Pension Reform Comes to Ventura County

“401Ks carry no guarantee, and that’s the distinction between a defined contribution system and a defined benefit system.”  – Rick Shimmel, executive director of the Ventura County Deputy Sheriffs’ Association, February 20, 2014, Fox News Soundbite

Truer words were never spoken, Mr. Shimmel. But when the “guarantee” can’t be lowered to levels that are merely unfair and burdensome, as opposed to monstrously unfair and financially catastrophic, then replacing “guarantees” with uncertainty and risk becomes the only option.

The latest attempt at pension reform in California is the Ventura County Pension Reform Initiative, affecting an affluent and idyllic coastal region that includes cities to the north of Malibu and south of Santa Barbara. It’s hard to imagine a nicer place to serve as the latest battleground in the pension wars.

What Shimmel objects to is the provision of the pension reform that creates a 401K “defined contribution” plan for all new hires to the county. The virtue of such as system is that the only commitment the employer makes is to deposit an agreed percent of each participant’s salary into a tax-deferred retirement account. Once the employee retires, they will draw on the retirement account until it’s gone. And if they run out of money, the employer – i.e., the taxpayer – doesn’t have to replenish their account.

How could it not have come to this? Despite well-orchestrated statewide protests against reformers who threaten the “modest pensions” of “working families,” Ventura County is no exception in terms of just how out of proportion their retirement benefits are compared to private sector norms. Take a look at this “VCERA Retirement Benefit Calculator” to do some informal Ventura County pension analysis:  A public safety employee making final compensation of $100,000 with 30 years service can retire at age 55 with a pension of $78,594 per year. Many of us look at these numbers too much. Exactly what part of $78,594 for the rest of your life, starting at age 55 – “guaranteed” and including COLA adjustments – doesn’t sound rather excessive? If you wanted to save enough to pay yourself that much for 30 years using a 401K account, according to the conventional wisdom of responsible investment advisors, you would have to save between $1.97 and $2.59 million. How many 55 year old workers can save that kind of money? But wait, there’s more. While on the VCERA retirement benefit calculator webpage, take a look at their “Retirement Compensation Definition:”

“In addition to base salary, compensation earnable may include, but is not limited to:
Flexible Benefit Credit (total)

Educational Incentives
Employer-paid employee retirement contributions
Employer-paid FICA
Assignment and shift bonuses

Automobile allowance
Annual Leave or Vacation Redemption, limited to the hours you actually redeemed during the normal course of active service, and within the 12 or 36 month period to be used for the measurement of final compensation, not to exceed the number of hours actually accrued during that measurement period, reduced by the number of hours you were required to use in order to qualify to redeem annual leave or vacation.
30 year incentives
Uniform Allowances
Overtime that is scheduled as part of your normal work week”

“Employer-paid employee retirement contributions” and “employer paid FICA” count as “Retirement compensation” for the purposes of calculating a pension. Is this a joke? Automobile allowance? Uniform allowances? Vacation time? “Scheduled overtime”? Using this assortment of criteria, it must be common for full-time senior employees to break $100,000 in eligible final compensation, and many will break $200,000. Skeptical? Go to the TransparentCalifornia website and look up “Ventura County Pensions.” Too bad they didn’t provide the researchers with “years of service,” to debunk the absurdly low averages that are continuously used to mislead voters – averages that include people who only worked a few years.

Ventura’s pension reform has a good chance of being passed by voters, should it make it onto the ballot. But it represents not so much an ideal solution as the only solution that might be expected to survive court challenges. This is a shame. Here is a summary of some pension reform options:

(1) Move to a 401K plan for new hires and make marginal reforms to existing defined benefit plans. Benefits: It will probably survive a court challenge. Drawbacks: It won’t beneficially impact pension fund cash flows for decades, and it creates two very distinct tiers of public servants. An example of this is the Ventura County Pension Reform Intiative (text).

(2) Require all new employees to earn pensions according to lower benefit formulas that are financially sustainable, make marginal reforms to existing defined benefit plans.  Benefits: It will survive a court challenge. Drawbacks: It still won’t beneficially impact pension fund cash flows for decades, if ever. An example of this is CalSTRS “2% at 60” plan for participants hired after 1-1-2013.

(3) Require all active employees, new and existing, to earn pensions from now on according to lower benefit formulas that are financially sustainable.  Benefits: This program will create immediate significant reductions to required annual contributions.  Drawbacks: It still creates two tiers of employees, favoring veteran employees and retirees, because it does not retroactively reduce any formulas or benefits. Also, even though this reform only impacts future pension benefit accruals, by affecting existing employees it is an allegedly unconstitutional violation of “vested contractual rights.” An example of this reform is the state pension reform initiative “Pension Reform Act of 2014” (text) championed by San Jose Mayor Chuck Reed – and probably tabled till 2016, thanks to the power of public sector unions and their political partners, the public employee pension funds.

