Pensions in America

Pension fallout

Liabilities foreshadow bankruptcies

By Troy Anderson, Los Angeles Daily News, September 22, 2005

Years of bestowing lavish pensions and benefits on public employees has left dozens of the state's largest agencies with billions of dollars in unpaid liabilities that experts warn could start a cascade of bankruptcies, service cuts and tax increases.

According to a Daily News review of agencies in Los Angeles and across the state, California's largest public agencies face setting an extra $108 billion aside in the coming years to pay for promised retiree pensions, health care and workers' compensation claims.

That's a tenfold increase over the $10 billion the state Legislative Analyst's Office calculated among hundreds of public agencies statewide just three years ago.

"It's absolutely stunning," said Steven B. Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College. "We're just seeing the beginning of this. It's going to get worse, not better.

"Californians will suffer economically tremendously. Schools, roads, highways, bridges, sewers, water systems and expenditures of these kinds will have to be curtailed and more and more money will be channeled into these huge retirement obligations.

"It's one of the more stunning transfers of wealth in the history of the human race."

The unpaid bills, although they won't materialize all at once, are the result of generous benefits, mismanagement by elected officials, pressures from employee unions, stock market losses, and the longer life spans and pending retirements of tens of thousands of baby boomers, experts say.

And experts say the $108 billion is conservative, estimating it could soar as cities, counties, school districts and other agencies fully calculate the costs - especially retiree health care liabilities - under new federal accounting rules.

Los Angeles County alone currently has a total unfunded liability of $16 billion; Los Angeles city government, $3.2 billion; and Los Angeles Unified School District, $6.9 billion.

Then there's CalPERS - the state's public employee retirement system - with a total unfunded liability of $22.3 billion and the California teachers retirement system with $24.2 billion.

The debts represent the amount by which the liabilities of the retirement plan exceed its assets at any given time - which one expert describes "like an ever-growing family credit card balance."

"The bottom line is that many of these agencies are going to go bankrupt in the future," said former Los Angeles Mayor Richard Riordan, who in the 1990s helped reverse an unfunded liability in the Department of Fire and Police Pensions - now one of a handful of pension systems statewide with a surplus.

"It all goes back to the 1990s when we had the high-tech bubble and they improved the pensions for the bureaucrats in cities, counties and state government. It's ridiculous what we did.

"If you look at the dire predictions of the future of California and our tax revenues, you are going to have total fiscal disaster throughout the state."

In a series of interviews, elected officials, pension system administrators and pension experts agreed that some public agencies may face bankruptcy and will join San Diego - facing a $1.4 billion pension debt - in increasing fees and cutting services to cover ballooning costs.

"It's going to break the bank," said Bob Stern, president of the Center for Governmental Studies in Los Angeles. "There is going to have to be a whole review of this. Future contracts will have to be changed.

"When the money starts flowing to these retirees, as it will, it's sort of like the levees in Louisiana. We know it's going to happen, but are we planning for the future?"

And the debt is likely to come due soon as about half of all federal government employees and a third of California and Los Angeles County employees are expected to retire in the next five years.

Some agencies are expected to fare better with the issue than others, according to county Chief Administrative Officer David Janssen.

While the Board of Supervisors voted last week to further sweeten the health benefits package for current employees, Janssen said the unions agreed to some concessions including co-pays for hospital emergency room visits and medications.

"Los Angeles County, I think, is fully capable of dealing with the costs of these benefits," Janssen said. "The board has held the line all along on salaries and retirement benefits."

Still, the county grand jury recently said the debts will pose significant financial challenges in the years ahead.

And a Los Angeles city official, who requested anonymity, said the soaring annual contributions already have resulted in service cuts in the last two years.

"Certainly we're not in the shape of San Diego or other horror stories out there," he said. "The city may choose to start looking at some of these issues. On the health side, we may decide to limit subsidy increases. That hasn't been on the table yet, but it's something in our office we've kicked around a little bit."

Other public agencies around the state have already begun taking steps to reduce the unfunded liabilities.

In February, the Legislative Analyst's Office warned that the LAUSD's $6.9 billion unfunded retiree health and workers' compensation liabilities threatens its future ability to operate.

David Holmquist, LAUSD director of risk management and insurance, has presented a plan to the board to set aside $14 million annually for the next 30 years to offset the workers' compensation deficit.

He has also recommended the board hold a two-day retreat next year to come up with ideas and establish a task force to address the retiree health deficit.

"We are trying to look at all of the solutions, but obviously it starts at the bargaining table," Holmquist said.

California is not the only state facing this situation. Nationwide, taxpayers are exposed to more than $366 billion in unfunded public pension liabilities, according to a 2003 analysis of 123 state retirement systems by investment consulting firm Wilshire Associates.

That's more than double a $180 billion shortfall that was estimated just the previous year.

Combined with underfunding in private pensions, the promises made to retirees are projected to cost $700 billion more than the assets available to support them.

Some government and pension officials place most of the blame for the huge unfunded liabilities on the sharp decline in the stock market beginning in 2000, arguing that the funding ratios - at least for pension systems - will bounce back as the markets rise.

"All those straight-line projections don't reflect the ability to earn returns in the capital markets and they assume that everything that is today is going to be in the future on a consistent basis," said Rich Goss, director of the board of the 40-member California Association of Public Retirement Systems.

"We know from history that's not true. If we had this conversation in the mid-1980s, we'd be having the same conversation. If we had the conversation in 1997, the system was swimming in assets then."

But in a Reason Foundation think tank report issued earlier this summer, George Passantino argues that while market losses certainly played a role, the declines only unveiled the weaknesses in government pension systems.

"The fact that a retirement system could turn so quickly from investment nirvana to debt nightmares should give taxpayers and lawmakers cause for major concern," Passantino wrote. "At the heart of the pension crisis is a set of incentives that encourages policy makers to make decisions for which they do not have to bear the consequences."

And while stock market gains in the years to come may reduce pension debts, experts say retiree health care costs pose an even more serious problem because of rapidly escalating medical costs.

Fiscal Crisis and Management Assistance Team Chief Executive Officer Tom Henry - who helps public agencies deal with fiscal crises at the request of the Legislature - said many school districts and public agencies have not calculated their unfunded retiree health liabilities.

