Four big California public employee unions -- including firefighters and highway patrol officers -- would roll back their pensions under a deal struck this week with the governor. The compromise comes at a time when public sector unions are increasingly under pressure to make sacrifices to help state and local governments balance their budgets. KQED's Forum with Michael Krasny hosted Professor Daniel J.B. Mitchell of the Public Policy Department, along with guests John Myers, (KQED's Sacramento bureau chief), Steve Greenhut (author of Plunder: How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation and director of the Journalism Center of the Pacific Research Institute, a conservative think tank), and Terry Brennand (senior government relations advocate for Service Employees International Union (SEIU) California, which represents 700,000 public and private sector workers in the state.)
The following is an excerpt from the program:
KRASNY: Regarding public employees' retirement benefits in this state. Are they really so out of line? Give us some context for all of those numbers. Are they really so out of line? How do they compare to other states?
MITCHELL: First of all, there are different ways in which pension finance and pension actuaries look at these sorts of issues, and I think you have to put the pension issue into a larger context, particularly here in California. Since around 1990, we have had a structural deficit at the state level, which mean basically that we end up chronically borrowing to meet operating expenses, and in a way making pension promises that are underfunded is another way of borrowing to meet ongoing expenses. That's considered bad fiscal policy at the state and local level to be doing that.
And so the pension issue part of this larger issue that the state needs to straighten out so that we pay for ongoing expenses with ongoing revenue. What pension actuaries will say is that we have a concept called "the normal cost of a pension"--we're talking about these defined benefit pensions, where it's based on your age, and your service, and your earnings history and that sort of thing. And what they will say is what you ought to do is every year is calculate the value of the promised that you are making that year, that you are accruing in that year, that's the contribution you ought to be making into that fund--the normal cost. And if you do that, that money will be there when those people retire, and it's part of their earning package whether you're paying them in cash or pension or healthcare.
KRASNY: And by those standards, are California public employees putting enough into their pensions, or has that been lowballed in the past?
MITCHELL: Well, we haven't put enough in, and that's why there's an underfunded pension system. It varies with the up and down of the stock market and obviously with the collapse of the stock market, particularly in 2008, aggravated the situation dramatically, but the pension funds on kind of an ongoing basis in many jurisdictions were underfunded, and again it's part of this notion that if you don't meet your operating expenses with ongoing revenues, eventually you're going down you're going to be in trouble.
KRASNY: One more question Professor Mitchell--when you look at the average pensions for public employees, do California public employees get fatter deals that their counterparts around the country?
MITCHELL: I really don't know the answer to that. I think it's quite varied depending on which jurisdiction you're in, and what occupation you're in. Some pension plans in California have had abusive elements, such as pension spiking. Pension spiking means that effectively, that in whatever earnings period is used, you throw in things like overtime and things that go beyond the basic salary, and that's what really needs correcting.
KRASNY: Professor Mitchell, can you respond to the question of CalPERS and the accountability of fund managers?
MITCHELL: Well, you could run a pension fund in very conservative ways, just invest in treasury bills and so on, you'd get a very low return and you' d have to make very large contributions into it. The fact is that pension fund managers look to higher return investments as part of their portfolio management. Beyond that, I would simply say that although CalPERS did very well in the boom period, there's still this issue that if you don't put in the normal costs year after year after year, whether you're doing well in a particular year whether you're doing poorly, you can end up with an underfunded pension plan. and I think that's the financial lesson that can be drawn for this.