(4) Suspend cost-of-living adjustments for all pensions for all retirees collecting in excess of, say, $75,000 per year, and concurrently, lower pension formulas on a pro-rata basis, retroactively affecting vested pension benefits and prospectively affecting ongoing pension accruals, for all new and all existing employees, by the additional amount necessary to restore 100% solvency to the fund. Benefits: Solves the problem overnight, and spreads the sacrifice equitably among ALL public servants, rather than punishing the new employees to protect the veterans. Drawbacks: There are legal arguments supporting the position that such measures violate “vested contractual rights.” For examples of this option, look to Detroit and Rhode Island. But the sooner this option is exercised, the less onerous the sacrifices.

An aside: It’s funny how the questionable legality of retroactive pension benefit enhancements never bothered the defenders of defined benefits.

What defenders of defined benefit pensions such as Rick Shimmel should consider is this:  What options three and four accomplish – however unpleasant they may be to veterans accustomed to the current system – is preservation of the defined benefit. What option four offers is conversion to an “adjustable defined benefit” that “adjusts,” whenever necessary, in a manner that preserves solvency, protects taxpayers, and spreads the sacrifice among all participants – new hires, active veterans, and retirees – in an equitable manner, minimizing the sacrifice any single class of participants might have to experience. Social Security, by the way, is an adjustable defined benefit.

What reformers who focus on conversion to 401k plans are doing, unfortunately, is facing reality. The reality is that unions and pension funds refuse to accept meaningful compromises – leaving nothing but the nuclear option of 401K conversions to detonate amidst the palm trees and sandy beaches of Ventura County. Many of the union spokespersons can be forgiven for some of their intransigence, because they are being mislead by spokespersons and strategists representing pension funds into thinking the financial challenges these funds face are manageable without major upheaval. They are not.

*   *   *

Ed Ring is the executive director of the California Public Policy Center

26 replies
  1. Jody Morales says:

    This is an excellent, highly informative and clearly presented article! It shows that ‘nibbling around the edges’, which is all that has been done so far in pension reform in California, simply doesn’t work. If unions, elected officials and public pension funds don’t accept a realistic and dramatic change to the current system, they may find their members with no retirement pensions at all. It could happen, and no one wants that.

  2. Robert Sands says:

    What I fail to see is how pension reform is going to be “funded”. Obviously union members have a big incentive to donate money for their cause. Who, besides some sort of “sugar daddy” is going to spend millions on a pension reform campaign. If you look at it from a financial standpoint someone is going to have to prove to me that the 1000 dollar donation I give towards pension reform is going to save me some hard earned money. Why can’t anyone provide, even a rough guess, how much money each taxpayer could save annually?

  3. SeeSaw says:

    Robert: The proposed pension reform will not personally save you anything. Whatever portion of your taxes are used to fund pensions will just be moved to another line-item. Your question reminds me of a story I heard years ago about an activist who appeared at a budget hearing for NASA. He decried the burden that was being placed on the backs of Americans and asked for the tax’s abolishment. Someone did a Study on the subject to find out the exact liability of each citizen for the funding of NASA. After the Study, an announcement was made, stating that the liability of each American for the funding of NASA was one-half of one cent/yr. Don’t be foolish, Robert. Save your thousand dollars for a worthy cause. We all benefit from a thriving economy.

  4. Tough Love says:

    A copy of this blog article should be mailed to every registered voter in Ventura County ….. with the list of item included in pensionable compensation in BOLDED 20-size type.

    What a bunch of greedy slugs !

  5. Tough Love says:

    Perhaps a better option than the 4 you listed……..

    Fire ALL of them and contract for services from the State Police or a neighboring County, or better yet, start fresh with a new group of recruits who get 401K-style DC Plans and no more.

  6. Tough Love says:

    I challenge anyone to identify even ONE single Private Sector DB Pension Plan that included the employer’s FICA contributions in the workers pensionable compensation.

    The ONLY reason such nonsense occurs is because:

    (1) the elected officials (or their management representatives) cave in to such nonsense because they are bought-off with campaign contribution and election support … or threatened that the Unions will works AGAINST their re-election if they do not go along, and
    (2) The supervisors/management know that whatever they grant the workers, THEY too will get …. it’s called self-interest.

  7. Robert T says:

    The problem with public sector pensions is that the taxpayers, not the pensioners, take the risk of the market. Why should the taxpayer be forced to make up the shortfall caused by falling markets? Why not the employees? The fact is the pensions should be defined contribution plans, not defined benefit plans, and the unions should be running the investments ion the plans. Once the state has made its contribution, the state should have no further obligation.

  8. Tough Love says:

    It’s actually a COMBINATION of things …..

    It’s BECAUSE the Plans pass along the risk (and COST) of less than stellar investment returns (OUTSIDE the Plan to the Taxpayers) that they can assume overall returns typically in the 8% range (which means even higher 10%-12% expected returns from the equity portion of their portfolio to offset somewhat lower expected fixed income returns).

    The upshot of assuming such ABSURDLY high returns is to show a Plan cost FAR FAR less than it’s real cost if priced properly … WITH the risk charges included.

