employees will be the requirement that they contribute half of the cost of their pensions.
Some, such as teachers, have been doing that. The general employees of Stanislaus County won't see any change either, because they are paying employee (or member) contributions toward retirement. But for several county bargaining units, such as probation officers, deputy sheriffs and district attorney investigators, the county is paying the member contribution, ranging from 8.5 percent to 14 percent of their pay.
The Modesto Police Officers Association and the city recently signed a new contract that calls for raises and for the officers to contribute more of their own pension costs. It's almost a wash, but in the long run a positive because the employees are contributing more.
Over the past five years, The Bee has run dozens of articles and editorials about local pension programs. Each program is unique and all are complex, making them difficult to compare. For example, some of the agencies participate in Social Security; others don't.
Last month, we sent a questionnaire to the largest local government agencies, asking for descriptions of their pension plans in 2008 and what they've done since. We present their responses here, in chart form. And we invite your attention to what we consider key elements:
The section showing "Changes made before state mandates" tells which agencies took the bull by the horns, so to speak. Stanislaus County led the way, reducing pension benefits for new hires starting in 2011. Modesto followed in 2012. Kudos to both.
The two irrigation districts did nothing to reduce their pension obligations. In fact, the TID enhanced benefits in 2009. The irrigation district boards have the authority to raise electrical rates, which they did, and aren't vulnerable to the ups and downs of property and sales tax revenues, as cities and counties are.
Not shown on the chart is the funded ratio the overall financial obligation over the long term in contrast to what has been accumulated so far, based on financial forecasts. A retirement plan that is fully funded is considered to have a funding ratio of 1.0, or 100 percent. Those with a shortfall are less than 100 percent. In spring 2007, StanCERA boasted that it was funded at 96.6 percent. It dropped to 71 percent in summer 2009. As of June 2011, its funding ratio was 78 percent.
In December 2011, the funding ratio for the TID was 59 percent. The MID's funding ratio is 71 percent. Both districts, like everyone else, will have to adjust pensions because of the new state laws.
The bottom row reflects a related issue: retiree health obligations. Again, the county is in the best shape because it doesn't provide them. And again, the irrigation districts are the most generous.
Modesto's health liability is in another form allowing employees to use unused sick days to buy one month of insurance coverage. The generous option is not available to employees after January 2011, and the city is negotiating to reduce its big liability.
In fall 2011, Modesto voters weighed in on pension issues, passing three advisory measures, including one that called for the city to move from its defined benefit retirement plan through CalPERS to a defined contribution plan that is typical in the private sector. A member agency cannot just walk away from CalPERS, however, so the City Council asked CalPERS for the buyout cost.
The city still doesn't have an answer. CalPERS has lowered the earnings forecast for agencies that want to drop out, however, which means the buyout will be millions of dollars higher than it was a year ago.
Public pension issues are going to remain in the spotlight.
California's pension reform laws, Assembly Bills 340 and 197, went into effect this month. The most significant impacts:
On retirees none, unless they return to work for a public employer in the same retirement system
On employees hired before Jan. 1:
Within five years they must be paying half of their pension costs. In recent years, government agencies have been paying not only the employer's share of pension contribution but all or part of the employee's share. That must end. (Also applies to new hires.)
Restricts what is considered pensionable compensation, with the goal of reining in pension spiking. More legislation will be needed to clarify what is base pay. (Also applies to new hires.)
Requires public officials and employees to forfeit pensions and related benefits if convicted of a felony associated with carrying out their official duties or in seeking an elected or appointed office or in connection with obtaining salary or pension. (Also applies to new hires.)
On those hired Jan. 1 or later:
Changes the formula so that typical retirement ages will be 57 for public safety; 62-65 for teachers; and 62-67 for general occupations. The percentages used in the formulas also drop. For instance, the percentage of annual salary received would be 1 percent at age 52, increasing to 2.5 percent at age 67 for a general employee.
Places cap on compensation used to calculate defined benefit, tied to the Social Security wage index limit.
Requires that final compensation figure (used to calculate pension amount) be based on the highest average annual compensation over a three-year period. This is an effort to prevent pension spiking.
Prohibits purchase of extra years of service or "air time."