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Public Pension Time Bomb*

September 5, 2002 Talk about it E-mail story Print

Sweetened Public Pensions Put a Squeeze on Budgets


Finance: As stocks fall, some municipalities cut services in order to fund retirement plans. Bills on Gov. Davis' desk may push costs even higher.

Generous retirement plans for California public employees, approved during the 1990s stock boom, now threaten to burden state and local governments with huge new debts as the stock market declines.

In 1999 and 2001, Gov. Gray Davis signed legislation--backed by unions for police officers, firefighters and other public employees--that allowed local governments to negotiate pension increases of up to 50%.

Davis' administration granted better retirements to members of the California Highway Patrol and other state workers. Under pressure from unions--and buoyed by high stock prices that had fattened pension funds--more than half the state's local governments did so as well. Some of the contracts provide pension benefits of up to 100% of a retired worker's salary.

Now the bills for the higher benefits are starting to come due even as the declining stock market has reduced the value of state pension funds by 5% to 10% over the last year. The state government's bill for its workers has doubled in the last year to $1.2 billion. On the local level, the California Public Employees' Retirement System sent a letter to city administrators in June warning that benefit payments by many cities could rise by 20% over the next two years.

CalPERS invests pension funds and pays benefits on behalf of the state and local governments. Because the benefits are guaranteed, if the return on pension funds falls short, local governments must make payments from general tax funds to cover what they have promised.

That is what is now happening in Contra Costa County in the Bay Area. Officials there expect to cut $17 million from programs and services this year and $37 million next year to pay for worker benefits.

"Every single county department has been hit," said John Sweeten, a Contra Costa County administrator.

Monterey County's pension payment rose from zero to $6 million for law enforcement employees this year. That is about 26% of payroll. The debt is expected to peak at 30% of payroll by 2007, which would force serious reductions in county services, said County Administrative Officer Sally Reed.

The effects won't be felt in Los Angeles because county and city leaders haven't approved pension increases. But dozens of other local governments--including Orange, Riverside and San Diego counties and the cities of Oxnard, Long Beach, Anaheim and Garden Grove--are bracing for steeply higher costs.

The changes in Orange County's pension benefits illustrate the changes. Under the old system, a sheriff's deputy with 30 years' experience could retire and receive at least 60% of his pay. Under the new system, he would receive benefits equal to at least 90%.

Critics of the new benefits say the unions' financial support for Davis and labor's nearly nonstop lobbying of the Democratic majority in the state Legislature opened the door to fiscally unsound decisions by local governments.

Labor groups have given Davis at least $9.7 million since 1999, with more than a quarter of that amount coming from public employee unions whose members have benefited from the enhanced retirement packages.

A Davis spokesman said labor's financial support played no role in his decision to sign the legislation, and noted that both bills had broad legislative support. Indeed, the bills passed the Legislature on lopsided votes with little public debate.

Public employees were asked to sacrifice during the down times of the 1990s, and the pension bills were designed to "make up for the many, many years they were neglected," spokesman Steve Maviglio said. "We do these things so we can keep and retain employees and remain competitive. I wouldn't characterize them as excessive."

California's pension benefits for public safety employees are substantially higher than the average among the states, according to figures from the National Assn. of State Retirement Administrators in Washington, D.C.

Regardless of the motivation, passage of the legislation has set off political fights across the state over benefit levels.

A CalPERS spokeswoman, Pat Macht, said cities and counties had been given full disclosure about the effect of approving the higher benefits for employees.

"No one twisted their arms," Macht said. "The Legislature allowed the opportunity if it seemed appropriate. Any increase in benefits was fully analyzed and provided to their staffs."

But once the first city approved the pension increases, "the pressure to do the same was enormous," said Long Beach City Manager Henry Toboada. "It was a feeding frenzy."

Often, public employee unions are in a strong position to put pressure on county or city officials sitting across the table from them in bargaining sessions.

For example, in 2001, Ventura County supervisors resisted increasing pensions for sheriff's deputies. The board's refusal to grant the benefit increase almost cost supervisor Judy Mikels, who represents the Simi Valley area, her seat.

Union members picketed Mikels' campaign events and backed her opponent, a former Los Angeles police officer.

Mikels, a two-term incumbent, squeaked by with 51% of the vote. After 18 months, the deputies union gave up and accepted a contract that does not include the higher retirement benefits.

Mikels, a Republican who had been one of law enforcement's closest allies on the board until the benefit issue arose, called the proposed pension increases "obscene."

"How much is too much and when does good sense return?" she asked.

Critics of the pension increases argue that retirement plans for public employees already were more generous, and more secure, than the up-and-down 401(k) plans increasingly offered by private sector employers.

"How many people have been able to retire at 50, period, let alone get most of their salary?" said Dave Thompson, legislative consultant for the Los Angeles County Sanitation Districts. "It does exactly what you don't want to do as an employer. It encourages people to leave early."

But union officials say public employers must offer improved benefits to attract good men and women.

For people like police officers, the job is often difficult and sometimes fatal. When officers have a choice, they will go with an agency that will guarantee them an early and livable retirement, said Clancy Faria, president of the Police Officers Research Assn. of California, based in Sacramento.

"Recruits today are very savvy about what's out there," Faria said. "They shop areas for cost of living, housing, salary and retirement benefits."

Moreover, some public employees don't get Social Security, noted Terry Brennand, a lobbyist for the Service Employees International Union. Government officials weren't complaining in the late 1990s when the stock market carried pension funds so high that local governments were not required to make any payments at all, he said.

"I don't have a lot of empathy for them," he said. "When they had excess dollars, nobody set any money aside. Nobody planned for the future."

Meanwhile, public employee unions have succeeded in pushing several new bills through this year's legislative session that could raise costs further.

SB 1024 and SB 1409 would allow police and firefighters to "retire" but continue working for as long as five years, earning a salary during those years and collecting retroactive retirement pay for that period when it ends.

AB 2023 would allow state and local prosecutors and deputy public defenders to be classified as safety employees, allowing them to negotiate for pension benefits greater than they currently are allowed.

AB 2792 would eliminate local government's ability to reduce or modify benefits, without employees' consent, for newly hired employees. That bill would eliminate one potential avenue for local governments to help remedy their current problem by cutting back on pensions for newly hired employees.

All four measures have been approved by the legislature and are awaiting Davis' signature.

The current problem, meanwhile, is only likely to worsen, pension experts say. The steepest increases in payments won't be seen until next year because it takes two years for the stock market's performance to show up in pension bills, said Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based organization financed by employers, unions and government agencies.

"If you increase benefits based on short-term market factors, and those factors suddenly reverse, the cost quickly catches up with you," Salisbury said. "I always say be cautious with benefits. What you think you have today could go away tomorrow."

Times staff writer Dan Morain in Sacramento contributed to this report.

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