Experts say those debts will likely be in the tens of billions of dollars.

Statewide, 70 school districts provide lifetime health benefits, 134 provide health benefits beyond age 65, and 554 provide retiree health benefits up to age 65, according to a survey conducted by the team.

"In all districts we surveyed, they are paying as you go," Henry said. "So the (annual payments are) growing exponentially. In some districts it's doubling year to year. That seems mind-boggling. This is starting to drive all other decision-making in important operational areas.

"That's resulting in cuts to programs and services. The LAUSD is a perfect example. But they are actually, and this is to their credit, ahead of a lot of school districts in addressing this. So far, we've just seen the tip of the iceberg."

One lawmaker tries to keep pension issue alive

By Daniel Weintraub, Sacramento Bee Columnist, January 3, 2006

Keith Richman clearly is a man who doesn't give up easily. But the Republican assemblyman from Northridge might simply be ahead of his time in trying to bring attention to one of the biggest policy problems of the era: public employee pensions.

Richman authored the proposal embraced by Gov. Arnold Schwarzenegger a year ago this week and then abandoned by the governor after critics said it would have eliminated death and disability benefits for the survivors of law enforcement officers killed in the line of duty.

And while that pension proposal never went to a public vote, Schwarzenegger's debacle at the polls Nov. 8 suggests that high-profile fights such as the one that would be needed to enact retirement reform are not on the governor's to-do list for 2006, a year in which he will be running for reelection.

But Richman is charging ahead without his powerful patron, hoping to keep the issue in the spotlight long enough for the public to weigh in. Polls suggest that if the voters ever do get a chance to tighten benefits for public employees, they will be receptive to the idea.

It's not hard to see why. Benefit increases first approved in 1999 at the height of the technology boom in the stock market have become difficult to sustain, especially for local governments. It is now common for police officers and firefighters to retire with a pension equal to 90 percent or more of their final salary shortly after they turn 50. In many cities and counties, desk-bound workers can quit at age 55 and get 60 percent of their final salary for life, plus Social Security when it kicks in.

The early retirement ages at a time when life expectancy is lengthening mean that taxpayers are being asked to pay for two parallel work forces, one still on the job and the other that is retired and living off a pension for almost as long as they worked.

A recent Sacramento Bee review of the county of Sacramento's retirement records showed that at least 30 employees, mostly sheriff's deputies, had retired in 2004 with pensions of more than $100,000. As its pension costs have increased, the county has been borrowing to keep up with the payments. The cost of retiring those bonds has climbed from about $21 million a year to more than $50 million and expected to double again by 2014.

Sacramento's experience is not unusual. The problem can be traced to the competition among government agencies for employees. As one agency increases pensions, others follow suit to keep up, with policymakers often not blinking at the cost because it will be borne mainly by future taxpayers who are not around today to complain.

Richman's latest proposal would help remedy that by standardizing pension benefits statewide for new employees hired after July 1, 2007, forcing local governments to compete on salary, which has to be accounted for up-front and is far easier for taxpayers to understand. Agencies that wanted to offer pensions richer than the standard benefit would have to get voter approval to do so. It is no coincidence that the one large public agency that has such a requirement already - the city and county of San Francisco - also has one of the most solvent pension funds in the state.

The standard benefit that would be offered under the Richman plan is not exactly ungenerous. It would consist of two parts: a basic guaranteed pension and an individual retirement plan with employee contributions matched by the employer.

The guaranteed portion would provide a pension equal to 1.75 percent of pay multiplied by the number of years worked. For someone who worked 30 years, that would be about half their salary. The other portion of the retirement benefit would match money the employee set aside each year, up to 4 percent of salary. The normal retirement age would be 65.

Public safety workers would get 2 percent of salary for each year worked - plus their individual account - and could retire with full benefits at age 55.

"This proposal is a very fair proposal for the employee and also for the government and the taxpayer," Richman says.

The keys to the proposal are the higher retirement age, which allows money invested for and by the employee to compound over a longer period of time, and the transparency provided by a standard formula that can't be tweaked after a backroom deal that voters never see and ends up costing millions. The individual accounts, meanwhile, would be a boon to employees who go into and out of the workforce or change jobs, giving them a benefit they could take with them rather than forfeiting much of their potential pension when they leave government service.

Public employee groups that prefer the status quo are already fighting Richman's plan, however, and they have the clout to stop it cold in the Legislature. But that won't make the problem go away. If and when it is ever addressed, Richman should get some credit for doing everything possible to keep the issue alive.

Deals So Sweet They'll Kill Us

By Steve Lopez, Los Angeles Times Columnist, January 23, 2006

Worried about your 401(k) tanking in your golden years?

You should become a cop.

Ticked off about your company yanking healthcare benefits in retirement?

Get a teaching job.

If you hadn't already noticed, while the rest of us watch our retirement benefits shrivel up and blow away, public sector retirement deals are sweeter than ever. And we're footing the bill.

Pension loophole aids fire managers

Their state retirement pay may far surpass their working wage

By John Hill , Sacramento Bee, April 23, 2006

A quirk created this year in California's pension law allows state firefighting supervisors to be paid significantly more in retirement than they earned on the job, the state retirement system says. The loophole could theoretically allow some supervisors to get retirement pay as much as 180 percent of their working salary.

No one expects pensions to hit that level. But the state already is paying pensions for some firefighting supervisors that exceeds their salaries. "Even if only one person gets it, it's wrong," said Ronald Roach, spokesman for the California Taxpayers' Association, a longtime critic of what it considers to be overly generous state pensions.

The loophole opened when the state, starting this year, gave rank-and-file firefighters a richer pension than the one received by fire supervisors, based on an agreement five years ago under then-Gov. Gray Davis.

Because most supervisors came up through the ranks, their retirement is now set by two separate sections of retirement law.

Each section limits pensions to 90 percent of salary. But the California Public Employees' Retirement System says the fire supervisors with rank-and-file experience can add the two caps together.

It's uncertain whether the anomaly will stand. Gov. Arnold Schwarzenegger could close the loophole by doing what the state had avoided in the first place - granting supervisors more lucrative pensions that match those of the firefighters they supervise.

