Thursday, February 24, 2011
CA - The Little Hoover Commission
Their recommendations are to cut pensions for current retirees to make up the shortfall and stop stupid practices such as using short-term gains as a reason to stop the pension contributions. The report is 106 pages, so I am just going to post their main recommendations:
Recommendation 1: To reduce growing pension liabilities of current public workers, stateSome of this is just pure dynamite, especially the part about submitting pension increases to a vote. You think WI unions are upset - this will produce a reaction akin to that which would occur if the Japanese air force poured acid on Godzilla.
and local governments must pursue aggressive strategies on multiple fronts.
- The Legislature should give state and local governments the authority
to alter the future, unaccrued retirement benefits for current public
- State and local governments must slow down pension costs by
controlling payroll growth and staffing levels.
Recommendation 2: To restore the financial health and security in California’s public
pension systems, California should move to a “hybrid” retirement model.
- The Legislature must create pension options for state and local
governments that would retain the defined-benefit formula – but at a
lower level – combined with an employer-matched 401(k)-style
- The 401(k)-style component must be risk-managed to provide
retirement security and minimize investment volatility.
Recommendation 3: To build a sustainable pension model that the public can support,
the state must take immediate action to realign pension benefits and expectations.
- To provide more uniform direction to state and local agencies, the
- Cap the salary that can be used to determine pension allowances,
or cap the pension, at a level that is reasonable and fair. Once
the employee exceeds the threshold, employees and employers
could make additional retirement contributions into a riskmanaged,
401(k)-type defined-contribution plan.
- Set appropriate pension eligibility ages to discourage early
retirement of productive and valuable employees.
-Set a tight definition of final compensation, computed on base
pay only, over a five-year average to prevent and discourage
- Set uniform standards for the maximum hours that retirees can
return to work and continue to receive public-sector pensions.
- Set uniform standards and definitions for disability benefits.
- Restrict pension allowances to exclude service in an elected office.
- Eliminate the purchase of “air time.”
- Strengthen standards for revoking or reducing pensions of public
employees and elected officials convicted of certain crimes
involving the public trust.
-To minimize risk to taxpayers, the responsibility for funding a
sustainable pension system must be spread more equally among
- The Legislature must prohibit employees and employers from
taking contribution “holidays,” except under rare circumstances.
- The Legislature must prohibit retroactive pension increases.
- The Legislature must require employees and employers to
annually adjust pension contributions based on an equal sharing
of the normal costs of the plan.
- State and local governments must explore options for
coordinating pension benefits with Social Security.
Recommendation 4: To improve transparency and accountability, more information
about pension costs must be provided regularly to the public.
- The Legislature must require government retirement boards to
restructure their boards to add a majority or a substantial minority of
independent, public members to ensure greater representation of
- All proposed pension increases must be submitted to voters in their
- The ballot measures must by accompanied by sound actuarial
information, written in a clear and concise format.
- The Legislature must require all public pension systems to include in
their annual financial reports:
- The present value of liabilities of individual pension funds, using
a sensitivity analysis of high, medium and low discount rates.
- The government entity’s pension contributions as a portion of the
general operating budget and as a portion of personnel costs,
trended from the past and projected into the future.
- The State Controller must expand the Public Retirement Systems
Annual Report to include the above information. Administrative fees
to pension systems should be considered as a funding source to
support actuarial expertise and the timely production of the report.
- The Legislature must require pension fund administrators to improve
procedures for detecting and alerting the public about unusually high
salary increases of government officials that will push pension costs
Oh, and a footnote:
It is important to note that the Commission did not examine retiree health care costs as part of its pension study. The Commission would like to acknowledge the extensive work of the state Public Employee Post-Employment Benefits Commission, which stressed the need of current workers and employers to share in the responsibility of pre-funding retirement health care costs.The report is not all unfavorable to the workers, though. It is worth reading to see the games that politicians have played:
During a weak economy that cut into state revenues in the early 1990s, Governor Pete Wilson proposed using $1.6 billion from CalPERS’ accounts to help balance the state budget. Wilson also called for giving the Governor the authority to appoint a majority of CalPERS board members, as well as to control actuarial projections, which are used to determine liability levels and state payments into the pension fund. The Legislature agreed to the changes in 1991 with AB 702.10That move was blocked by Proposition 162. I thought I'd just throw that in to show that the referendum system in CA has been used at times to address governmental irresponsibility. As the report notes, CA's public retirement system is overall much better off than that of some other states. Still, CalSTRS is going broke around the original SS break time - 2040. And some of the cities are in deep, deep trouble.
Just for fun and because I'm evil, CA set up a website so that concerned citizens can look up salary and compensation for local officials. And here is a DU thread on this report.
Gut pensions, gut SS, assault the minimum wage,
and increase the cost of living. Good thing free trade
has brought us so many benefits.
I wonder how the government employees would vote.
The end results of this California dreaming will be more then public pension shortfalls as the continued decline in tax revenue will at some point spark a panic in the bond market. The forces that created most of this mess are still busy pushing various public-private growth schemes such as green energy or high speed rail or more housing tracts in the boondocks so the fat lady has yet to made an appearance but clearly there are more to this story then public sector Unions dipping into the public pocket.
Government workers feel that they're being blamed for the incompetent decisions of their political masters, and to a large degree they're right. Too many politicians have made promises and deals they can't back up, in the knowledge that by the time the reckoning came, they'd be long out of office.
How we stop this from happening now and in the future — that's the trick.
The government side would have contributed less overall if they had just made a steady contribution, and the result would have been better.
There's a problem and a pending reform of government pension accounting. It's been stalled (wonder why) for quite a while. Instead of going for the higher returns (8%? on pensions) the idea is to go for lower, far more certain returns and to calculate funding more realistically (basically to come a lot closer to the private standards).
It seems as if big parts of our economy were predicated on a never-ending boom.
I sat down and did some basic math on CALPERS. Using a reasonable rate of return, neither the employees nor the government made contributions large enough to generate the fund needed to support the last big step-up in benefits.
The irony is that California is in better shape than many states. Maybe it's just that CA is so large that people focus on it.
The other, much larger, problem for CA is medical and long-term care benefits for public retirees.
Another issue is the very simple one of demographics. Defined benefit schemes really only worked with a rapidly expanding population and a rapidly expanding base of employment. As soon as the working base stabilizes they are pretty much all in trouble unless the promised individual benefit is quite low and the contribution rates are high.
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