Would you take a 12 percent pay cut in exchange for a 100 percent reduction in work? In Orange County, if you’ve worked 30 years – say from age 25 until age 55 – that is exactly what you can expect. And many OCERS retirees are receiving pensions in excess of their highest salary.
For instance, Orange County Department of Education’s former deputy superintendent Lynn Hartline retired in 2013 with an OCERS-reported final average salary of $250,018. Hartline won’t have too much trouble adapting to life without a salary, however. Her 2013 full-year pension benefit from OCERS (Orange County Employees Retirement System) was 100 percent of her final average salary – $250,018.
Charles Walters received the second-highest OCERS yearly payout in 2013. Walters was the former Orange County assistant sheriff who retired in 2008 amidst a criminal grand jury probe for the 2006 murder of John Chamberlain in the jails he oversaw. His pension for the 2013 year was also 100 percent of his final average salary — $226,365.
Unfortunately the examples above are hardly extreme outliers, but rather indicative of an underlying trend. For all OCERS full-career retirees — those with 30 or more years of service credit for retirement — the average annual pension benefit received in 2013 was $73,875, or nearly 90 percent of their final salary.
Focusing on only recent retirees prevents older retirees — who’ve received significant cost of living adjustments to their pension benefit — from artificially inflating the comparison of pension benefits as a percentage of final salary. The average pension benefit received by a full-career OCERS retiree who retired in 2004 or later was $81,283, which represents 88 percent of the average final salary.
OCERS retirees who worked for the O.C. Fire Authority received an even larger percentage of their final salary in retirement. The average full-career Fire Authority retiree received a pension benefit of $117,934 in 2013, which was 94 percent of the average retiree’s final salary. Retirees who had retired after 2004 received an average benefit of $119,326, worth 94.5 percent of their final salary. For 2008 or later full-career Fire Authority retirees, the average pension benefit in 2013 was $122,770, which was 94.75 percent of the average retiree’s final salary.
The data from those who retired after 2008 demonstrates that pension benefits worth 94 percent their final salary is indicative of the base pension amount an employee can expect to receive upon retirement.
Reviewing the OCERS 2013 data reveals that this problem goes beyond fire retirees. In addition to Hartline’s quarter million dollar yearly benefit, a former social services director, assistant public defender, and sanitation district manager all receive annual pension benefits well over $150,000 apiece.
As salaries rise, so too will future pension benefits for which taxpayers are responsible. Consider the Orange County Department of Education’s current superintendent, Alfred Mijares, who received a salary of $287,500 in 2013. If Mijares retires with at least 30 years of service credit, he will likely receive a pension benefit of over $250,000 his very first year of retirement.
Private citizens usually consider an appropriate pension amount to be what is necessary to cover the cost of living during retirement. Yet for many Orange County employees, pensions have become a continuation of the extravagant salaries they took home during their careers.
This system encourages government employees to retire 10 to 20 years earlier than their private- sector counterparts. Taxpayers are left paying for six-figure government pensions that most can only dream of, while simultaneously trying to fund their own, significantly smaller pensions.
Most fire fighters do not get Social Security, so they completely count on the pensions they have contributed to, been promised and earned over a career. Take their pensions away or cut their pensions and you have fire fighters who risked their lives over a career to save others living in destitution, on public assistance, meaning the taxpayers have to foot that bill, too.
– Harold A. Schaitberger, President of the International Association of Fire Fighters, Press Release Sept. 26, 2013
The implication in Mr. Schaitberger’s remark, apparently, is that $234,000 per year isn’t enough to permit someone to save enough money to avoid “living in destitution.”
Here’s how Orange County’s full-time firefighters did in 2011, according to data from their own website (ref. OCFA Employee Compensation, 2011 – Grand Jury Format). Anyone who wishes to verify all of the calculations referenced in this post can download the spreadsheet produced by the California Public Policy Center.
Slicing this data another way, during 2011 there were 47 OCFA firefighters who made over $300,000, and another 594 firefighters who made less than $300,000 but more than $200,000. That is, out of a full-time workforce – not including support personnel – of 747 firefighters, 641 of them made over $200,000 in total compensation during 2011. The average general physician practicing in California reported an average annual salary of $182,200 per year to the U.S. Bureau of Labor Statistics in 2012. To be able to do this, doctors need eight years of postsecondary schooling and three years of training and residency before they can legally practice. This is comparable to the average direct pay of veteran OCFA firefighters, and it is unlikely that doctors collect benefits that are nearly comparable to OCFA’s, which on average add another $76,000 per year to their total compensation.
