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PERSPECTIVE: The State of Public Pensions

By Annie George/Source: Washington Post

Posted on 09 Mar 2011

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We see it in Wisconsin, Ohio, Indiana, and all across the country. States and cities are struggling with deficits and cutting expenses to get budgets in line. One way states are dealing with the ballooning deficits is to cut the pensions being paid to retired public employees.

In a recent article in the Washington Post, one example cited as an illustration of how the pensions are draining the states is as follows:  A retired city administrator of Vernon, California receives a pension of $43,320.53 a month (or close to $520,000 a year) through the underfunded California Public Employees' Retirement System (CalPERS), which covers about 50% of all government workers in the state and is the nation's largest public pension administrator.

According to the Post, this administrator receives this huge pension because he held six four-day-a-week jobs at the same time in Vernon, a town just south of Los Angeles. He was Vernon's city manager, city clerk, finance director, treasurer, redevelopment agency secretary and director of light and power.

It’s deals like this, for example, that rub Californians the wrong way…I would venture to say even the most progressives in the state. The state's public employee pension plans are dangerously underfunded as a result of overly generous benefit promises and an unwillingness to plan prudently. Last month, a government-appointed panel of experts, the Little Hoover Commission, urged the California's Governor Jerry Brown and the legislature to establish the legal authority for the state and local governments to freeze pension benefits for current workers. The Commission recommends that, going forward, current workers accrue benefits under more sustainable pension plans. Payments to current retirees would not be affected. (Daily NewsFlash, February 28)

“State and local governments cannot solve this problem without addressing the mounting pension obligations of current employees,” said Daniel W. Hancock, chairman of the Little Hoover Commission, a bipartisan and independent state agency charged with recommending ways to increase the efficiency and effectiveness of state programs.

But California is not an anomaly, as the issue is being played out in cities and states across the nation as lawmakers are trying to cut worker pay and benefits.

The Vernon retiree’s inflated pension is not a typical example, but it does serve to spotlight the problem and highlight the excess. According to AFSCME, the largest public-employee union, its average member earns less than $45,000 a year and receives an annual pension of roughly $19,000. However, many retirees from state and local government jobs do much better than that. When the advocacy group California Foundation for Fiscal Responsibility requested state retirement system records in 2009, it discovered that nearly 15,000 of the state's retired government employees were receiving pensions of more than $100,000 a year.

Retirement benefits for state and local workers varies widely, but experts say retirement packages have become significantly more lavish over the years, especially in the late 1990s, when pension funds were seeing big returns in the stock market.

In Arizona, for instance, a decade ago the legislature feared the flight of retirement-age police officers and firefighters. It created a program that would give them a lump sum in addition to their inflation-adjusted pensions, if they agreed to work an additional five years. The one-time payments have indeed been enticing - an average of $247,422 for police officers and $314,338 for retiring firefighters, the Arizona Republic reported last year.

Critics say that is one reason the state's Public Safety Personnel Retirement System now has only two-thirds the amount it needs to meet its obligations. However, its defenders say that it has kept more experienced officers on the job, which has saved the expense of training new ones.

It should probably be no surprise that the elected officials who designed state and local retirement systems often benefit the most.

Veteran legislators in Minnesota joke about doing a "high five" when the governor appoints one of them to a six-figure post as head of a state commission. It means that his pension, calculated on the average of his five highest-earning years, will be significantly higher than what he would have earned had he closed out his career as a $31,140-a-year representative or senator.

Part of the backlash is the fact that the retirement system for government workers, especially on the state and local level, has become by many measures a significantly better deal than that available to most people who work for the private sector.

"Defined benefit" plans - which guarantee a certain pension payment - are still the norm for state and local employees. But they have all but disappeared in the private sector, replaced by 401(k) systems that make the worker bear the risk of Wall Street's ups and downs.

What makes headlines, however, are the stories of workers who exploit the loopholes.
Public-sector workers frequently can retire earlier, often in their 40s and 50s, receiving pension checks even as they go on to another career - or sometimes, "double-dipping" in their old one.

Some public employees end up getting paid more in retirement than they did during their working years, thanks to pension-benefit formulas that encourage practices such as "spiking," the inflation of salary and overtime payments in the final years before retirement.

"I've never understood why public employees themselves haven't policed these abuses, because it hurts everyone when they come to light," said Alicia Munnell, the director of Boston College's Center for Retirement Research.

Last year, New York's then-Attorney General Andrew M. Cuomo - now the governor - investigated pension-padding and found cases in which government employees who had never worked overtime in the early years of their career clocked more than 1,000 hours of it as their retirement neared. Cuomo said the abuse transcended "occupation, region or job title."

Nineteen states last year moved to reduce their pension liabilities, by cutting benefits or requiring employees to make bigger contributions, according to the Pew Center on the States. And about a dozen states are considering restructuring their systems so that at least part of public employees' retirement savings will be put in 401(k)-type plans

Some are proposing a hybrid system, similar to the one put into place for newly hired federal workers, starting in 1985. They have a three-tiered retirement plan that includes Social Security, a relatively modest fixed pension - roughly half the value of the annuity for those hired up through the end of 1983 - and a 401(k) plan.

Public-employee unions say that although the occasional stories of workers who game the system make for good headlines, the real problem was reckless behavior on Wall Street, which caused the value of pension-fund assets to plummet. To force state and local employees to accept what now passes for retirement security in the private sector would amount to a race to the bottom for all workers, they contend.

AFSCME Secretary-Treasurer Lee A. Saunders said: "401(k)s have been around for a generation and the result is tens of millions of workers who lack retirement security. We need to figure out ways to expand effective retirement programs to more Americans. We gain nothing by destroying the defined benefit plans that public employees agreed to and funded over the course of their careers."