Why did Schwarzenegger bail on pension reform?

Today’s topic: Gov. Arnold Schwarzenegger had said he would sign a budget only if legislators reformed the state’s pension system. The budget he signed last month, however, didn’t include this overhaul. What happened?

The sacrifices made by public employees
Point: Scott Adams

The governor’s plan to hold pensions hostage to the budget was a bad idea from the start. Legislators and Gov. Arnold Schwarzenegger knew it would not really fix the budget shortfall. That’s why it died a quick death.

The budget deal has put a heavy burden on public employees at the state and local levels. Furloughs, job losses and cuts in take-home pay have hit hard and will continue to do so, while the heavy workload for state employees shows no sign of diminishing. As a result, quality of life in California will suffer. Vital services and amenities such as public safety, roads, libraries and state parks simply will not function at a level we are accustomed to.

For public employees, the sacrifices are immediate and measured in real dollars.

Any attempt to reform pensions must be done with reason and facts. A one-size-fits-all approach does not work. Each bargaining unit of public employees works under different contracts. Public employees’ contracts take into consideration market conditions, which results in wage and benefit trade-offs.

The collective bargaining process has addressed pension-reform issues in the past and will likely do so in the future. A contract recently bargained by the largest unit of state workers will save taxpayers money on pension obligations. These state workers agreed to change the pension formula for new employees from a benefit calculated on the highest one-year average salary to the highest three-year average.

Public employees disagree with groups that want to replace pensions with risky 401(k) plans. That’s understandable. Americans’ 401(k) retirement savings plans have been decimated by the current economic meltdown. Public pension plans suffered substantial losses too, but nowhere near the level of the average 401(k).

Public employees would rather invest their hard-earned money in a pension plan that keeps management fees low, uses professionals to diversify their investments and posts returns that consistently beat the market. It’s smart financial planning for a secure retirement and something that all Americans should have access to.

We believe pension plans need to be transparent. Public scrutiny of pension benefits in the media and elsewhere is welcome. The average state worker receives an annual pension of just more than $24,000, a fairly modest amount. Furthermore, most people don’t know that many public workers will not receive Social Security benefits, an arrangement that saves employers from making the required contributions to Social Security. That’s a good deal for taxpayers.

Much of the focus from proponents of reform has been on a so-called $100,000 club, a list of former state employees receiving annual pensions in excess of that amount. These egregious examples of “pension spiking” -- a phenomenon that hurts workers -- disturb us too. Paying high-salaried management such extreme pensions results in job and pay cuts for rank-and-file workers.

We look forward to working with all stakeholders to pass legislation that will stop such pension spiking. Legislation was passed in the 1990s that successfully curtailed pension spiking at California Public Employees’ Retirement System. It’s time to pass similar legislation that targets spiking at the county and local levels.

Scott Adams is a pensions and investments analyst with the American Federation of State, County and Municipal Employees.

Get ready for another taxpayer revolt
Counterpoint: Marcia Fritz

Scott, the governor didn’t just pull pension reform out of his hat during the budget deal. After his election in 2003, Schwarzenegger warned legislators that public pension benefits were so rich that costs would threaten the state’s fiscal health and require cuts in services. He tried to reform pensions as a top priority, but unions fought ferociously to stop his efforts. He agreed to allow “the system” to study the problem and propose sensible solutions. Since he took office, nothing has been done. In fact, conditions are measurably worse. Consider:

- More state workers have shifted to safety positions with higher benefit formulas.

- Litigation settlements required the state to include additional pay in final compensation used in formulas and required CalPERS to pay retroactive bonuses to retirees.

- Earlier state worker retirements are draining retirement funds.

- State workers are taking advantage of a flaw in the government code and purchasing up to five years of “air time” at bargain prices to increase their pensions even more.

The governor was right to use budget negotiations as a tactic to bring attention to this problem. It forced state Senate leaders like Democrat Darrell Steinberg to reluctantly admit that pensions need to be addressed.

You say “a one size fits all” approach does not work to reform pensions. Nonsense! Tell that to the Social Security Administration, the military and the federal employee retirement system.

You also mention that the average state worker receives an annual pension of just over $24,000. The average new state retiree in 2008 received $120 per month for every year of service -- $4,200 per month for a career (35-year) employee. The average new California Highway Patrol retiree last year received $247 per month for every year of service -- $7,414 per month for a 30-year veteran. These pensions include survivor benefits and guaranteed cost-of-living increases as well. Your average benefit lumps older retirees’ pensions with those for recent retirees, whose pension formulas were increased three years before our governor took office. That is why he sounded the alarm.

I agree with you that pension spiking should be addressed immediately. It is long overdue. But the problem didn’t surface until we began posting our $100,000 pension club. No one should receive a higher pension than he or she earned in wages before retiring.

You would be wise, Scott, to encourage your union to propose other sensible solutions; the governor’s proposal to roll back pensions benefits for new workers to formulas in place a decade ago won’t be enough. CalPERS staff warned their board just last week that the system, as it is currently designed, is rapidly becoming unsustainable. Outside experts also warned the board that taxpayer revolt from pension envy is brewing as citizens become aware of how rich the benefits for public employees are compared to the private sector.

Voters won’t stand for increased taxes or cuts in services to pay rich benefits promised in private negotiations by officials they elected to serve them.

Marcia Fritz is vice president of the California Foundation for Fiscal Responsibility.