Government pensions in cross hairs

By Evan Halper and Marc Lifsher

April 23, 2010 12 AM PT

SACRAMENTO — Across California, state and local leaders are moving to confront the cost of public employee retirement packages -- an escalating financial burden that threatens to choke off funding for other government services.

Legislation now being debated in Sacramento would curtail pension benefits to future state employees. Elsewhere, city and county governments are looking at a variety of measures, including raising property taxes to cover shortfalls and reducing payments to retirement funds.

On Thursday, pension consultant Girard Miller told California’s Little Hoover Commission that state and local governments have $325 billion in unfunded pension liabilities, which he said amounts to $22,000 for every working adult in the Golden State.

“In California we had the Internet bubble, we had the housing bubble, and I see in the very near future the public pension bubble,” Gov. Arnold Schwarzenegger said this week. Confronting the pension crisis, he said, should be the state’s No. 1 policy priority.

If the problem is not addressed, the burden for funding government employee pensions would fall to the state’s taxpayers. Many elected officials are advocating a reduction in benefits mostly for new hires to stave off tax hikes -- setting up a collision course with the state’s powerful public employee unions.

“When you have men and women standing side by side in extremely stressful, hazardous, grueling situations over the course of a career, it’s hard to look one or the other in the eye and say, ‘Your future security matters less,’ ” said Carroll Wills, a spokesman for California Professional Firefighters, which represents 30,000 state public safety workers.

Wills said state employees are taking the fall for the Wall Street financial crisis, which bludgeoned the stock portfolios that help fund pensions.

“We would argue that reforms like this basically are hitting the little guy for what the big guys did,” he said.

Others contend that the typical pensions enjoyed by the public sector have simply become too expensive and have largely been abandoned by the private sector in favor of 401(k)-type plans in which employees build a nest egg but can’t count on monthly payments for life.

Under current law and union contracts, for instance, retirement packages allow some classes of government workers -- mostly police officers, firefighters and prison guards -- to retire as young as age 50 with a pension equal to nearly their entire salary.

“Public pension costs are becoming unsustainable, and benefits are out of alignment with the private sector, generating public resentment,” the nonpartisan League of California Cities recently warned.

The shortfall at the California State Teachers’ Retirement System has ballooned so big -- the system estimates it at $42.6 billion -- that officials there say future investment profits could not come close to covering it.

CalSTRS would have to see returns exceeding 20% a year for five years in a row to make up the gap, according to an internal report. Otherwise, school districts and taxpayers would have to foot the bill.

In Los Angeles, where pension costs are expected to consume 19% of the general fund budget in the coming fiscal year, Mayor Antonio Villaraigosa wants voters to sign off on scaling back the pensions available to police officers and firefighters. The City Council, he said, has the authority to make those changes for the rest of the city’s employees.

Grand juries in Fresno and Ventura counties, and the city and county of San Francisco, have all warned of pension shortfalls. San Diego and Orange counties have taken steps to trim benefits.

In Rialto, the City Council is mulling over a plan to cover an $8-million shortfall in the pension fund with a property tax hike that would cost the owner of a $200,000 home $300 each year. Voters in the San Bernardino County community will have a chance to weigh in on the idea in an advisory measure on the June 8 ballot.

City Councilwoman Deborah Robertson, who opposes the proposed tax hike, can guess at the outcome.

“The comments have been, ‘Hey, why should we in these times want to add an additional tax?’ ” she said.

Labor leaders and some pension system officials say the condition of the retirement funds is not as dire as many critics have forecasted forecast.

They say much of the problem would disappear if the financial markets simply performed as they have over the last two decades and if public employers and employees kicked a little more into their pension funds.

But many government officials are leery of betting too heavily on the financial markets to cover future costs.

Local governments are not permitted to default on pension payments short of declaring bankruptcy. And the state government, which cannot legally go bankrupt, has to pay the obligations even if it means eliminating other services -- such as healthcare and social programs -- or raising taxes.

Current benefits are less generous for those public workers outside of public safety ranks but still far outpace what is typically available in the private sector. And many government workers can begin collecting their pensions at age 55.

Lifetime healthcare is also part of the retirement package for hundreds of thousands of government workers.

That costly benefit, which most private employers stopped providing long ago, was created decades ago when health insurance was inexpensive and the offering seemed an easily manageable expense; money was never invested to cover it, but now the bills are astronomical.

Unions have at times traded salary increases for the bigger pension payouts. They contend that payments to most public-sector retirees are modest, averaging $2,100 a month for those under the state’s largest pension fund, the California Public Employees’ Retirement System.

But with so many Californians in the private sector having lost their jobs or seen their pay cut, supporters of rolling back benefits say the public wants changes.

The Field Poll, one of the state’s largest independent polls, found in a survey in October that majorities of voters favored replacing public pension plans with 401(k)-style savings programs or setting limits on the benefits given newly hired public employees.

Still, public employee unions have successfully resisted changes to retirement formulas, contending that warnings of a funding collapse are exaggerated.

“There’s been a big drumbeat from a relatively small group on the issue,” said Dave Low, assistant director of governmental relations for the California School Employees Assn. “It’s not exactly a groundswell. The issue is of low salience to the average voter.”

But former Assemblyman Joe Nation, a Marin County Democrat, said local governments will find themselves in serious trouble if they don’t take action.

“This may end up pushing more cities and counties either into or closer to bankruptcy,” he said. “The numbers are just staggering.”

In Los Angeles, which faces a $1-billion shortfall in three years, the mayor and top budget officials are working on a plan to cut pension costs by scaling back benefits for newly hired workers. Changes in pension plans for police and fire employees can be reduced only with voter consent.

The city projects that the taxpayers’ share of city pension costs will grow from $653 million this year to nearly $1.3 billion in four years, accounting for one 1 of every 4 dollars spent on basic services.

The city of San Diego, one of the first to experience a pension crisis early this decade, is preparing for employee layoffs and a slashing of services to try to close an unanticipated $179-million budget gap created by a jump in pension obligations.

Heavy investment losses and an increase in the number of city employees deciding to retire contributed to the increase. The system now has only 66.5% of the money it needs to cover its obligations to retirees, the lowest level in six years.

The minimum a system typically needs to cover retirees is 80% of its obligations.

Yet even in relatively flush cities, such as Ventura, which has set aside more than 90% of the money needed to pay future pensions, concern is mounting.

In the last year, Ventura budget officers and a citizens task force have been studying a number of pension solutions, including a so-called two-tier program that would dramatically reduce benefits for newly hired workers. They also would have all workers pay for a share of their pension costs.

“These are the kinds of techniques we might use to have a more financially sustainable pension,” said Ventura Mayor Bill Fulton.

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