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Tuesday, August 18, 2009 12:39 AM

CalPERS Admits California "Pension Costs Unsustainable" - So What To Do About It?

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In an unusual display of honesty CalPERS Actuary Says "Pension Costs Unsustainable"

The CalPERS chief actuary says pension costs are "unsustainable," and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

"I don't want to sugarcoat anything," Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. "We are facing decades without significant turnarounds in assets, decades of -- what I, my personal words, nobody else's -- unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) ... unsustainable pension costs. We've got to find some other solutions."

Dwight Stenbakken of the League of California Cities told the seminar that pension benefits are "just unsustainable" in their current form and difficult to defend politically.

"I think it's incumbent upon labor and management to get together and solve this problem before it gets on the ballot," he said.

"I actually think it is sustainable," said Terry Brennand of the Service Employees International Union. He said the basic problem is investment losses, not high benefit levels.

"What is sustainable?" said Lou Paulson of the California Professional Firefighters. He said proposals to extend the retirement age for firefighters from 50 to 55 would result in more injuries with advancing age, driving up workers' compensation costs.
Sustainability In Eyes Of Beholder

The California Firefighters Association and the Service Employees International Union think the plan is sustainable. I think it is too, if they are willing to put 25% of their pretax pay in every year at retire at 60 after 25 years of service.

Otherwise, they are speaking as extremely biased beneficiaries of massive public handouts, not as impartial unbiased observers.

8% annual returns are not sustainable, at least not with long-term yields at 3.5%. Indeed chasing performance is one of the reasons CalPERS suffered the losses it did. CalPERS is attempting to get 8% returns in a 4% return world.

Perhaps the crisis is just too noticeable to deny any longer, but it's refreshing to see a bit of reality from CalPERS even as the unions are in a massive state of denial.

Politically Unfeasible Solutions

The article notes that four years ago Gov. Arnold Schwarzenegger backed an initiative proposed by former Assemblyman Keith Richman, R-Northridge, that would have switched all new state and local government hires to a 401(k)-style plan. However, Richman has since called a switch to a 401(k)-style plan "politically" unfeasible.

Dropping defined benefit plans may be "politically unfeasible", but they are "Actuarially Mandatory". If unions had any brains (and typically they don't), they would hop on the 401K bandwagon for new employees, hoping to save what they have for current members.

Instead, they risk municipal bankruptcies such as happened Vallejo, California, where some bankruptcy judge ultimately decides who gets what.

Note that the system is so broken that it is highly probable that a massive reduction in pension benefits is necessary even IF the unions would agree to the 401K solution.

Long Beach Pension Costs Unsustainable

The Press-Telegram is reporting Long Beach pension cost spurs move for changes.
It is no secret the current pension plan has taxed Long Beach's budget. Now three council members are looking for solutions that could include giving public employees a choice between pension plans.

"The current pension costs are unsustainable long term and changes need to be made," said 3rd District Councilman Gary DeLong. "There needs to be a significant amount of discussion before deciding what those adjustments should be. This is the beginning of that process."

First District Councilman Robert Garcia, 2nd District Councilwoman Suja Lowenthal and DeLong are presenting the possibility of allowing public employees to choose between the current pension plan or a new hybrid plan.

The council will consider recommending that the city manager work with employee unions to study the pension option and report back to the council within 30 days.

The second option to the current "defined benefit" pension system would be a hybrid retirement plan, which is part pension and part 401(k). Employees could decide how much to contribute to their defined plan while paying and collecting less for pensions.
Growth In State Workers Simply Indefensible

The San Diego Union-Tribune calls the growth in government workers Beyond Bizarre.
What's wrong with this picture? Jobs are disappearing by the millions across the United States, and California is particularly hard-hit, with unemployment reaching a record 11.6 percent. Yet even as state revenue plunges, The Sacramento Bee reported that the state government has continued to expand during the deep recession, adding 4,000 new jobs since July 2008.

Even as Gov. Arnold Schwarzenegger laid claim to being the biggest tightwad of any recent state executive. Even as lawmakers of both parties announced we were in a new era of fiscal sobriety.

Instead of more state jobs, California needs far fewer. Since 1997, the number of full-time state government employees has gone from 284,000 to about 340,000. If the productivity revolution that's transformed the private sector finally manifested itself in government, there is simply no reason the state couldn't still function with its 1997 levels of staffing. Businesses handle procurement, record-keeping, claims and payroll processing, inventory management and housing with fewer employees than ever. Why can't government follow suit with its identical tasks?

There is no good reason why, only a political reason: the power of public employee unions.

And now here's the sad kicker to this story: Schwarzenegger's spokesman said he's “proud of where we are on hiring.”

The governor needs reminding that pride goeth before a fall, or maybe in this case before a collapse. If the state is ever going to live within its means — with an honest, gimmick-free budget — it has to first stop growing.
I agree with the Union-Tribune. It is "beyond bizarre" to be adding to state employees. Moreover, all of the proposed solutions to date mask the real problem: too many government workers. Two-tiered systems and "hybrid plans" will work only until the next crisis.

Eliminate Unnecessary Service and Privatize the Rest

I discussed the only true solution to the problem in Bay Area Rapid Transit Union Sets Strike Over Pension Benefits.
PATCO Revisited

The best thing for San Francisco commuters is if every one of the union workers never works another day for BART in a Ronald Reagan vs. PATCO type of decision.

More government unions need to be dissolved, 100% of them to be precise. Amalgamated Transit Union Local 1555 is a good place to start.
The only feasible long-term solution is to eliminate unnecessary services and privatize the rest. Everything else does nothing but postpone the problems.

By the way, those interested in a discussion of pension problems and issues should tune into Jack Dean's Pension Tsunami blog. That is where I found the links for this story.

Mike "Mish" Shedlock
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