Enough beating up on Illinois for right now (for a few days at least): let’s take a look at the Golden State:
Gilbert Robles retired as a state parole agent at age 53, able to collect a $101,195 annual pension — 94% of his final salary. Last year, six months after he retired, the Arcadia resident accepted a political appointment with the same agency that pays an additional six figures.
Scott Hallabrin took retirement as the top attorney for the state’s ethics agency on June 29, 2009. The next day, he went back to the same post, as he prepared to watch his pension checks roll in on top of a salary.
Los Angeles school administrator Norman Isaacs got a 35% raise in 2006, the year before he filed for his public pension. The increase sharply boosted his retirement benefits.
Let me remind you of some public pension terminology. Robles and Hallabrin are doing what’s called double-dipping—both collecting a pension and then continuing to work for the government, collecting a salary. Hallabrin’s is worse, because he’s continuing to do the exact same job he’s receiving a pension for.
Isaacs had “spiked” his pension (yes, public employees often do not get to directly name their salaries, but given the quid pro quo nature of those working in the government—especially the elected “employees”—that 35% boost was no coincidence). Spiking is when a salary sharply increases before retirement—sometimes only months before. Some pension formulas are based off of the last wage rate, so if a government organization cannot afford to pay a high salary for a long period of time, they can artificially boost the salary to sweeten the pension payments.
While there have been laws passed throughout the country to try to tamp down on these behaviors, there have been problems with this. Let’s pick up the story again.
Robles, Hallabrin and Isaacs acted within their rights under California’s pension rules, which the Legislature’s independent budget analyst recently described as “among the most generous in the country.” That generosity comes with a price: The main pension system for public employees is expected to cost taxpayers $2.3 billion this year and has long-term obligations that it is $85 billion short of being able to fund.
Gov. Jerry Brown came to office promising to reduce the state’s burgeoning pension costs, partly by limiting the kinds of practices that inflated the three employees’ retirement incomes. Saying the system is not financially sustainable, the governor has laid out a 12-point plan to change it. He would raise the retirement age, require many employees to contribute more toward their benefits and stop allowing workers to buy retirement credit for years they don’t work, among other changes.
But key parts of the plan would apply only to people hired in the future—after the overhaul passed the Legislature and became law. Tens of thousands of current public employees would still be able to take advantage of the rules that benefited Robles, Hallabrin and Isaacs.
“The governor’s plan doesn’t go far enough,” said Dan Pellissier, president of California Pension Reform, a group led by former state officials that is proposing a ballot measure to rein in pensions further.
Eliminating one of the three practices, the kind of salary “spiking” that swelled Isaacs’ retirement pay, could be difficult. Courts have ruled that the California Constitution prevents the state from changing the terms under which employees were hired. One of the terms is that retirement benefits are based on a worker’s highest-paid year of service.
So here’s the “constitutional” deal with public employees. The argument has been that the benefit formulas in effect when a particular person was hired have to remain in effect until that person dies (and/or his beneficiaries do . . . you think I’m exaggerating?)
Oh wait, that’s not how it works.
How it “works” is that whatever formula was in effect is the minimum benefit. Of course, the state and localities may increase that benefit. But once that increase is made, one can never bring it back down. The ratchet goes only one way.
Pretty sweet, don’t you think?
This is key because of something that happened in 2001. You remember 2001? Right around the time the dot-com boom burst?
CalPERS pushed localities into sweetening pensions around that time:
A labor-friendly CalPERS board offered local governments an incentive eight years ago to boost public employee pension benefits, now called “unsustainable” by some.
CalPERS said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier to pay for more generous pensions.
Booming pension fund earnings in previous years were cited in a self-congratulatory board resolution approving the incentive in 2001. But the stock market boom had already cooled by then.
The CalPERS chief actuary, Ron Seeling, advised against the plan to inflate the market value of the assets, Tom Branan reported in the May/June 2001 issue of The Public Retirement Journal.
The California Public Employees Retirement System could not say how many of the 1,800 local government retirement plans had their assets inflated in exchange for increasing pension benefits.
The inflation incentive was approved as a bill, AB 616, was moving through the Legislature that would allow increased pension benefits for local governments contracting with CalPERS, as well as for county retirement systems covered by a 1937 act.
Supporters said the legislation would allow labor unions representing miscellaneous workers to bargain for contracts increasing their pension benefits by a third, according to an Assembly floor analysis of the bill.
The supporters said a bill enacted two years earlier, SB 400, had allowed benefit increases of up to 50 percent for local government safety workers in CalPERS, mainly law enforcement, but did not cover local miscellaneous workers.
The bill, SB 400, sponsored by CalPERS in 1999, also allowed increased pension benefits for state miscellaneous and safety employees. A cut in state worker pension benefits enacted under former Republican Gov. Pete Wilson in 1991 was undermined.
It would have been bad enough if it had only been public safety workers, but that little “goose” was soon spread to all California public employees. And boy howdy, did they take advantage.
So there had been a little numerical mumbo-jumbo going on. Part of which was assuming the great bull run would continue.
So how have the funds been doing lately?
The nation’s two largest public pension funds last week reported slim annual investment earnings, CalPERS 1.1 percent and CalSTRS 2.3 percent, as experts continue to say hitting their long-term earnings target, 7.75 percent, will be difficult.
While CalPERS reported weak earnings in 2011, a prominent private-sector investment manager, Robert Arnott of Research Affiliates, told the board last week he thinks the most they can expect from stocks and bonds next decade is 4 percent.
Another major investor, Laurence Fink of BlackRock, told the CalPERS board during a similar educational session in 2009 that during the next 15 years: “You’ll be lucky to get 6 percent on your portfolios, maybe 5 percent.”
A Wall Street Journal columnist, Jason Zweig, said last week Warren Buffet’s Berkshire Hathaway pension fund projects a return of 7.1 percent. He said William Bernstein of Efficient Frontier Advisors expects roughly 6.5 percent from stocks.
In my prior post, I had linked to a union-backed piece wherein Dean Baker, he of the dodgy math, said that even when there are some investment losses, the funds have 30 years to make it up.
Really? When you’ve got people, lots of people, drawing benefits right now? Assets will have to be liquidated if the contributions don’t keep up with the outflows. How’s that working out for pensions?
I am not a law-talking type—I am a numbers type, specifically the type of person who projects numbers out under different scenarios. So while it’s a nice, juicy legal puzzle to deal with trying to get current pensions ramped down, I am not overly concerned on the matter inasmuch if and when the money runs out the government cannot proclaim more money to exist (unless you’re the Fed, but that’s not really creating money; I don’t want to get started on that now).
In other contexts, I have heard it said that Constitutions are not suicide pacts.
But I wouldn’t put it past the public unions to drive the car screaming over a cliff, all the while arguing that of course, there’s a bridge there.
If you wish hard enough.
Are you sure you guys are wishing hard enough?