But a dozen or so fire supervisors already have qualified for pensions higher than the cap, said Pat Macht, a Cal-PERS spokeswoman.

Some pensions are as high as 115 percent of salary, Macht said.

If Schwarzenegger closes the loophole, CalPERS would have to evaluate what it is legally required to do about the higher pensions already granted.

Terry McHale, a spokesman for CDF Firefighters, said it's not certain that the state will be able to recover the money already paid out for the pensions greater than 90 percent or even take them away in the future from those who already got them.

The union, which doesn't represent the supervisors but maintains a relationship with them, warned the administration earlier this year about the quirk, McHale said.

"It's a ridiculous situation," he said. "The union never sought any type of retirement that exceeded the 90 percent."

The union believes that the supervisors, who get paid less than those they supervise, deserve the richer pension that the rank-and-file started getting this year, McHale said. Many still work in physically demanding jobs on the fire lines, he said.

He said the "mean-spirited" decision to withhold it from them could create a serious problem at the onset of the fire season, as experienced supervisors retire to take advantage of the loophole.

The oddity has its origins in a decision five years ago by Davis and the Legislature to grant prison guards and firefighters the most lucrative retirement formula.

Under the formula, state public safety workers get pensions at age 50 that add as much as 3 percent of their highest annual pay for each year worked, with a cap of 90 percent.

The policy of giving public safety workers richer pensions was originally meant to encourage those whose jobs require physical fitness to retire early. But over time, a growing number of state workers were granted special pensions - from one in 20 in the 1960s, to one in three today.

In many cases, the special retirement has been given to workers, including managers and supervisors, whose jobs are not unusually physically demanding.

Under the labor agreement five years ago, firefighters and prison guards were given the "3 at 50" pension formula beginning this year. Past service is counted retroactively at the better rate.

The deal, however, left open the question of what to do about those who supervise and manage firefighters and prison guards. They currently get a less attractive deal - 3 percent of highest pay for each year worked, but not until the age of 55.

The state has often extended special public safety enhancements to managers and supervisors, reasoning that rank-and-file workers would not seek promotion if it meant giving up better pensions.

But earlier this year, the state Department of Personnel Administration initially decided against granting the "3 at 50" pension to bosses in prisons and firefighting.

Instead, the personnel department said it would propose legislation giving those supervisors the better pension only if they contributed a bigger share of their salary to the retirement system, according to a Jan. 12 memo, from the current 8 percent to 10 percent.

Two months later, however, the administration reversed course for the prison supervisors, but not the firefighting bosses, giving them "3 at 50" without a requirement that they kick in more money.

That move will cost the state $5.7 million a year, in addition to the $25.5 million for rank-and-file correctional officers, Cal-PERS estimates.

Fred Aguiar, Schwarzenegger's Cabinet secretary, said that without the pension bump, "you can't get the best and the brightest and the most qualified to apply to be supervisors." The administration's hand was forced, he said, by the earlier decision by Davis and lawmakers to grant the more lucrative pensions to rank-and-file prison guards and firefighters.

Schwarzenegger so far has not granted the same pension increase to fire supervisors. If he does, it will cost the state another $400,000 a year, CalPERS says, on top of the extra $4.4 million for rank-and-file workers.

The lack of action means that some supervisors qualify for pensions under two separate sections of the law, each with its own 90 percent limit.

"In these circumstances, a member may receive a retirement benefit that exceeds 90% of final compensation," Fred Buenrostro, CalPERS chief executive officer, wrote in an April 7 letter to CDF Firefighters.

Roach, the taxpayers' association spokesman, said the situation shows that the state still has not drawn the line on public pensions, despite widespread criticism in recent years of the high costs to taxpayers.

He blames CalPERS for an interpretation of the law that allows fire supervisors to exceed the 90 percent cap.

"CalPERS is like the fox guarding the henhouse on this," he said. "They will almost always come down on the side of granting more retirement benefits. They're basically under the thumb of the public employee unions."

Macht responded that CalPERS is merely following the law.

Roach pointed out that, even if Schwarzenegger closes the loophole, fire supervisors will win the most lucrative pension.

"It's a win-win for them - and a lose-lose for the people who are writing the checks," he said.

Tax cost soars to pay retired public workers

Liability is likely to climb

By Troy Anderson, Los Angeles Daily News, January 16,2007

California taxpayers forked out $10.2 billion for public employee pensions in 2003-04 and are likely to face even greater liability in future years, according to a study released Monday.

The study prepared for the Howard Jarvis Taxpayers Association by the Center for Government Analysis at Newport Beach analyzed 130 public pension systems statewide and found taxpayer outlays doubled from 1997-98 to 2003-04.

"State and local governments are going to have to put more money into these systems and that means less money for police, less money for teachers, less money for schools, less money for roads, less money for parks and less money for libraries," said Steve Frates, president of the center.

"The total payout to retirees up and down the state was $20 billion in (the 2003-04 fiscal year). ... That's twice the amount of money we spend on police services."

Spiraling pension payouts pose threat

Costs for retired public employees could reach 'critical mass' and cut into government services

By Catherine Saillant, Los Angeles Times, February 8, 2007

Retirement costs for public workers in some of California's largest cities and dozens of others across the country are far outpacing inflation and will reach "critical mass" in a few years unless changes are made, Wall Street analysts are warning.

In two reports made public Wednesday, Moody's Investors Service outlines retiree costs in 55 cities, including eight in California: Anaheim, Fresno, Long Beach, Los Angeles, Oakland, San Diego, San Francisco and San Jose.

Though pension expenses have risen significantly in recent years, the cost of providing healthcare benefits to retirees is going up even faster, the reports conclude. On average, they have risen 15% a year while inflation has hovered around 3%, the reports said.

The rising costs "could reach a critical mass" where they are eating into general funds used to run libraries, pave roads and provide education, said Moody's, a credit rating agency.

Former state Assemblyman Keith Richman, a longtime pension reform advocate, said the reports back up what he has been saying for years.

"What Wall Street is doing is sounding the alarm again," he said. "When they talk about these costs reaching a critical level where pensions are competing with current operations for funding, we ought to pay attention."