A phone call to OCFA revealed that when there is a need, an announcement is posted on their website inviting people to apply to become firefighters. During the last call for applicants, between May 13 and June 13, “thousands” of people applied for 30 positions. According to the spokesperson, anyone may apply.
It is important to emphasize that total compensation is the only proper way to measure how much someone really makes. And several factors combine to make the average total compensation for OCFA firefighters, $234,000 per year, a misleadingly low number. The primary reason for this is because their retirement health benefits and retirement pension benefits are woefully underfunded (ref. “Orange County Pensions At Risk – Unions Just Call Critics “Extremists“). This means that unless the benefits are cut, or the firefighters themselves start contributing far more of their direct earnings to these funds via payroll withholding, the employer share of the payment will have to increase.
Another factor that is important to consider is the actual hourly and daily pay. Firefighters working “suppression” shifts log a lot of work hours. The average OCERS firefighter worked 2,877 hours of normal shift time, plus another 861 hours of overtime shifts. This translates into 156 shifts of 24 hours each. But included in these hours are, for firefighters with 10 years service or more, vacation hours that equate to 12 shifts of 24 hours each (ref. OCFA MOU, page 44). This means that even including overtime, the average OCERS firefighter worked 144 days and was off 221 days. Obviously working 24 hour shifts represent a sacrifice. But during these shifts firefighters are eating and sleeping. And if the cost of firefighter pensions weren’t so expensive, it would be possible to hire more firefighters in order to eliminate so much overtime. If OCFA firefighters collected zero overtime, they would still have collected average total compensation of $190,000 during 2011, and they would have worked – taking into account vacation time – 108 shifts of 24 hours each and had 257 days off. There’s more. For example, firefighters accrue sick leave without limit and after 20 years of service may collect 100% of the value of their accrued sick leave as additional pay. Wasn’t sick leave supposed to be for when you’re sick?
What about the average pension for an OCFA firefighter? If you assume that only direct pay and “specialty pay” are eligible, if you assume that the average salary is the same as the final salary (not even close), and if you assume there are no incidences of “spiking,” the “pension eligible pay” on average for an OCERS firefighter is $106,000. If they work 25 years, with their 3.0% per year multiplier, they may expect a pension of $80,000 per year. This estimate is undoubtedly lower than reality.
It’s a long way from $80,000 per year to “destitution,” Mr. Schaitberger.
There’s nothing wrong with paying firefighters more than what the market might offer based purely on their skills and work hours, because firefighters incur risks in their jobs that most jobs don’t impose. And there’s nothing wrong with paying more than market rates in order to attract the most capable people to fill these positions. But it is important to counter claims that firefighters are on the brink of “destitution,” and therefore cannot agree to anything more than token concessions with respect to their pay and benefits.
How much someone should make is a very subjective and contentious issue. But it is probably reasonable to suggest that firefighters should not make more than doctors. Nor should they make more than four times as much as the average citizen they serve. And since they earn direct pay that is on par with top management in most private firms, they should be able to save for their own retirements. Insisting on a pension after 25 years of work that pays at least five times as much as the average Social Security benefit available after 40 years of work is not financially affordable nor fair. Saving the defined benefit may well depend on returning – retroactively and across the board – to pension benefit formulas that were in effect 20 years ago, before we had booms, bubbles, and bloated benefit binges.
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Ed Ring is the executive director of the California Public Policy Center.
“Just as the overseer of Detroit lied to the public about Detroit’s unfunded pension liability, these extremists are likewise lying to the taxpayers of Orange County, and they’re following his playbook.”
– Jennifer Muir, Communications Director, Orange County Employees Association
We’re not lying, Jennifer. We’re not even stretching the truth.
What government union spokesperson Muir is referring to is an analysis released last week by the California Public Policy Center entitled “Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?”
They aren’t adequate. They aren’t even close to adequate. No lie.
The problem with pensions, unfortunately, as Teri Sforza aptly put it in her coverage of the CPPC study on September 10th in the Orange County Register, is “the nature of America’s public pension systems is to peer 20 to 30 years into the future – and the crystal ball can get a bit murky.”
