Recently voters in San Diego and San Jose overwhelmingly approved ballot measures to roll back municipal retirement benefits. Like so many other California cities, San Diego and San Jose have concluded the California Public Employees Retirement System's (CalPERS) benefit program has created a financial burden they cannot afford.
The San Jose initiative would force current city workers to either contribute more to keep their benefits or accept a more modest pension. Additional provisions allow the city to suspend cost-of-living raises that retired workers now receive.
The voter approved measure in San Diego imposes a six-year freeze on pay levels used to determine pension benefits for current employees. The city expects this will save nearly $1 billion over the next 30 years. Public employee unions have already instituted litigation to block both measures.
"Been there - done that"
Pacific Grove has been attempting to adjust or eliminate the CalPERS pension program for several years, but the outright termination of CalPERS would cost $30 million and the city could not afford that expense. After a brief look at bankruptcy, P.G. finally settled on Measure "R" which voters approved on the November 2, 2010 ballot measure by a 73.89 percent vote. The subsequent city ordinance put a cap on the city's contributions to employee pension benefits at 10% of worker's salaries. The employees were paying only 9% toward their pension and the city was contributing 19%.
The police union lawsuit alleging breach of contract immediately followed, but was dismissed with prejudice by Superior Court Judge Larry Hayes in July of 2011; however, the city is still defending - both in court and in administrative proceedings - this ordinance against accusations by the police officers association which maintains the city enacted the measure without proper negotiations. Critics, on the other hand, argue the expensive police pension benefit package which provides for 3 percent of salary for each year of service at age 50 was illegally approved by the city in 2002.
Pension system flawed.
CalPERS does not calculate its pension based on actual contributions made, as is the case with social security, but instead offers the reverse calculation whereby the participant can be awarded retirement based upon a percentage (2 or 3%) times an average of his highest income years, times the number of years served. An actuary is then employed to determine how much must be contributed to the fund in order to pay for this retirement when it comes due.
It is understandable why public employees have joined this pension program because it offers a huge return with a small percentage cost. The real question is why would the State, County or City get involved? Private enterprise would never consent to a plan requiring contributions with no designated limits.
The alarming reality is, the California taxpayer gets to pick up the tab for any losses or shortfalls to the system. Currently, the average cost per person is approximately 30 percent of wages paid and this does not include the "Pension Obligation Bond" which adds another 10 % to the mix. According to some financial actuaries, any existing formula is still not enough because CalPERS could have unfunded debt exceeding $100 billion by 2020.
Retirees live longer than original calculations. Public Safety personnel argued they should be given the 3@50 formula because they simply did not live as long as other employee types; however, CalPERS statistics show this to be completely false noting that public safety employees' life expectancy is the same as other employees.
There is no "cap" limiting pension benefits. Some public jurisdictions allow overtime pay, accumulated sick leave and even vacation time to be added to the final pension calculation. The Sacramento Bee reported in June, 2011, that nearly 9,000 retirees in the state currently receive $100 thousand or more in annual benefits.
Unfortunately, taxpayer expense for pension plans does not end with a State or local solution. Federal Employee Retirement System (FERS) takes the top three year salary average times number of years served times 2.5%. The Federal employee pays 1.3 percent of his salary and can qualify for the pension after 5 years but cannot draw the retirement until 62; however, if he serves 20 years he can retire at 50, and 25 years of service allows retirement at any age.
Once again the taxpayer gets to pick up the tab for all costs above the 1.3 percent the employee pays and considering the federal retirement does not reinvest retirement funds, the cost of this program is massive and 100 percent out of pocket.
The irony here is that when congress discusses what they are going to do about the massive $15.7 trillion national debt, it is Social Security and Medicare which comes under scrutiny and not this huge Federal retirement boondoggle. Social Security, which deducts a modest 6.2% from our paycheck with matching funds from the employer, is affordable and reasonable - the only problem is those in charge of our pension plan have loaned our $2.6 trillion in accumulated surplus to a government which cannot manage its fiscal affairs.
There is no question this nation needs to seriously consider a single retirement program for everyone and set down some common sense rules which apply to everyone equally.