Moody's prepared the reports in response to market concerns about the effect of the growing pension debt, said Moody's spokesman Richard Helgason.

In San Diego, pension officials face charges of conflict of interest, conspiracy and fraud for allowing the city to under-fund its pension system, which now has a deficit of at least $1 billion.

Fearful of another such debacle, investors want full disclosure of current and future funding obligations when deciding whether to invest in municipal bonds.

Later this year, governments will be required for the first time to report current and future healthcare costs, in addition to pension debt, in annual financial statements.

The new reporting standards are expected to provide a clearer picture of what has been promised to workers and how public entities intend to pay for them, said Douglas Benton, a Moody's vice president based in Houston.

"There was not a lot of consistency in disclosure," Benton said. "This makes a level playing field to discuss expenses and liabilities."

The report on healthcare benefits for retirees shows that they rose an average of 15% a year over five years ending in 2005. Oakland had the largest annual average increase — 45% — of the 55 cities surveyed nationwide, the report said. Oakland's annual payout for retiree healthcare rose to $2.6 million in 2005 from $600,000 in 1997, Moody's reported.

As for pensions, Moody's found that the funding ratio of pension trusts has steadily dropped since 1999. In a well-managed trust, the funding ratio should hover close to 100%, meaning there is enough money to cover all of its pension obligations.

In 1999, the median funding ratio of the 55 cities surveyed was 103%, an actuarial surplus that has since disappeared. By 2004, the funding ratio was 84%.

Dwight Burns, a Moody's analyst, said state and local governments could prevent fiscal crises by taking steps to fully fund trusts.

Moody's did not make recommendations, but pension reform advocates have suggested potential fixes such as reducing benefits for new hires and increasing employee contributions.

A bipartisan panel created by Gov. Arnold Schwarzenegger is expected to meet this year to come up with recommendations.

CalSTRS warns on divestments

Fund's trustees vote to oppose legislative efforts that would ban investing in Iran or terrorist countries

By Gilbert Chan, Sacramento Bee, April 6, 2007

The California teachers' retirement board Thursday issued a stern message to lawmakers: Stay out of the money management business.

Warning that sweeping investment bans sought by the Legislature could threaten financial returns for retired educators, trustees of the California State Teachers' Retirement System voted to oppose any blanket divestment bills.

"None of us is for terrorist countries," said Anne Sheehan, board representative for state finance director Michael Genest, but she warned a broad Iran investment ban could wreak havoc in the fund's $163.5 billion portfolio. "We're talking about Coca-Cola, Microsoft. It is amazing what we would have to divest."

The board's stand amounts to a pre-emptive strike against two measures introduced this year in the Capitol that call for California's massive public pension funds to shed holdings in Iran and terrorist states. The Iran bill is Assembly Bill 221 by Assemblyman Joel Anderson, R-Alpine, while Bakersfield Republican Sen. Roy Ashburn wants to ban investments in terrorist states with Senate Bill 461.

"This will cost the fund money," said Trustee Jerilyn Harris. "We could be looking at what could become a political football."

Anderson said he wasn't surprised by CalSTRS' position and vowed to press ahead.

"Nobody likes to be told what to do," Anderson said. But "investing in Iran is still a bad idea. Iran is definitely on a collision course with the rest of the world."

CalSTRS' opposition comes a year after trustees bowed to pressure from politicians and student activists and agreed to divest Sudan-related investments because of mass killings in the African nation's Darfur region.

The Legislature last summer followed up with a Sudan divestment law targeting the CalSTRS fund and the California Public Employees' Retirement System, which has more than $230 billion in assets.

Unlike Sudan in which the funds have limited investments, the two latest divestment bills could force the pension systems to shed billions of dollars in investments. Officials said Florida, for example, estimates divestment could cost its pension funds $800 million a year in lost financial returns.

"It is extremely broad. Most of our portfolio is multinational companies. It would be impossible to find alternative investments," said CalSTRS chief investment officer Christopher J. Ailman.

As the nation's two largest and most influential public funds, CalSTRS and CalPERS are often lobbied by activist groups to pull investments from specific companies or countries because of questionable political, social or business practices. The pension funds have divested in only rare instances -- to protest apartheid in South Africa or the health ills of smoking.

The Sudan law requires divestment if companies are complicit in the genocide in that country. The law outlines a process that includes meeting with executives of targeted companies and searching for alternative replacements in the fund's portfolio before any holdings are sold off.

Trustees voted to oppose the Anderson and Ashburn bills, unless they are amended to include the fund's legal and investment standards.

Last week, AB 221 passed in the Assembly Public Employees, Retirement and Social Security Committee.

Anderson said 17 organizations, including taxpayer, labor and Iranian American groups, have backed his effort.

Nationally, Missouri has adopted an Iran divestment policy while New Jersey, Florida, Texas, Wisconsin, Ohio and Georgia are considering similar proposals on terrorist states.

In other action, trustees voted to oppose a proposal by Gov. Arnold Schwarzenegger to cut the state's contribution to an inflation-protection fund for older retired teachers.

The governor proposes to make the benefit permanent in exchange for a lower state contribution, estimated at $75 million next fiscal year. The board said the lower payment could create a long-term shortfall because of inflation.

CalPERS considers ways to cut health care benefits and costs

By Gilbert Chan, Sacramento Bee, April 18, 2007

Slap on a penalty for excessive emergency room visits. Give rebates for using urgent care centers. Waive co-payments for colon screening.

With major changes in health benefits in the offing next year, state pension board trustees got an earful of suggestions Tuesday from employers, labor leaders and retiree advocates looking to ease the financial burden for the system's 1.2 million health plan members.

The lobbying, coupled with new financial information, prompted a key panel of the giant California Public Employees' Retirement System to postpone a decision to raise insurance co-payments, create a new network of doctors and pull Blue Shield of California HMO coverage from four rural counties.

The delay also will let CalPERS officials get more feedback during a town hall meeting at 6 p.m. May 9 at the Crest Theatre in downtown Sacramento. The Service Employees International Union Local 1000 is organizing the session.

"We need more time to analyze the data," said George Diehr, CalPERS Health Benefits Committee chairman. "It would be inappropriate to make decisions without having the opportunity to speak with members. There is a lot of misunderstanding out there."

