MONTEREY PARK, Calif. — Despite the central role pension liabilities play in the Stockton and San Bernardino bankruptcy proceedings, a speaker at a California League of Cities event here doesn’t expect pension reform to be the hot topic during this year’s legislative session that it was last year.
Amy Brown, publisher of the Public Retirement Journal, said that she expects clean-up legislation to the pension reform legislation adopted during last year’s legislative session, but no dramatic changes.
“What we had was pension envy from private employees,” Brown said Thursday night. “I think voters have moved on. The big issues this year will include discussions about water and how to move it from north to south.”
Brown and Steve Koffroth, business representative from the American Federation of State and County and Municipal Employees Council 36, which represents 22,000 Southern California workers, downplayed concerns cities have over pension liability, comparing it to paying off the mortgage on a house.
“Think of when you sign the mortgage papers, and realize you will be paying $800,000 for a $200,000 house – but it’s over a 30-year period,” Brown said.
Both Brown and Koffroth said the dangers to future city budgets are being exaggerated, because most people don’t understand how pensions are structured.
“I agree with Amy that most members of the public don’t understand what an unfunded liability is,” Koffroth said.
But Ron Bates, Pico Rivera’s city manager, also a speaker, said during a follow-up interview that comparing pensions to a home mortgage is disingenouous and doesn’t take into account the volatility that pension funds face.
Mortgage payments are a fixed cost paid back at a pre-determined interest rate and don’t fluctuate, he said.
Pension funds, on the other hand, go up and down with the stock market and the actuarial tables are still based on the expected life span of people near retirement without taking into account the expected extended lifespan of people now in their 20s, Bates said.
CalPERS recently upped the amount its members have to contribute; and Bates reiterated what many pension fund experts have been saying – that the pension fund is going to have to lower its expected rate of return from the current 7.5%. When it does that, he said it will exact a toll on California cities, which could result in more cities joining the ranks of Stockton and San Bernardino.
“This is probably one of the most important issues facing local government since Proposition 13,” he said.
The current situation regarding pensions in the state came was created by deals struck at a time when the stock markets were soaring and retirement funds were running surpluses. In the late 90s, cities began offering safety workers the option of retiring at 3% of their highest annual salary -- multiplied by the number of years served up to 30, as soon as age 50 - the so-called “3% at 50” scheme.
“Pretty soon everyone was doing it,” Bates said.
Combine that with the fact that retirement salaries were based on a percentage of the final year salary; and many cities are paying retirement benefits they can ill afford.
Bates predicts that many cities will have to move to contract police and fire departments, because they can’t afford to fund salaries and retirement.
“When you have 18-year-olds graduating from high school, joining the police force and then receiving a starting salary of $85,000 a year – that works out to be $165,000 annually with benefits,” he said.
The impact isn’t likely to be felt until 2018, but speakers predicted there will be changes made to the pensions of existing employees. The 60-page pension reform document passed by the state legislature last year only affected new employees.
But speakers expect as employees talk to each other and the differences in benefits being received by employees receiving the more generous benefits versus what new employees will receive will lead to modifications.
“Cities are looking at creating two sets of literature on benefits -- one for employees who have already been in the system -- and another for new employees,” Koffroth said.