And hiding behind this convenient murkiness, defenders of the system – inadequate payments included – can call anyone concerned about the long-term solvency of the system “liars,” and “extremists.”
It’s much easier, and certainly much more effective, to disparage the critics than grapple with facts. But anyone familiar with the real estate and credit crash of 2008 should understand that ignoring financial fundamentals is a dangerous game. Here are the financial facts:
As of 12-31-2012 the Orange County Employee Retirement System had invested assets of $9.47 billion. For the plan to be fully funded, those assets needed to be equal to the liabilities; defined as the present value of the system’s financial obligation to pay all active participants – working and retired – retirement pensions. Here’s where the crystal ball gets murky – because how big that liability is today depends on what rate of interest the assets will earn each year, for the next 20-30 years. At a projected rate of return of 7.25%, those liabilities are valued at $15.14 billion. Underfunding = Assets – Liabilities.
OCERS is officially underfunded – according to their own annual report, by $5.67 billion. No lie. Fact.
Now it is fair to argue over what rate of return is truly realistic. But even if we use a higher rate, say, 7.5%, that liability only shrinks to $14.69 billion. Put another way, if you increase the projected rate of return by one-quarter of a percent, your unfunded liability will go from $5.67 billion down to $5.22 billion.
To verify these numbers, download the spreadsheet created by CPPC analysts and see for yourself. Go to table 1 “unfunded liability” and enter .075 in the yellow highlighted cell D23, and look at the result in the green highlighted cell D26. To construct this spreadsheet, the CPPC relied on those extremists at Moody’s Investor Services, whose formulas are meant to provide credit analysts with accurate tools to perform what-if analysis.
The point of all this?
In order to pay down their unfunded liability of $5.67 billion – or $5.22 billion if you want to use something approximating the union’s number – during 2012 OCERS contributed $218 million. Was that enough?
If there were no interest at all on this unfunded liability, at a rate of $218 million per year, it would take OCERS 26 years to pay off $5.67 billion; 24 years to pay off $5.22 billion. But it isn’t that simple.
Pension plans like OCERS rely on investment returns for most of their annual contributions. The assets they’ve got invested are supposed to earn – presumably – 7.25% per year. Investment returns, not contributions, are the intended source for most of the money OCERS needs to fund current and future pension payments. And if OCERS were fully funded, their investments would be earning $1.1 billion each year, that’s $15.14 billion times 7.25%. But because OCERS was only 63% funded in 2012, because they only had $9.14 billion of invested assets, at their projected rate of return of 7.25% they would only have earned $687 million. To earn the required $1.1 billion, at a 63% level of funding OCERS would have to have earned 11.6% – and they would have to do that every year just to avoid going further in the hole.
Does anyone really think OCERS is going to average a return of 11.6% per year for the next 25 years? Should only “liars” and “extremists” be concerned?
The reason OCERS got away with contributing a mere $218 million during 2012 towards a liability of $5.67 billion is because they intend to eventually increase these annual payments. Meanwhile, OCERS CEO Steve Delaney acknowledged that during 2012 the OCERS unfunded liability experienced “negative amortization,” despite better than normal investment returns. How much do these payments need to increase?
If OCERS were serious about restoring adequate funding, they would adopt the recommendations of Moody’s Investor Services – those extremists with the green eye shades – who in April 2013 called for a “20 year level payment” plan for reducing the unfunded liabilities of pension plans. At 7.25%, that would equate to $546 million per year. And if reality reveals over time that OCERS can only earn 6.2% per year on average, that payment would increase to $685 million per year. By this reasoning, the OCERS unfunded contribution was well over $300 million short in 2012, and the longer they wait to increase their annual unfunded contribution, the greater – above and beyond $300 million – the required increase.
By adopting graduated repayment schedules instead of telling the truth about just how perilous the situation is for OCERS, defenders of the status quo are putting the entire system at risk of a complete collapse. They are committing precisely the same unsustainable excess as the issuers of subprime mortgages ten years ago – financial instruments with graduated payment plans that mislead borrowers into thinking they could buy things that they couldn’t possibly afford.
Jennifer Muir, Nick Berardino, and others who have been outspoken critics of pension reformers, are invited to download the spreadsheet the CPPC has produced to evaluate the financial health of OCERS. Before trotting out the insults, perhaps they might first familiarize themselves with the liberating reality of algebra, a discipline that is indifferent to lies, extremism, and all other flights of wishful fancy.
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