A Pension "Pledge" for State Politicians

Earlier this week, noted pension reformer John Moore published “The Mechanics of Pension Reform,” listing specific principles of pension reform. Moore’s article focuses on state policy; he intends to focus on local pension reform policies in a later article. The list he has produced for state legislators is quite detailed; here’s is a partial summary of highlights:

1 – Change control of public employee pension boards to politically neutral private institutions. Currently, government union operatives exert nearly absolute control over California’s 81 state and local government employee pension systems.

2 – Limit the total annual pension contribution by any government entity to a fixed percentage of pension eligible salary.

3 – Differentiate between annual salary and pension eligible salary to lower overall contributions. Stop counting annual wage increases as pension eligible.

4 – Eliminate collective bargaining for government workers.

5 – Prohibit legislative bodies from granting vested contract rights to pensions.

6 – Require agency in-house counsel to advocate exclusively for the broader public interests of the legislative body, rather than for the staff and unions.

7 – Prohibit any agency to link their salary increases to that of other agencies.

8 – Require the chief financial officer of any agency to report directly to the legislative body, autonomous of the agency manager.

9 – Start practicing accrual based accounting in conformity with virtually all other economic entities.

10 – Investigate post-employment disability claims with a goal of eliminating abuses.

11 – Lower the exit fees required for agencies to leave pension systems. The liability calculations employed typically assume rates-of-return less than half rate used for official actuarial calculations.

12 – Remove automatic indemnification of agency officers from gross financial negligence, so they are subject to the same rules that apply to private sector executives.

How many politicians in California would pledge to fight for these pension reform policies?

Moore’s experiences as a bankruptcy attorney, and now as a retiree living in Pacific Grove, have made him an expert eyewitness to what pension abuse is doing to California. Read Moore’s two earlier series of articles on the topic, one published in 2014 “The Fall of Pacific Grove,” and a more recent update published this year “The Final Chapter – The Fall of Pacific Grove,” for an account of how that city faces financial calamity because of out-of-control pension promises.

California’s government unions, along with their partners in the financial community, have spent millions to defend the pension system as it is. The uncertainty inherent in any financial projections that attempt to frame the issue make it hard for reformers effectively communicate the urgency of their position, even if they did have sufficient financial backing to mount a serious campaign for reform. Moore understands this, and has based his prescriptions for reform on a fundamental assumption: Change will come when elected politicians – who have the courage to play hardball with government unions – hold governing majorities in California’s cities and counties. Wherever that occurs, Moore’s prescriptions are viable.

For example, Moore, along with many other legal experts, does not believe that pension reform efforts in court have been exhausted. In particular, he repeatedly cites cases where cities and counties violated due process when approving pension benefit enhancements. All of these improperly adopted enhancements can be challenged in court. Moore also points out – more of this will appear in his next article – that cities and counties may not have the authority to revise “vested” pension benefits, but they can cut current benefits and cut staffing. If necessary, Moore recommends cities and counties engage in draconian cuts in the areas of personnel management where they have latitude, because if they have the courage to do this, in response the unions will be forced to accept reasonable modifications to their pension benefits.

How many politicians in California would be willing to be this tough?

One of the biggest misconceptions spread by government unions is that all pension reformers want to eliminate the defined benefit. This is false. The problem with government pensions is that they are not financially sustainable or fair to taxpayers. In California that began with Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, followed by SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of California’s state and local government workers.

If Prop. 21 and SB 400 had not passed, or, for that matter, if California’s government worker pension systems merely had to conform to ERISA, which sets responsible limits on the financial behavior of private sector pension funds, California’s government pension systems would be financially sustainable.

*   *   *

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

15 replies
  1. Avatar
    Pierre says:

    This article should be read by all elected officials.
    Problem a raises when our Officials benefit equally with those employees who have UNION REPRESENTATION.


  2. Avatar
    Tough Love says:

    Ed, I support all of Mr. Moore’s proposals, however one need to be examined in depth, specifically,

    “2 – Limit the total annual pension contribution by any government entity to a fixed percentage of pension eligible salary.”

    The problem with this GREAT proposal is that it inherently conflicts with the basic operation & funding of a Traditional-style “Final Average Salary” Defined benefit Plan ….. so much so that it makes such Plans “unworkable” absent either much lower benefit formulas or the risk-transfer of FAR greater contributions directly from current ACTIVE workers.

    Under typical DB Plans in the Public Sector, the Employees typically contribute a FIXED %-of-pay and (if operated honestly) the BALANCE of the calculated ARC (encompassing BOTH the year’s Normal Cost plus amortization of any exiting unfunded liabilities) is contributed by the government entity …. meaning the Taxpayers. That is, historically the Taxpayers are the BALANCING ITEM for all costs above the fixed contributions for the workers….. whether the result of overly aggressive assumptions, or poor investment/mortality experience.

