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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.

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