Pensions Q&A

Is state spending for pensions soaring?

Pensions are one of the smallest percentages of state spending – and increases for pensions have been slower than the overall increase in state spending. Pension costs represent about 3.2 percent of total state spending for the Fiscal Year 2016-17 budget. In comparison, 30 percent of the total state budget is earmarked for public education, 8.5 percent for higher education, and 6.2 percent is for corrections.

Are most firefighters and police officers retiring at age 50 with their full pay?

Public safety workers would have to begin their career at age 20 or younger and work continuously for 30 years, with the highest 3 percent at age 50 benefit formula, to retire at age 50 with 90 percent of pay. This is a small fraction of the workforce; CalPERS safety members who retire with 30 or more years of service represent just three percent of CalPERS’ total retiree population.

Are pension costs “squeezing out” other services at the local and state level?

No. Over the long term pension costs have not increased dramatically as a percentage of budgets for the majority of public agencies.

State and local government pension contributions constitute a small percentage of spending. Pension contributions as a percentage of direct expenditures for California state and local governments ranged from 3.1 percent in 1994 to 4.4 percent in 2012, with a low of 1.7 percent in 2002. Pension contributions combined with salary and wages accounted for 31 percent of direct California expenditures in 2012.

Will “reforming” the pension system solve all fiscal problems facing our state and our communities? 

No.  Eliminating retirement security for teachers, firefighters, police officers and other public employees is bad for the economy, will force more Californians to turn to other taxpayer-funded social services, and will result in untold short-term costs with no guarantee of saving taxpayers in the long run. The nonpartisan Legislative Analyst says pension-changing proposals could strap taxpayers with billions more in costs during the next few years.

That happened in places that have passed so-called pension “reform.” According to the San Jose Mercury News, that city’s police department became woefully short-handed, crime soared, and it was unable to fill its police training ranks with new recruits when then-Mayor Chuck Reed began his “reforms” – most of which have been reversed. San Diego also is experiencing higher costs. And taxpayers in both cities paid millions in lawyers fees ($5 million in San Jose alone) for pension measures that have been ruled unconstitutional in courts.

California’s public retirement systems actually are better off than they were during Gov. Jerry Brown’s first term in office years ago. CalPERS was about 55 percent funded In the early 1980s, the final years of Gov. Brown’s first term and following another severe recession.

As an investigative report by McClatchy Newspapers noted: “There’s simply no evidence that state pensions are the current burden to public finances that their critics claim.”

Why aren’t government workers contributing more to their pensions and why are taxpayers on the hook to pay those costs?

They are.  Pensions largely are paid for by employee contributions and investment income – not taxpayers! Public employees pay up to an average 12 percent into their own retirement. Teachers contribute 8 percent of their salaries to their pensions, do not receive Social Security and most teachers over the age of 65 do not receive retiree health care benefits either. They pay for their pensions with every paycheck.

Didn’t communities like Stockton and San Bernardino go bankrupt because of pensions?

Stockton’s bankruptcy wasn’t caused by the city’s police officers and garbage truck drivers, but from a combination of circumstances and decisions including lavish borrowing to construct a waterfront ballpark and entertainment center.  Stockton’s then-city manager has said pensions were NOT responsible for the city’s bankruptcy.

In a ruling criticizing Wall Street creditors in the Stockton Bankruptcy case, U.S. Bankruptcy Judge Christopher Klein agreed that the bankruptcy was not driven by pensions, saying a host of decisions and circumstances led to the city’s financial woes including developments and tax breaks that could not be sustained because of the housing crisis and recession.

In San Bernardino, pension costs last fiscal year totaled just 4 percent of its budget shortfall. That means even if pensions were eliminated entirely, San Bernardino would still have had a $43 million budget hole. 

Why are unions and public employees blocking pension changes?

Public employees have been part of the solution to ensure public pension systems are financially sound. More than 600 new agreements have been signed in more than 400 jurisdictions where public employees are contributing more.