As health care prices continue to climb, CalPERS has faced increasing pressure to find ways to keep premiums under control for employers and employees.

"The health care plans are not as secure as our pensions. There is no silver bullet," said Diehr. "Unfortunately, there is no doubt there will be some situations in which lower-paid (workers) with large families will feel some pain."

Government officials from El Dorado County, one of the four rural counties that could lose Blue Cross HMO coverage, called on CalPERS on Tuesday to explore other health alternatives for 3,000 employees there.

Blue Shield wants to pull out of El Dorado, Napa, Lake and Plumas counties, a move that would affect 8,500 state and local government workers as well as 600 retirees. Health plan officials said the cost of health care for these four counties is 78 percent more than the statewide average for CalPERS.

The withdrawal would bring savings, however, estimated at $30 million. It would reduce the premiums for more than 350,000 other Blue Shield members by 2 percent.

Placerville Vice Mayor Carl Hagen said the pullout will be a hardship for government workers, especially those living in remote areas of the county.

CalPERS' other HMO offerings -- Kaiser Permanente and Western Health Advantage of Sacramento -- would force families to drive up to two hours to hospitals in Folsom or Roseville.

Trustees are considering raising co-payments for prescription drugs, doctor visits and emergency room care and waiving co-pays for preventive care such as annual physicals. These changes could save about $66 million a year.

Teachers' pension plan narrowed its shortfall, but is still about $19.6 billion below its obligations

By Gilbert Chan, Sacramento Bee, May 26, 2007

Surging stock markets and three straight years of strong investment returns have pared billions from a long-term pension shortfall plaguing the California State Teachers' Retirement System in recent years, but it's not enough.

The state, school districts and teachers still will be forced to dig deeper into their pocketbooks to erase a projected $19.6 billion gap over the next three decades, according to a new report for the nation's second-largest public fund.

Moreover, coming up with the money won't be easy and should stir debate in the coming year as lawmakers, school administrators and educators grapple with cash-strapped budgets and financing future retiree health care liabilities likely to top $100 billion in California. At the same time, Gov. Arnold Schwarzenegger also has convened a special commission exploring public employee pension benefits.

"Everyone has competing priorities," Jack Ehnes, CalSTRS chief executive officer, said Friday. "We've embarked on an intense education effort with our stakeholders and the Legislature."

The CalSTRS analysis, prepared by the actuarial consulting firm Milliman, shows the giant fund's financial outlook improved slightly at the end of fiscal year 2006 as the nation's second-largest public fund continued to rack up double-digit percentage annual investment gains, including a 13.2 percent return in '06.

The results have cut the long-term deficit to $19.6 billion, compared with $20.6 billion in 2005. That's an improvement from a $24.2 billion funding gap in 2004.

Milliman said CalSTRS, with nearly 800,000 members, has enough assets to cover 87 percent of its pension obligations decades from now -- up from an 82 percent rate in 2003. By comparison, the average for 125 state retirement systems is 88 percent, according to a 2007 report by Wilshire Consulting.

"I'm encouraged by the progress," said Dana Dillon, CalSTRS board chairwoman. "But it's not going to take care of it."

For years, CalSTRS officials have said the $168 billion fund isn't likely to generate a steady stream of big investment returns to wipe out the shortfall -- even with a more ambitious strategy such as shifting about $11 billion from lower-yielding corporate bonds and mortgages into high-risk, high-reward private markets such as real estate and venture capital.

The consultant's report said CalSTRS needs a 3.3 percent boost in annual pension contributions to wipe out the deficit. Currently, school districts pay 8.25 percent of payroll toward teacher pensions, while the state puts in 2 percent and teachers contribute 8 percent of their pay.

In December, trustees backed a legislative measure to increase contribution rates in 2009 while leaving benefits intact. The proposal calls for raising the teachers' rate to 8.5 percent while gradually increasing the state's portion to a maximum of 3.25 percent. The school district contribution would slowly rise and be capped at 13 percent.

For decades, CalSTRS fell well short of having enough money to meet its future obligations. In 1975, for example, the pension plan was 29 percent funded. Four years later, the Legislature passed a law creating a state funding formula to bridge the pension gap. The change and the historic bull market of the 1990s helped CalSTRS build a surplus by 1998.

Flush with that cash, lawmakers approved $11 billion in sweetened benefits and a smaller state contribution in 2000. The moves came just before stock market losses began piling up, and CalSTRS turned in a subpar investment performance.

The teachers' fund cannot change contribution rates without approval of the Legislature.

Former Assemblyman Dave Elder, who authored the CalSTRS funding plan in 1979, favors higher school district contributions.

"I don't think the state can pay any more," he said. "Some of the districts are well off."

Health costs hit teachers

CalSTRS report sees no end to rising rates squeezing retirees

By Gilbert Chan, Sacramento Bee, June 1, 2007

Teachers are taking an increasing amount of money out of their own wallets to cover the cost of health care in retirement -- and that trend will escalate, according to a survey by the California State Teachers' Retirement System.

While many educators receive Medicare, that plan does not cover vision, dental or all pharmaceutical needs. Consequently, many senior citizens must buy supplemental coverage and pay for their own drugs.

Thousands of California educators have seen school districts pare or even eliminate retiree health benefits in recent years, according to the CalSTRS survey, presented in detail Thursday in Rancho Cucamonga to Gov. Arnold Schwarzenegger's special Public Employee Post-Employment Benefits Commission.

The survey results will come as another burr under the saddle to the state's teachers, who frequently contrast their health benefits to those offered by the California Public Employees' Retirement System.

That pension agency manages a $5 billion health care program for 1.2 million state and local government employees, including non-teaching workers such as custodians, bus drivers and office staff employed by school districts. CalPERS members receive lifetime health benefits.

Faced with surging health care costs, Lee Jernigan scaled back vacation travel and sold his 24-foot recreational trailer.

Since retiring in 1988, his teacher's pension check couldn't keep pace with the steady rise in insurance premiums, which more than doubled to $842 a month.

"Our premiums were more than we can handle. We were finding we had to cut back on a lot of things," said Jernigan, an 83-year-old retired junior high math science teacher and school administrator from Oroville.