    And of course, showing a FALSE lower cost means they can FALSELY justify granting higher than reasonable or affordable pensions & benefits to the workers.

  9. CaptainAmerica says:

    The author wrote, “Too bad they didn’t provide the researchers with ‘years of service,’ to debunk the absurdly low averages that are continuously used to mislead voters – averages that include people who only worked a few years.”

    Actually, that information is available here: http://spreadsheets.latimes.com/ventura-county-pensions/

    On the LA Times retiree list there is an icon in the far right column titled “detail”. Click on the icon and it provides the detailed info, including years of service. If you go through the list you will discover that there are retirees from Ventura County with less than 25 years of service that somehow managed to still retire with pensions greater than 100% of base pay.

  10. SeeSaw says:

    CA, I don’t think any public employee can, “somehow manage” to emerge from active employment with a retirement that is calculated to be 100% of active, base-salary, with 25 years’s-service credit. Such calculation could only be obtained if the, respective, employee is covered by a county plan, ie, 37 Act, that allows a list of spiking mechanisms, such as uncapped vacation and sick leave pay. Those types of spiking are not allowed by CalPERS. Public entities that run their organizations in a responsible manner, place reasonable caps on vacation accumulation and on percentage of sick leave payout allowed at retirement. You can place the blame for egregious examples on the, respective, entities and Plans who participate–not on the individuals who are on the receiving end of those benefits. It makes no sense to abolish DB plans and replace them with DC plans unless you want to see public pensioners in the public, social services departments, in their “end-years”.

  11. Tough Love says:

    Quoting …”Public entities that run their organizations in a responsible manner, place reasonable caps on … percentage of sick leave payout allowed at retirement”

    How about ZERO !

    NOTHING more is “reasonable”

  12. SeeSaw says:

    Some public employees do lose zero of accumulated sick leave at retirement, TL. Where I worked, it used to be 2 for 1 in the last six months before you retired; or the option with CalPERS, for those lucky enough that their employer contracted such, is still half added to the service time. I was lucky to get half of my unused sick leave in cash–that was a whopping $12,000 which was taxed off the top. You are such a scrooge, TL. You have no love for any part of humanity, except that you have for yourself!

  13. Tough Love says:

    Sorry seesaw, It’s called basic “fairness” that the benefits afforded one PUBLIC Sector worker should not be compared against what another PUBLIC Sector worker gets, but to what PRIVATE Sector workers typically get ….. which is almost ALWAYS ZERO Sick leave payout.

    After all, it’s the PRIVATE Sector that pay for EVERYTHING that Public Sector workers get.

  14. SeeSaw says:

    Every time I make a post here, the instructions tell me to prove I am human. How do you get on, TL?

  15. Tough Love says:

    seesaw,

    Wwhen you object to a statement like my above one, quoting

    … ” ..It’s called basic “fairness” that the benefits afforded one PUBLIC Sector worker should not be compared against what another PUBLIC Sector worker gets, but to what PRIVATE Sector workers typically get ..”

    I can only conclude the you believe that Public Sector workers are “special” and deserving of a better deal than the Private Sector Taxpayer that pay their way.

  16. wesmouch says:

    Isn’t the easy way out of this is to tax all pensions say over $50,000 per year at a 90% rate. Apply the proceeds to fix the mess. It would stand up in court.

  17. wesmouch says:

    Any city or county that is stretched to meet pension obligations. The long term fix is eliminating defined benefit plans but this would bridge the gap of revenues since most of the outlays would be harvested back. Eliminating pensions without bankruptcy runs into legal challenges but taxes are well established and can even be retroactive and still legal.

  18. Tough Love says:

    Such a tax change has to be sponsored by a legislator and then passed.

    In CA’s Democratic (in-the-Union’s-pocket) legislature … slim chance.

  19. wesmouch says:

    Cannot taxes be assessed at the local level? That is to say city or county. Ohio has city income taxes. So you are saying that all city governments are Democrat controlled?

  20. Fred says:

    Hey Rick, we aren’t your slaves….we aren’t paying you pensions into the next century, and we aren’t paying your 401k either….

  21. jjohnjj says:

    The motive behind the Ventura County pension “reform” initiative was made clear when Texas hedge fund billionaire John Arnold gave them $75,000 to campaign with.

    The rare problem of high pensions going to top public executives was solved last year by state legislation. Pensions will now be based on the salary cap for Social Security taxes: $160,000. The abuses of spiking pensions with unused vacation pay, etc. have been curtailed. The highly exaggerated “unfunded liability” problem is resolving as the stock market and tax revenues recover from the recession.

    The VCTA’s “reform” scheme was hatched as a Wall Street scam to convert well-managed public pension portfolios into thousands of individual IRA’s. These are more dependent on mutual funds and lose more of their value to broker’s fees.

    The initiative is now just a zombie, lurching forward to election day, hoping that the politics of resentment will serve it some fresh victims before dawn breaks.

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