As state and local governments in California face soaring public pension costs, unions insist that cost-cutting changes must be bargained, not imposed by legislation.
But there is one major exception: schools.
Teachers and non-teaching school employees in California are in unions that do not bargain pensions. Instead, their pensions are in big statewide pools that have some of the lowest costs for employers and some of the lowest pension formulas for retirees.
Bargaining for pensions is used extensively only in California and a few other states. One of the first pension reform proposals to include ending bargaining came last month in Rhode Island, where bankrupt Central Falls is drawing national attention.
The Rhode Island auditor general, Dennis Hoyle, said an end to bargaining for pensions and retiree health would make benefits more visible to the public, set a standard and avoid the tendency to save now by pushing employee costs into the future.
In California, particularly in local government, critics say bargaining tends to result in pensions not based on what retirees need or on what governments can afford, but on pensions offered by other government employers.
Often blamed for triggering market-like competition resulting in costly local police and firefighter pensions: a CalPERS-sponsored bill, SB 400 in 1999, enacting a 50 percent pension increase for the Highway Patrol negotiated by their union.
The same competitive pressure can drive up the salaries on which pensions are based. An article in the November issue of Vanity Fair magazine, “California and Bust,” makes the point in a section on pension-troubled San Jose.
“The effect was to make the sweetest deal cut by public-safety workers with any city in Northern California the starting point for the next round of negotiations for every other city,” wrote Michael Lewis, author of “Moneyball” and “The Big Short.”
Another criticism of bargaining is that managers who can curb retirement costs personally benefit from higher pensions. A lawsuit forced the Sonoma County retirement system to release records last month, showing 98 pensions of $100,000 a year or more.
Rod Dole, 59, a former county auditor-controller-treasurer who retired in May is said to have a $254,625 annual pension, $46,600 more than his final pay. Others with pensions above $200,000 are a former sheriff and a former county administrator.
“What’s particularly discouraging to us is how many of those at the top of the pension pyramid are those – former supervisors and department heads – who had the decision-making authority to be part of a solution,” said an editorial in the Santa Rosa Press Democrat, which filed the lawsuit.
Compared to other public pensions, the two school retirement systems where pensions are not bargained have a significantly lower cost for employers, similar or better funding levels, low costs to employees and formulas that provide lower pensions.
Employer costs. The California State Teachers Retirement System receives a total employer contribution of 12.75 percent of pay for teachers and others – 8.25 percent from districts and other employers and 4.5 percent from the state.
The California Public Employees Retirement System receives an employer contribution of 10.9 percent of pay for non-teaching school employees (office, food, maintenance and others).
For employees that do bargain pensions, CalPERS receives employer contributions of 18.2 percent of pay for miscellaneous state workers and 31.2 percent for the Highway Patrol.
At the high end, the CalPERS employer contribution for police and firefighters in 55 local governments, where these “safety” worker costs are a big part of the total budget, is 40 percent or more of pay.
Funding levels. The latest CalPERS valuation, as of June 30, 2010, shows that the non-teaching school employee pension fund has 69.5 percent of the assets needed to fund future obligations.
The five CalPERS state worker funds that bargain have a lower average funding level of 62.8 percent, ranging from 68.3 percent for industrial to 57.6 percent for the Highway Patrol.
The latest CalSTRS valuation, also as of last year, shows a funding level of 71 percent using the actuarial value of assets. Switching to the market value of assets, the CalPERS method, drops the funding level to 63 percent.
(Critics argue that the real funding level of CalPERS and CalSTRS is much lower because the nation’s two largest public pension funds use an overly optimistic forecast of what their investments will earn in the future, 7.75 percent).
Unlike CalPERS and most California public pension funds, CalSTRS lacks the power to set annual contribution rates that must be paid by employers. So to build support for rate-increase legislation, CalSTRS has been the most forthcoming about its shortfall.
With no rate increase, CalSTRS expects to run out of money in 30 years. To reach 100 percent funding, CalSTRS needs an additional 14 percent of pay (about $4 billion), more than doubling the current total employer contribution of 12.75 percent.
A phased-in rate hike to reach 100 percent funding may be unrealistic now. But officials say enough of an increase to get the funding level moving up would cut future costs and avoid sinking into calamitous underfunding, as in New Jersey and Illinois.
Employee benefits. Non-teaching school employees in CalPERS, contributing 7 percent of their pay to pensions, may have grumbled about an inequity during the last decade.
State miscellaneous workers contributed 5 percent of their pay to CalPERS. But they had the same pension formula as non-teaching school employees, “2 at 55,” or 2 percent of final pay for each year served at age 55.
Now after negotiating new contracts last year that helped lower state payments to CalPERS, state miscellaneous workers are contributing 8 percent. Non-teaching school employees, who do not bargain pensions, continue to contribute 7 percent.
The new contracts give newly hired state miscellaneous workers a lower pension formula, “2 at 60,” the bottom rung of CalPERS miscellaneous formulas. In addition to “2 at 55,” the others are “2.5 at 55,” “2.7 at 55,” and “3 at 60.”
Newly hired non-teaching school employees continue to receive “2 at 55” pensions. The landmark SB 400 in 1999 increased Highway Patrol pensions from “2 at 50” to “3 at 50” and state miscellaneous workers to “2 at 55” from “2 at 60.”
Teachers and others in CalSTRS also have a “2 at 60” pension formula. Bargaining by teacher unions has given California teachers some of the highest salaries in the nation.
But the powerful teacher unions have not pushed for the right to bargain pensions. Instead, when CalSTRS was fully funded during a stock market boom in the late 1990s, the unions backed several legislative bills that increased retirement benefits.
The big one, AB 1509 in 2000, made CalSTRS a “hybrid” plan by adding a 401(k)-style individual investment plan, the Defined Benefit Supplement, with guaranteed minimum earnings based on the 30-year bond.
Teachers contribute 8 percent of their pay to CalSTRS. For a decade ending last January, a quarter of the teacher contribution, 2 percent of pay, went into the supplement rather than the underfunded CalSTRS pension system.
Unlike non-teaching school employees in CalPERS, teachers are not in federal Social Security. It’s currently funded by 6.2 percent of pay from employees and 6.2 percent from employers.
In 1982 during his previous term, Gov. Brown proposed lower pensions for new state hires. He said it was possible for a state worker to retire at age 62 with more than 100 percent of their final salary from CalPERS and Social Security.
But the teacher unions have not pushed for Social Security. To the contrary, some at CalSTRS worry that Congress may try to close the Social Security funding gap by putting all public employees in the system, imposing big costs on the state and teachers.
Under the current CalSTRS plan, a report to the board said in June 2009, with the pension, the supplement and $100 a month invested in a tax-deferred plan, a teacher at age 63 with 34.5 years of service could retire with 103 percent of final pay.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 3 Oct 11