Medical benefits have eroded as medical inflation surged and new accounting standards force districts to list on their books future obligations for retiree health benefits.

These obligations translate into liabilities that can send a district's budget into the red and potentially hurt its credit rating, meaning the cost of issuing bonds could rise.

A similar accounting mandate for private companies led to a dramatic cutback in retiree health benefits in the early 1990s. For example, 66 percent of employers with at least 200 workers offered health coverage for retirees. The rate plunged to 46 percent in 1991 and had declined to 35 percent by 2006, according to the Henry J. Kaiser Family Foundation.

"The costs are certainly a major pressure on employers. While many continue to offer it ... many firms are cutting back on the generosity of those benefits," said Michelle Kitchman Strollo, a principal policy analyst at the Kaiser Family Foundation in Washington, D.C.

She said governments are likely to feel the same economic squeeze soon. In an interview Thursday, Jack Ehnes, chief executive officer of CalSTRS, confirmed that they are. Ehnes runs the nation's second-largest public pension fund with nearly 800,000 members.

"The employer support is weakening for health care coverage for retirees 65 and older," he told The Bee before presenting the CalSTRS survey to the benefits commission. "There are a lot of signs that show the out-of-pocket cost for retirees ... is going to go up."

Appearing before the commission, Ehnes reported the fund's survey found in 2006 that only 14 percent of school districts pay for health benefits for retired teachers after age 65, down from 22 percent in 2003.

Roughly, 62 percent of retirees had to pay for their own health coverage, including supplemental Medicare programs. That compares with 40 percent in 2003.

The Schwarzenegger benefits commission is reviewing the financial consequences of future pension and health care liabilities facing school districts, the state and other public agencies.

"There are a lot of teachers having trouble," he said. "Most of the HMOs in the rural counties have left. It means they are paying high premiums."

CalSTRS, which has about 182,000 retired members, has created a special task force exploring proposals that could create a statewide employer health benefits pool and reduce the financial strain on retirees. In California, health coverage for teachers is provided separately through the state's 1,110 individual school districts.

On average, teachers retire at age 61. That means those without employer health benefits must pay for their own insurance until they become eligible for Medicare.

Some districts such as San Juan Unified provide coverage until retirees become eligible for Medicare at age 65. A handful offer lifetime benefits while others provide no benefits for retirees.

Pension initiative planned

Richman seeks 700,000 signers

By Troy Anderson, Los Angeles Daily News, June 25, 2007

Hoping to eliminate the need for hundreds of billions of dollars in new taxes to bail out state pensions and health care benefits, former Assemblyman Keith Richman will ask voters to raise retirement ages for teachers, police officers, firefighters and other public employees.

Warning that continued inaction will bankrupt the state, Richman said Monday his plan would save $500 billion over 30 years.

"If we just keep going the way we are going, not only are some government entities going to go bankrupt and cut services, but in all likelihood there will be the need for billions of dollars in new taxes throughout the state of California," he said.

Richman's Public Employee Benefits Reform Initiative, which he has filed with the state, needs about 700,000 signatures to qualify for the ballot. Under the plan, all new public employees except those in public-safety jobs would have to work until age 65 to 67 - and police officers and firefighters would have to work to age 55 - to receive full pension benefits. Depending on years worked, some safety agencies in the state have a lower age for full retirement.

Richman's plan would apply to all new employees in state and local government, special districts, school districts, and the California State University and University of California systems beginning July 1, 2009. If enough signatures are collected, the initiative would go on the ballot in November 2008.

SEIU opposed

Public employees unions were quick to blast Richman's plan. Elizabeth Brennan, a spokeswoman for Service Employees International Union, Local 660, which represents more than 50,000 Los Angeles County employees, said the proposed initiative would be unfair.

"We think this punishes teachers, nurses and other public employees by cutting pensions and taking away health care for those who choose not to or can't work until age 65," Brennan said. "What we really should be looking at is ... to make sure there is quality, affordable health care for everyone."

Many city, county and state government agencies awarded unions generous benefit packages in the late 1990s when the stock market was hot. Today, unfunded pension liabilities threaten to bankrupt some municipalities and increasingly concern state officials. One concern is that money needed for education and other public services increasingly goes toward pensions and retirees' health care benefits.

Richman, a Granada Hills resident, heads the California Foundation for Fiscal Responsibility. He said current unfunded pension and health care liabilities, for all city, county and state workers, range from $200 billion to $300 billion.

"With more than $200 billion in retirement debts and skyrocketing costs crowding out the investments we need in education, health care, transportation, public safety and the environment, it is time for a statewide solution to our retirement-benefits crisis," Richman said.

In addition to estimates that it would save $500 billion over three decades, savings would be generated by requiring new employees to wait until they reach Medicare-eligibility age before supplemental retiree health benefits begin.

But J.J. Jelincic, president of the 140,000-member California State Employees Association, said Richman and others exaggerate the state's pension problems.

"The fact is there is no pension crisis in California. Even the Wall Street Journal admitted recently that most pension plans are now `healthy,' thanks to several years of double-digit investment gains and rising interest rates. Our state's largest public pension fund, CalPERS (California Public Employees' Retirement System), recently exceeded $250 billion in assets, an increase of more than $100 billion in just the past decade," Jelincic said. "CalPERS is more than 93 percent funded. Some county and municipal funds are more than 100 percent funded."

But local government officials are not as optimistic.

"Municipalities not only gave attractive benefit increases when investment markets were on fire, but they also made minimal contributions to the pension plans during those good times," said Orange County Supervisor John Moorlach, a Richman plan backer. "Our initiative stops this fiscally irresponsible practice."

2005 plan killed

In 2005, Richman proposed switching public employees to 401(k)-style retirement plans, a proposal unions attacked with advertising claiming it would deny benefits to widows and orphans of police officers and firefighters. After initially proposing to place the matter on the ballot, Gov. Arnold Schwarzenegger dropped it from a series of government-reform measures.

"The only opposition we've heard so far is from union bosses, who are against any changes and who want to continue to stick their heads in the sand and ignore this problem," Richman said.

Ted Costa, the People's Advocate group chief executive who helped spearhead the recall of former Gov. Gray Davis, said today's children will pay for what he calls bloated pensions and overly generous health care plans through higher taxes and reduced government services in the years ahead.

