Public Employees: The New ‘Welfare Queens?’

Are public employees, with the national spotlight on their salaries and pensions, getting a “bum rap” as the new “welfare queens?”

That was the view of several members of a panel when the CalPERS board met on Monterey Bay last week, one of two annual “off-site” meetings away from Sacramento to take a break from routine committee action and be briefed on issues.

The CalPERS chief executive, Anne Stausboll, opened the panel on national retirement security by outlining the gap between what private sector workers have for their retirement and what they need.

It’s an estimated $6.5 trillion shortfall, she said, dwarfing the public employee pension funding gap.

Stausboll said there is a growing acknowledgement among policy and business leaders of a “retirement security crisis,” including long-term funding for Social Security and Medicare, and CalPERS should identify its “voice” for the coming debate.

“Our objective is to bring back to you, the board, some time this spring a broad policy platform for the board to consider taking up in the national discussion,” she said.

Despite the attempt to set the stage for a discussion about retirement for everyone, most of the 90-minute panel was about how public employee wages and pensions are being wrongly blamed for state budget shortfalls.

The panel began with a Jan. 1 segment of the Rachel Maddow show on MSNBC that said public employees are the GOP scapegoat for a deep economic recession caused by the misdoings of Wall Street and bankers, leading to the housing bubble.

“A $100 billion bad situation (total state budget shortfall) is a direct result of the hoards of overpaid shiftless pensioners, public sector workers who are sucking the lifeblood out of the body politic,” host Chris Hayes said ironically.

It was the lead in to brief video clips of criticism of public employees and their unions by Steve Malanga of the Manhattan Institute and two Republican governors, Tim Pawlenty of Minnesota and Chris Christie of New Jersey.

Hayes countered with several points: Texas, a conservative state with weak public employee unions, has one of the worst budget shortfalls, $25 billion over two years.

A study found the average state worker salary is 4 percent less than the private sector average for the same work, with comparable age and education. Christie and other New Jersey governors chose not to make $14 billion in pension contributions since 2004.

“Public sector workers are the new welfare queens in American politics,” Dorian Warren of Columbia University said in an interview with Hayes, pointing to an article by Jonathan Cohn in the New Republic.

“They are an easy scapegoat that distracts us from the real sources of the problems that are affecting state and local government,” Warren said. He said the “real villains” are Wall Street, bankers and even politician promises to workers.

The CalPERS federal lobbyist, Tom Lussier, said he thinks the Maddow segment is a “good representation of what many of us feel” and is not, “I think it’s fair to say,” representative of what most of the media is saying about public pensions now.

“We come to this discussion I think at a time of real unprecedented attack on the public sector pension model,” Lussier said. “I think everybody in the room has either seen it, or felt it or certainly experienced the fact that it has intensified.”

CalPERS met at Monterey Best Western

A former congressman on the panel who specialized in public pensions, Earl Pomeroy, D-North Dakota, mentioned two recent national newspaper articles critical of public pensions.

The New York Times said the Securities and Exchange Commission is investigating whether CalPERS properly disclosed investment risk. A USA Today editorial said “lavish” pensions add to state fiscal woes.

Pomeroy said a bill by U.S. Rep. Devin Nunes, R-Tulare, requiring pension funds to report their debt using a lower “risk-free” earnings forecast, if a state wants to continue issuing federal tax-exempt bonds, is “hostile action” against public pensions.

He said a similar requirement that private-sector pensions use the “market” value of assets, rather than “smoothing” gains and losses over several years, drew bipartisan support in Congress because advocates said it would strengthen the funds.

As it turned out, Pomeroy said, the change was a “catastrophe” that may accelerate the end of private-sector pensions. He said corporations were required to shift more money into pensions, instead of investments that might help end the recession.

Pomeroy said the U.S. Chamber of Commerce joining anti-tax groups in supporting the Nunes bill suggests retaliation for CalPERS success in pushing corporate governance reforms, such as the selection of corporate boards.

He said the California Public Employees Retirement System, the nation’s largest public pension fund, has long been known for “best practices” in operations and investment management.

“You are getting a bum rap,” he said of recent criticism.

Pomeroy said the Boston College retirement center estimated that states have been spending 3.2 percent of their funds on pensions and now need to increase the spending to 5 percent.

In an article accompanying the USA Today editorial last week, a national union leader said state pension shortfalls are the result of reckless behavior on Wall Street and the failure of politicians to make proper contributions, not “lavish” benefits.

“It is projected that states must increase pension spending from about 4 percent of their budgets to just 5 percent in the future,” said Gerald McEntee, president of the American Federation of State, County and Municipal Employees. “Surely this is manageable.”

Pension contributions in Gov. Brown’s proposed budget for the new fiscal year beginning July 1 are 4.4 percent of the $84.6 billion general fund spending. With the retiree health payment, the cost increases to 6.1 percent.

But the California State Teachers Retirement System and the UC Retirement Plan, both underfunded, need contribution increases totaling several billion dollars, which if provided would probably push the state general fund share to around 10 percent.

The proposed budget expects the state contribution to CalPERS, which has the power to set the rate, to increase from $3.769 billion ($2.148 billion general fund) in the current fiscal year to $4.14 billion ($2.384 billion general fund) in the new fiscal year.

The CalSTRS contribution, $1.257 billion current year, is expected to increase to $1.35 billion in the new fiscal year, if an old benefit formula is triggered. All of the CalSTRS contribution comes from the general fund.

Unlike CalPERS, CalSTRS cannot set its own contribution rate, requiring legislation instead. The current rate is 4.5 percent of pay from the state, 8.25 percent of pay from school districts and other employers, and 8 percent of pay from teachers.

State retiree health care costs, nearly all from the general fund, are expected to be $1.394 billion this year, increasing to $1.554 billion next fiscal year, according to Department of Finance figures.

Last week CalPERS and CalSTRS both reported double-digit investment earnings for 2010 – respectively, 12.5 percent and 12.7 percent. But they still have not recovered from losses during the recession and stock market crash.

The CalPERS portfolio was valued at $225.7 billion at the end of the year, well below the peak of $260 billion in the fall of 2007. CalSTRS investmentsare worth $146.4 billion, below its peak of $180 billion in October 2007.

A day after the CalPERS panel in Monterey last week, two more articles critical of public pensions appeared in the national media.

Girard Miller said in his Governing magazine column that local governments, worried about rising pension costs, are skeptical of “dodgy” data from CalPERS, which uses a 15-year smoothing for assets, well beyond the five-year industry standard.

A page-one story in the New York Times said there is a behind-the-scenes move in Congress “to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.