    Establishing a FIXED Taxpayer contribution (absent OTHER structural changes) flips the positions of the Taxpayers and the workers because BOTH simply CANNOT have “fixed” contribution levels in (an honestly run) Final-Average-Salary Defined Benefit Plan.

    By way of example, California’s 3%@50 Police pension is so extraordinarily generous, that (depending on the interest rate assumed in the discounting of Plan liabilities) the expected level annual %-of-pay cost of fully funding promised pensions over the working careers of the employees ranges from 40% to 60% of pay, with the workers contributing about 25% of that total (10% to 15% of pay).

    It would be had to imagine Taxpayers being willing to agree to even a CAPPED 20% of pay contribution when THEY typically get no more than 3%-of-pay into a 401K Plan (plus their employer’s 6.2%-of-pay Social Security contribution on their behalf).

    Taking into account the current 10%-15%-of-pay from the employees, where will the balance come from …. even on day one of the transition, let alone when investment returns in a few years are NEGATIVE 10% and at least theoretically the workers contributions must jump to say 40%-of pay.

    Also note that under this arrangement, the ACTIVES become responsible for the shortfalls associated with the assets supporting those ALREADY retired….. as well as their own !

    Bottom line…… I realize that Mr. Moore proposed this as his way of addressing the currently untenable (and clearly RISING) pension contributions coming from the Taxpayers, but it a VERY convoluted and problematic way of getting Taxpayer costs to a reasonable level.

    No matter how you shake it, MATHEMATICALLY, the current DB Plan pension accrual rates for the FUTURE Service of all CURRENT workers MUST be materially reduced. Nothing else will work, notwithstanding CA’s Constitution, it’s Laws, it’s Regulations, Court decisions, or the California Rule.

  3. Avatar
    Tough Love says:

    I should have ended my above comment with something that I have brought up before …

    “Funding” requirements FOLLOW FROM (and IN DIRECT PROPORTION TO) Plan “generosity”, and the lack of full funding is not the CAUSE of the pension mess we are in today, but the CONSEQUENCE of the true root cause, that being grossly excessive pension “generosity”.

    A VERY VERY “generous” Plan will always be VERY VERY difficult to fully fund.


  4. Avatar
    john m. moore says:

    I appreciate the emphasis of your comment. Clearly my recommendations are general compare to the detail for implementation. For example, if the issue that you raise is insurmountable for current workers, the legisature can limit contributions for new workers to 10%, or even nothing.
    Keep in mind I am assuming a legislative body that has wrested control from the unions, staff and the bent attorneys. Note that one of my recommendations is that there cannot be new pension deficits; if so, benefits must be reduced accordingly. What about vested rights? Now that the state bar seminar on
    “Vested Pension and Other OPEB” has been published, it is absolutely clear that the contract clause does not “create” vested rights, but protects them if granted by the legislative body in a contract or statute. Based on my observations of numerous city and county pension plans, I believe that at least 80% of government agencies(other than state employees and teachers)do NOT have vested pension rights. They never adopted a statute or a contract that clearly stated that the benefit continued after the contract expired or that the statute that granted the benefit could not be repealed. That means that 80% of agencies may reduce benefits for work not yet performed, a recognition that the California Rule only comes into play after a vested right has been established(like in Kern v City of Long Beach). Cities and counties should hire LibertCassidyWhitmore to analyze whether they have vested or OPEB rights. It authored the seminar materials. But agencies should not rely on opinions by its lawyers or lawyers selected by them.
    When you discuss agency contributions, it should include payments on pension bonds(In Pacific Grove, 10% of annual revenues).
    I truly appreciate your comment; this is the type of dialogue that is helpful.

  5. Avatar
    SkippingDog says:

    It’s nice that Ed Ring and Unionwatch have given Mr. Moore a place to practice his hobby. It’s all pie in the sky stuff, but I suppose it keeps him from disrupting his local city council and board of supervisor meetings.

  6. Avatar
    Equal Time says:

    Tough Love’s critique of Mr. Moore’s reform recommendations is amazing in its candor and accuracy. The reality of so many public pension reform proposals is that they would make current DB plans insolvent, and thus unworkable. Some of us think that is the real (but almost always hidden)agenda of reformers such as Mr. Moore, as well as Reed and DeMayo. Thanks to Tough Love for drilling down to the hidden impacts of Mr. Moore’s ideas. Now I have to go slap my own face for finding Tough Love’s analysis to be refreshing as, for me, that is a first!

  7. Avatar
    Tough Love says:

    Equal Time, Wow, you calling one of my (as a strong supporter of meaningful pension reform) comments “refreshing” is indeed a first ….. too much Christmas Cheer ?

