California’s largest state/local government employee pension system, CalPERS, has posted a page on their website called “Myths vs. Facts.” Included among their many rather debatable “facts” is the following assertion, “Pension costs represent about 3.4 percent of total state spending.”
This depends, of course, on what year you’re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of California’s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the “view CalPERS employers” page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.
In a study earlier this year, “California City Pension Burdens,” the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for California’s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.
UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesa’s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.
Costa Mesa’s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. California’s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.
For every dollar they pay their employees in salary, should California’s cities be sending, year after year, $.50 cents or more to CalPERS? That’s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes they’ve got the demographic projections correct this time, and won’t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.
And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under California’s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions – with a ceiling of 8% for regular employees, and 12% for public safety employees.
If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason – it is absolutely impossible for a private company to afford this in a competitive economy.
Returning to the Myths vs. Facts page posted by CalPERS, they also assert that “The average CalPERS pension is about $31,500 per year.” This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the “average pension,” because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.
If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.
One can debate forever regarding how much of a premium public employees should receive over private sector workers because they’re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.
The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.
CalPERS and California’s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that California’s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do – not only to the beleaguered taxpayers, but to their own members.
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