"The older generations decided to put the screws to the young people," Costa said. "I'm totally ashamed of my generation for doing this. The public pension system is being destroyed from within, and most politicians are afraid to step up to the line and say what needs to be done. This will probably only be the beginning of a movement that will happen in California until we have a sane public pension system in this state."

Richman refines pension measure

Capitol Alert, Sacramento Bee, January 07, 2008

Former Assemblyman Keith Richman, who has long argued that the state employee pension system is costing taxpayers too much, is re-writing an initiative that would scale back pension benefits for new government employees.

Richman said he plans to make some minor changes and refile the initiative in the next couple of weeks. His California Foundation for Fiscal Responsibility would then have to gather enough signatures by the end of April to qualify it for the November ballot.

Richman admitted that the timeline is tight, but said he will continue to pursue the initiative even if it doesn't qualify for November.

"We're in this for the long run," he said.

Among the changes Richman said he would make are allowing miscellaneous employees to retire with full benefits at the current age of 65, instead of tying it to Social Security eligibility, which can be as high as 67. He said he's also removing some provisions having to do with retiree health care.

But he said it will preserve the major components of the initiative his foundation filed in June. It would, for instance, slash the pension pay-out for new government employees who also qualified for Social Security from the current 2 percent of pay for each year worked to 1 percent.

Those who didn't qualify for Social Security would get 1.5 percent. Peace officers and firefighters would qualify for 2.2 percent of pay for each year worked at the age of 55. Under the current system, the state and many local governments pay public safety workers 3 percent at age 50.

2 teachers sue union over retirement plan

The National Education Assn. is accused of getting a kickback for touting a costly offering

By Kathy M. Kristof, Los Angeles Times, July 17, 2007

The National Education Assn. faces a federal lawsuit accusing it of breaching its duty to members by recommending a high-cost retirement plan in exchange for millions of dollars from the managers of the plan.

The suit, which seeks class-action status, was filed by two of the 57,000 schoolteachers who the suit says invested $1 billion in a so-called 403(b) retirement plan endorsed by the NEA.

The suit says the teachers were lured to invest in the plan by assurances that the NEA "conducted an extensive review of numerous financial services companies to find the best provider." But the NEA's member benefit unit "received millions of dollars … as the quid pro quo for NEA's exclusive endorsement," the filing says.

The money received by the NEA ultimately came from its members' pockets, according to the suit, through "excessive" fees charged by plan providers Nationwide Life Insurance Co. and Security Benefit Life Insurance Co. The fees reduced the returns earned by the teachers who invested in the plan, the suit claims.

Nationwide and Security Benefit were also named as defendants, as were the NEA's benefit unit and its directors. All of the defendants declined to comment on the suit, filed last week in U.S. District Court in Washington state, saying they had not received a copy of the filing.

The suit, which liberally quotes from a Los Angeles Times article about lucrative union endorsements of teacher retirement plans, is unusual in that it is among the first to contend that a teachers union could be considered liable for a bad retirement plan under the Employee Retirement Income Security Act, which governs retirement plans in private industry.

The act requires employers to act in their workers' best interest when screening retirement plans. School districts have largely escaped those dictates because the law says that if a district makes retirement plans available but doesn't encourage membership in any particular one, it does not have to meet the same duty of care as other plan sponsors.

The suit, however, says the NEA, by endorsing, marketing and selling a retirement plan, became both sponsor and administrator to the plan's participants.

The lawsuit asks that the fees paid to the NEA be returned to the participants. The amount of damages would be determined in court, said Jeffrey Engerman, a Los Angeles attorney who is representing the plaintiffs.

The case was brought by teachers David Hamblen of Diamond Springs, Calif., who works for the El Dorado Union High School District, and Jerre Daniels-Hall of Port Orchard, Wash.

Orange County considers taking back pension hike

By Daniel Weintraub, Sacramento Bee Columnist, August 9, 2007

Ever since the Legislature, former Gov. Gray Davis and local governments across California boosted pensions for public employees amid the stock market boom early in this decade, critics have been looking for ways to reduce the cost of those benefits to the taxpayers.

A rollback has always been unlikely, given the influence of public employee unions on the political process. But almost everyone seemed to agree that any changes that did occur could apply to new employees only.

Current employees and retirees who had been given higher pensions, and then made life-changing decisions based on those payments, were considered safe.

Until now.

The Orange County Board of Supervisors voted late last month to consider taking back a pension increase granted to public safety employees in 2001 -- on the grounds that a portion of that increase represented an unconstitutional debt and an illegal gift of public funds. The reduction would affect sheriff's deputies and other safety employees who are still working, and hundreds who already have retired.

If the board follows up next month and actually votes to cut the benefits, the case will be watched around the state, and probably across the country. Hundreds of other public agencies in California did the same thing that Orange County did. If it turns out that their actions were illegal, those agencies might have no choice but to undo them.

At issue are retroactive pension hikes that cities and counties gave to public employees at the same time that they increased benefits generally.

The broader benefit increases are not in question here because they were financed by future contributions to the retirement funds from employees and the taxpayers, and investment earnings on those contributions.

But the retroactive benefit increases were a windfall, especially to workers who had already put in a long career and were ready to retire.

In Orange County's case, the county increased pension benefits by 50 percent for public safety employees in 2001. Under the former system, a sheriff's deputy who retired after 25 years with the county would get a pension equal to 50 percent of his pay. After the change, that same deputy gets a retirement check equivalent to 75 percent of his final salary.

For a deputy earning $70,000 a year at retirement, the change meant the difference between a pension of $35,000 a year and one totaling $52,500 a year.

Deputies can retire at age 50, which means they can draw on their pensions for decades. Over the projected lifetime of such a retiree, the benefit boost would mean the county has to invest an extra half-million dollars in the pension fund to cover the cost. And all of that money would come from the taxpayers.

John Moorlach, the Orange County supervisor who is pushing the board to consider repealing the benefits, said the county might not have a choice -- if the retroactive portion of the benefit increase is found to be illegal.