    But yes, but while unworkable suggestions are not helpful in achieving that goal … that goal (meaningful pension reform) is necessary (because current Public Sector pensions & benefits are undeniably too generous, unfair to taxpayers, and unaffordable).

    And my LAST paragraph above stands as the “necessary” goal::

    “No matter how you shake it, MATHEMATICALLY, the current DB Plan pension accrual rates for the FUTURE Service of all CURRENT workers MUST be materially reduced. Nothing else will work, notwithstanding CA’s Constitution, it’s Laws, it’s Regulations, Court decisions, or the California Rule.”

  8. Avatar
    john moore says:

    Existing DB plans ARE insolvent and unworkable! We’re(reformers) trying to limit the damage before the pension bubble bursts. There is nothing “hidden” about the impacts I want to reform. Ca. Agencies owe about a Trillion dollars in pension deficits for past work. Government services have been slashed. Taxes have increased dramatically. I want to stop it ASAP. Is that clear enough for you?

  9. Avatar
    john moore says:

    TL,Everybody knows that!You and many others have said it a hundred times! Where are your details about how to get there?

  10. Avatar
    Tough Love says:

    Quoting …”Existing DB plans ARE insolvent and unworkable! We’re(reformers) trying to limit the damage before the pension bubble bursts.”

    I agree.

    Quoting … ” There is nothing “hidden” about the impacts I want to reform.”

    I agree. Equal Time said that, not I.

    Quoting … “I want to stop it ASAP. Is that clear enough for you?”

    I want to Stop it too. Do I not advocate for that same goal in every comment ?

    As for your comment that follows below, where you asked me … “Where are your details about how to get there”

    I know the math too well to know that addressing the funding side w/o addressing the level of benefits promised is pointless, and I have repeatedly stated that NOTHING will “work” that does not VARY materially reduce the FUTURE service pension accrual rate of all CURRENT workers.

    I have no idea HOW to get that accomplished in crazy California where the inmates are in charge of the asylum. Unfortunately, the money WILL eventually run out, and it WILL crash with catastrophic failure of promised pensions. Perhaps the focus should be to educate the younger, lower-service “actives” to THAT future so that THEY advocate for change from within …. NOW.

  11. Avatar
    Tough Love says:

    Above I stated …” NOTHING will “work” that does not VARY materially reduce the FUTURE service pension accrual rate of all CURRENT workers. ”

    What I meant is that addressing the “generosity” level and hence the “cost” of promised benefits is what is necessary, NOT simply fiddling with differing “funding” approaches.

    Reducing Plan “generosity” (and hence “cost”) is accomplished by materially reducing the pensions accrual rate for the FUTURE Service of all CURRENT workers, but it is ALSO helped by the following changes if applied to all CURRENT workers:
    (1) eliminating/reducing COLA provisions
    (2) increasing the age of full/unreduced retirement. Full retirement at 50 (or 55) for Safety is ludicrously expensive.
    (3) charging the FULL actuarial cost of early retirements (rather than the lower amount very common today) … a 5% to 6% pension reduction per-year-of-age.
    (4) eliminating the buying of “years of service” at lower than FULL actuarial cost (using CONSERVATIVE assumptions)
    (5) Making it FAR FAR more difficult to be granted a Disability retirement. 80+% of today’s “disabilities” are phony nonsense.
    And of course eliminating or VERY materially reducing all retiree healthcare subsidies …. which are a VERY rare employer-sponsored benefit in the Private Sector today. Public Sector workers are not “special” and deserving of a better deal …… on the Private Sector Taxpayers’ dime.

  12. Avatar
    john moore says:

    For the record TL, my first comment was intended for ET, who was obviously baiting you by blowing cuddos at you. I do agree that reform at the state level looks grim: every legislative body involved in pensions at the state level are beneficiaries of the crooked system; not one of them has a reform proposal. LIke PEPRA, the only proposal on the table(Reed) is palliative. But at the local agency level there is a path to an equitable solution as will be discussed in Part Two of this Post.

  13. Avatar
    HAHAHA says:

    TL –

    Your knowledge of pensions has grown over the last 4 or 5 years, I will give you that. You are still missing huge pieces of the puzzle, and it is fun to watch you in your righteous indignation. Can only hope you keep up the posts, and the misery that you put yourself in while doing them. Enjoy the early death that awaits you, I will.


  14. Avatar
    Tough Love says:

    HAHAHA, My guess is that your stress level is rising in lockstep with the increase in likelihood that your pension & benefits will be materially reduced.

  15. Avatar
    HAHAHA says:

    TL –

    Nah, I got a couple of mil set aside. That said my pensions are worth about 2mil on an actuarial basis. Good to me, eh?

    Go off and stress my little man, I have enjoyed it over the last few years.

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