Public Pensions Stay in the Spotlight

While the state budget has been a big story over the past week, cities and counties are continuing to address one of two major long term issues plaguing every governmental entity--future pension obligations (health care being the other major issue).

On the heels of San Mateo County releasing a telling grand jury report on pensions, now San Francisco has released their own report on the status of public pension obligations in their county. As noted in an article this week in the Chronicle (click here):

San Francisco's skyrocketing pension costs are untenable and both unions and politicians are to blame for abusing the system by negotiating extraordinary pension and retirement benefits without considering the unfair burden on future generations, according to a report issued Thursday.

The article goes on to note:
The document specifically targets San Francisco's police officers and firefighters for essentially gaming the system through "spiking" - the practice of artificially inflating retirement benefits by increasing their compensation just before retiring, often through temporary promotions. The jury calls the practice "institutionalized and ongoing" in public safety agencies and estimates it cost the city and other employees at least $132 million over a 10-year period ending in 2008. The report said more than half of police and firefighters who have retired since 1998 receive a pension worth more than their highest pay.

The preamble to the Grand Jury report pretty much sets the tone for the entire report:

In reference to the pension scandal in San Diego in recent years, the Pulitzer Prize winning author Roger Lowenstein wrote:
"The unions push for benefits that are beyond the ability of governments to properly fund. The unions get their promises; the politicians get to satisfy a powerful constituency. And by shortchanging their pension funds, they can run their budgets on borrowed time and put off the necessity to tax until later generations." 1
The time to payback the pension commitments made over the past 20 years is today, and the City of San Francisco may be unprepared to meet its obligations, without severe cuts in essential services to the residents of the City and the business interests who employ thousands of San Franciscans.

To read the entire grand jury report click here.

Down in San Diego County, the City Manager led pension reform group is having their recommendations for a two-tier pension system tested in Escondido. The San Diego Tribune notes:

The City Council this week authorized the city manager to pursue overhauling the pension system. The reforms would be accomplished by asking employees to contribute more to their pensions, and by giving new hires less generous retirement benefits.

More specifically, the City Manager is proposing to:
* Ask current employees to contribute more to their pensions. Escondido pays all of its public safety employees' contributions, and all but 1 percent of the other employees' contributions.

*Reduce retirement benefits for employees hired after January 2010. That would create a two-tiered pension system in Escondido in which current, non-uniformed employees receive 3 percent of the highest salary they earned for every year they served when they turn 60, and uniformed employees get 3 percent at age 50. New non-uniformed employees hired after January 2010 would be given 2 percent at age 60, and new uniformed employees would be given 2 percent at age 50.
*Seek legislative reform of the public employees' pension system, CalPERS, to include more employer representation on its board. Most cities in San Diego County, except for the city and county of San Diego, use CalPERS.

(click here for entire article)

Just up the road in Orange County, the Board of Supervisors will also be asking for legislation to implement their proposal for a two-tier system. As noted in the Los Angeles Times:

Under the plan, incoming employees as of March 1, 2010, would have the option to choose the older pension plan of 2.7% of the average of an employee's 36 months of highest salary at age 55, or 1.62% at age 65, which includes a 401(k)-style retirement account with up to 2% employer matching. Existing county employees would also be given the chance to move down to the new tier.

The lower tier is expected to appeal to new hires who may not stay with the county long or those who may need more money in their pockets now.

Click here for the entire article.

In a closely related item, one of the reasons for all this rush to reform, is the current condition of our pension funds. Both CalPERS and CalSTRS released their annual investment performance reports this week. The two investment funds lost a combined $100 million in value over the past year, which was about a 25 percent drop in overall value of the funds.

An article in the LA Times (click here) noted that the Governor has been harping about the potential future impacts on the state budget due to underfunded pensions. Here are a couple of excerpts from the article:

"No long-term fix is more important to our state's solvency," Schwarzenegger wrote in an opinion column in The Times this month. The governor plans to ask the Legislature to approve changes in the system. The state, he said, would save money by giving smaller pensions to new state workers through changing "our unsustainable retiree pension formulas."

Schwarzenegger told reporters last week that the big pension funds could face an estimated $300-billion shortfall in covering the cost of pensions to current and future retirees.

All of this points to the fact that pension reform is on the way. We at the local level need to work closely with our bargaining groups to find a solution that can ensure fair compensation for our employees while ensuring that we will still have enough available revenues to provide service to the public.