Admit guaranteed pensions are unsustainable
July 18, 2014
Detroit, Vallejo, San Bernardino, Stockton – all felled by one common denominator – public employee defined benefit pension plans.
They are not alone.
While each of these cities sought Chapter 9 bankruptcy as a solution to their fiscal woes, the state of California, every city, county and special district that grants its employees and retirees a guaranteed pension is beset with unfunded liabilities that threaten their very existence.
The state of California has anywhere from $200-$500 billion in unfunded liabilities despite record investment returns in recent years; Nevada County close to $100 million; the City of Grass Valley almost $7 million; Nevada County Consolidated Fire District anywhere from $3 to $4 million depending on calculation methods.
Why our elected officials believe that they can freely subject taxpayers to this same risk is astounding.
And, if any of these entities wanted to withdraw its plan from the California Public Employees Retirement System (CalPERS), you could triple the unfunded liabilities, since CalPERS utilizes a much lower discount rate for plans terminating than it uses to estimate annual required contributions.
Even public entities that are in relative fiscal health are incurring large increases in annual contributions and face “service insolvency” — they cannot provide adequate levels of public services due to onerous employee pay and pension costs.
So, what’s the answer? It’s long past the time for our elected officials to acknowledge what private sector employers have known for decades.
Guaranteed pensions are unsustainable — they subject owners/stockholders to unlimited liability, but without unlimited revenue — an untenable risk.
Why our elected officials believe that they can freely subject taxpayers to this same risk is astounding. Until our elected officials stop this insanity by terminating all defined benefit pension plans, we’ll continue to see declining public services, reduced police and fire protection, and bankrupt public entities.
So, how do we do it? We freeze all current plans as of a given date — say Jan. 1, 2016. Every employee vested in a defined benefit plan on that date is guaranteed the pension they have earned at that point in time — but they are not guaranteed benefits yet to be earned.
For example, a 20-year county employee earning $70,000 on Jan.1, 2016 with a defined pension benefit of 2.5 percent at age 55 would be guaranteed a pension of $35,000 at age 55, regardless of when he or she retires and regardless of the salary on the date of retirement. After Jan. 1, 2016, all employees would receive employer contributions and may make employee contributions to a defined contribution plan, like a 401K. These could be self-directed, managed by professionals or even be managed by CalPERS, if the employee desires.
Employer contributions would be meaningful, but still far less than current and future costs to support defined benefit plans.
Public entities would still be required to make contributions to CalPERS to fund the vested/earned pensions, but the unfunded liabilities and resultant pension costs would drop precipitously.
The 401K contributions would be predictable and under the control of our elected officials/taxpayers. In the long run, public employees will also benefit by having a retirement plan that they control, and more importantly, own the principal. They would be able to pass on their retirement funds to heirs should they die early in retirement or before retirement, a right unavailable under defined benefit pension plans (except for contingent annuity options for a spouse).
To those critics who abhor the thought of subjecting public employees’ retirements to the risks of Wall Street, they face no greater risk than does CalPERS, which is subject to the same market risks in the funds it manages. They wouldn’t have the security of a taxpayer guarantee, but please convince me why taxpayers should bear the risk of guaranteed investment returns when their own retirements have no such guarantees.
These changes can be secured through the collective bargaining process, and they don’t involve a withdrawal from CalPERS. The changes would require our elected officials to address the problem decisively. They all recognize the crisis, but have been content to make trivial changes by tinkering with lower tiers for new employees or slightly raising retirement ages. In the meantime, unfunded taxpayer liabilities continue to soar.
These necessary changes will also require concessions on the part of public employee unions to recognize the unsustainability of current public employee pension plans, the risks to present and future retirees of bankruptcy and default, and the unfairness of taxpayer guarantees.
It’s time for all elected officials, state and local, to act boldly and finally restore fiscal common sense — to the benefit of taxpayers for a change.
Rich Ulery is past chairman of the Nevada County Republican Party.