"You really can't encumber your municipality with a debt you can't pay in the year you create it," he said. "Otherwise, you have to go to your voters and get a two-thirds approval." On top of that, he added, the retroactive benefits represented an illegal gift of public funds to the employees who are receiving them.

"You didn't vest, you didn't work for it," Moorlach said of those employees. "You agreed to work for a salary and a pension package. You worked all those years and at the end they said, 'Hey, we're going to give you a new formula.' If you give it retroactively, it's like a bonus. You can't give bonuses. You can pay someone only what they agreed to be compensated."

Moorlach isn't seeking to take back any money already paid out to those retirees. But he would have the county end the portion of the higher payments that was based on years of service an employee accrued before the benefit increase was granted. As an alternative, current and future employees in the same labor group, in this case deputy sheriffs, could agree to pay a higher contribution rate to cover the cost of their brethren's benefits.

Public employee labor unions oppose the change and argue that Moorlach's legal analysis is flawed. That's not a surprise. But they have been joined by Sheriff Mike Carona and District Attorney Tony Rackaukus, who argue that the course on which the board has embarked would be unduly harsh.

Moorlach, however, has been a one-man early warning system before. In 1994, as a private citizen, he complained that Orange County's treasurer had invested too much of the county's money in risky securities. He was roundly ignored by the county establishment, but he turned out to be right. A few months later, the investment fund collapsed and the county was bankrupt.

If Moorlach is right on the pension issue, not just Orange County but counties and cities all over California -- and their retirees -- are going to be in for a rude shock.

Losers Win and Winners Lose

A study of teacher pension plans finds perverse incentives for retirement

By Thomas Donlan, 2007

FOR AS LONG AS WE HAVE BEEN CRITICIZING the American private pension system for its excessive reliance on the good will of corporate employers, we have failed to give proper attention to the government employers who operate under the colors of 50 state flags and untold numbers of counties, municipalities and school boards.

In our critiques of the private defined-benefit pension system, we have noted the tendency of corporate sponsors to regard pension trusts as savings accounts of last resort. However, a company in financial trouble is likely to get in worse trouble by playing games with the pension fund, not least because the federal government's Pension Benefit Guaranty Corp. insures basic benefits for retirees.

Local and state governments cannot get into this kind of trouble, because there are no federal funding standards for government-sponsored pension systems. What's worse, their pension plans are not insured -- governments can always call on the resources of their citizens through the power to tax. And standards of financial disclosure are lax, again because the taxpayers are assumed capable of bearing any burden for the comfortable retirement of their public employees.

Lifting the Rug

Robert Costrell of the University of Arkansas and Michael Podgursky of the University of Missouri wondered what foolishness had been swept under the rug by state governments operating defined-benefit pension plans for teachers. They recently reported on the problems they found in an article for Education Next, a periodical published by the Hoover Institution at Stanford University.

Costrell and Podgursky have gone well beyond the sad fact that many state teachers' pension funds have liabilities much larger than the assets collected to pay them -- but we won't fail to mention that in 2006, California was in the hole by $19.6 billion, Missouri was unfunded by $5.2 billion, Ohio by $19.4 billion and New Jersey by $10 billion. (The federal PBGC last week reported a mere $13 billion deficit for all the failed private plans under its control.)

Costrell and Podgursky have added to our understanding and our dismay by digging into the terms of some of the state teachers' pension plans, finding that they offer perverse incentives that are not in the interests of the funds, the teachers or the school districts that employ them.

In most states, teachers pay into state pension trusts through a payroll deduction, and that's matched by contributions from their school districts. In Ohio, for example, teachers are assessed 10% of pay and their school districts pay another 14%. At first this adds no value for teachers, but after five or 10 years of service, depending on the state, the teachers become vested in pension benefits payable at a specific age, such as 60 or 65, on a formula using final salary multiplied by a percentage that grows with the number of years of service. Such systems are "back-end loaded" -- senior teachers earn the bulk of their pension wealth on the higher salaries that they earn toward the end of their careers.

So far, this is pretty much like the pension system that was known and admired in the private sector, until employers found they couldn't afford it. But most state teachers' pension plans have early-retirement incentives and pay a cost-of-living escalator.

An Ohio teacher can work for 24 years accumulating benefits that would be paid starting at age 60, if he quit or retired at any time in those 24 years. But on working a 25th year, the teacher suddenly becomes eligible for retirement at 55, gaining five years of benefits in an instant. Missouri uses a "rule of 80," permitting retirement when age and years of service add up to 80, as long as the teacher is over age 45.

Such features have been seen in private plans, but they are more powerful when there is an inflation adjustment in benefits. That's a feature almost never seen in private pensions, which of course are sponsored by entities lacking the power to levy taxes on their customers.

It may be necessary to be an actuary or a math teacher to calculate the present value of a future stream of payments, especially if the future stream of payments is of uncertain size. But for every English teacher who is not clear on the concept, there is a math teacher in the school and a local union representative and a human-relations expert in the district office who understand it very well, and will explain it until the English teacher gets it:

"Now that you have taught for 10 years, you should hang in there to make 25, even if you hate your job, because there's a lot of money coming to you if you stay." Or:

"Now that you have reached the age of early retirement, staying with the job you love and do very well is just like tearing up thousand-dollar bills and throwing them out the window."

Losers and Winners

A system that tells discouraged or disgruntled workers not to change jobs and tells enthusiastic veteran workers to quit is not likely to have a high-quality workforce.

The two professors calculated the present value of retirement benefits for an Ohio woman who started teaching at age 25. Under the current system, this teacher would accumulate $315,000 in pension wealth over the first 24 years of work. The retirement benefit at age 49 would be about $100,000 less than the value of personal and employer contributions, plus interest at 5%. At age 55, a female teacher's pension wealth would be about $1 million, which is $370,000 more than the value of the contributions plus interest.

We can blame state legislatures that write generous benefit rules without carefully considering the effect on the whole system. But just as in private systems, the big problem is the failure to link contributions and benefits.

A defined-contribution system is simpler and fairer than a defined-benefit system because it pays in proportion to the contributions made on behalf of each beneficiary. It can be kinder because it does not lock people into jobs they do not like or push people out of jobs they want to do. And it can be as generous as employers make it, without deluding either workers or employers into thinking that the benefits are a free lunch.