The reforms approved by the Legislature and signed by Gov. Jerry Brown amount to a reduction of somewhere between $60 billion and $100 billion in the benefits promised to public employees. Take for example, a public employee making an average salary of $40,000 and working for 30 years. Prior to the new state law, this worker would retire with a pension of $24,000. Now that worker will receive $15,600, a reduction of $8,400, which is not a lot to live on in California.

A recent study by the Center for Retirement Research at Boston College says that pension “reforms” made at the state and local level will restore the state’s public pension funds to pre-financial crisis levels. The study, “State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform,” looked at changes in 32 plans in 15 states (including CalPERS and CalSTRS). It notes that recently-enacted cuts to public employees “will, over time, improve the financial outlook for plans and help ease their impact on other budget priorities.” Researchers also found “in most cases, reforms fully offset or more than offset the impact of the financial crisis.”

Can CalPERS pensioners “spike” their retirement benefit upward by manipulating the income that gets included in their final year of compensation?

No. The Public Employees’ Pension Reform Act of 2013 (PEPRA) included several measures to reduce abuses. It requires that final compensation be defined, as it is now for new state employees, as the highest average annual compensation over a three-year period. This change prevents employees from artificially increasing the compensation used to determine pension benefits. PEPRA also removed the opportunity for employees to buy “airtime,” additional retirement service credit for time not actually worked.

But why are public pension benefits so excessive?

They aren’t. The average CalPERS pension is about $31,500 per year. Unlike the private sector, many public employees, like teachers, firefighter and police, don’t get Social Security and their CalPERS pension may be their sole source of retirement income. Just 3 percent of CalPERS retirees receive the much-publicized $100,000 per year or higher pensions. The vast majority of the $100,000-plus pensions go to retired executives such as city managers and county executives, physicians, and senior managers of police and fire departments.

Don’t pensions hurt the state economy?

Just the opposite: CalPERS retirees benefit the state economy. A recent study showed the $15.3 billion in CalPERS pension benefits paid in the 2013-14 Fiscal Year produced another $15.6 billion in economic activity. In total, the paid benefits produced an economic impact of $30.9 billion while generating 104,974 jobs and over $716 million in sales and property tax revenues for state and local governments. The economic impact of CalSTRS payments results in more than 92,815 jobs and $11 billion in total output.

But didn’t Senate Bill 400 (1999) cause employer costs to soar over the next 10 years?

No.  The cost of SB 400 was then, and is now $500 million a year. This equals less than 1/2 of 1% of the current state budget. These costs were budgeted for and have not changed.  The increased costs in pensions were driven primary by Wall Street abuses which caused by the great recession.

Is CalPERS 7.5 percent assumed annual rate of investment return too high and unachievable?

CalPERS investments earned 13.2 percent in Fiscal Year 2012-13, 18.4 percent in Fiscal Year 2013-14, 2.4 percent in Fiscal Year 2014-15, and 0.6 percent in Fiscal Year 2015-16.CalPERS assumed rate of investment return is a long-term average. Any given year is likely to be higher or lower than the assumed rate.

CalPERS investments have earned an average annual return of 6.8 percent over the last five years, 5.1 percent over the past 10 years, and 7 percent over the past 20 years. Since 1988, when CalPERS began using the external custodian, the Fund has earned 8.3 percent annually.

A Wilshire study conducted for CalPERS recently projected annual earnings over the next 30 years at 7.83 percent.

Why are taxpayers and the State paying the total cost of pensions?

They aren’t. Investment earnings pay the majority of the costs of public pensions. For every dollar paid in pensions, 62 cents is from CalPERS investments. Public employees who are CalPERS members pay a part of their pensions as well. Each month they contribute a percentage of their paychecks toward their pensions. Through collective bargaining agreements negotiated in recent years, state employees pay more toward their pensions – some up to 15.25 percent of each monthly paycheck.