By Russell Buckley
August 25, 2010 (La Mesa) -- The President of the Board of Directors of the Helix Water District opened last Wednesday's rate increase hearing by saying it was imperative that the Board do the right thing. I hoped that meant to hold off on the proposed increase until excess pension costs were reduced. Unfortunately, that was not to be the outcome of the vote.
Few things that we Californians can do to rescue our state’s finances would have the positive impact of reforming public sector pensions. They are out of control. Money they gobble up squeezes vital public services and has our State at the edge of insolvency. The California Foundation for Fiscal Responsibility estimates that implementing a reasonable pension program for new hires would save in the neighborhood of $500 BILLION, statewide, over a 30-year period.
In addition, pension reform is a matter of fundamental fairness. Public sector pensions should be aligned with those of the ratepayers and taxpayers who foot most of the bill and take all of the risk. Public sector workers provide valuable services. But so do those who work in the private sector: dental hygienists, plumbers, electricians, refuse collectors, researchers, small business owners, etc. I could go on, but I expect that you get my point.
One of many examples of excess public pensions can be found at the Helix Water District. Nevertheless the HWD Board of Directors has approved an 8.8% increase in water rates. Water Districts tend to fly under the radar. We must have water; it is relatively inexpensive and a water district's personnel costs, unlike a City's, are not the largest part of the budget. However the two reasons for pension reform (fundamental fairness and cost savings) mentioned above apply to HWD just as much as they do to almost every other public sector agency in the state. Prior to the hearing I sent the HWD Board of Directors a letter to ask them hold off taking action on the proposed rate increase until the pension program is first made right. The letter went something like this:
"I wonder if you have asked yourself just what is a fair pension for HWD workers. I don't mean the exact amount, but rather a verbal description. If you haven't, please consider that question for a moment.”
I saw what I consider to be a good description of a fair pension written by The San Diego Division of the League of Cities: “The primary goal of a public pension program should be to provide a full-career employee with pension benefits that maintain the employees' standard of living in retirement” ' If that description seems reasonable to you, lets try to put it to numbers.
"Most financial planners advise that about 75% of pre-retirement income is sufficient to maintain one's standard of living into retirement. That number was reaffirmed in a recent Union-Tribune article about retirement planning. Certainly, with today's ever-longer life spans, it is difficult to argue that a minimum "full career" is less than 40 years. Forty-five to 50 years is probably more like it for those entering the workforce today. Now consider what kind of program is necessary to provide 75% of salary after 40 - 45 years of work.
"Government workers were allowed to opt out of Social Security and many chose to do so. The workers at HWD elected to remain in the program. They will thus receive part of the 75% of salary needed to maintain lifestyle from the Social Security program: 30% is a reasonable estimate. If 30% of the 75% is provided through Social Security that leaves another 45% to come from a pension program such as CalPers. A 1% multiplier can provide that amount over a 45-year career - a little higher percent is required for a 40-year career.
"The pension presently provided to HWD employees - 2.5% of final years salary for each year worked - far exceeds that amount. I wouldn't be bothered were the money required to support the pensions to come from some sugar daddy that simply likes public sector workers. But, alas, the source of funding for HWD pensions is not a sugar daddy with deep pockets, but the pocketbooks of ratepayers who must also provide for their own retirement. Few ratepayers (except, of course, others in the public sector) receive a guaranteed pension. Most must get by with Social Security and a 401k type of plan.
Ratepayers presently pay the 'employee portion' of CalPers pension costs - about $900,000 this year and rising. In addition they pay the significantly larger 'employer portion'. Social Security requires employee and employer to split the costs evenly. It forbids the employer from paying the employee portion. The CalPers pension is several times more generous than Social Security, yet HWD employees pay nothing for it. Why?
HWD workers may retire at 55 with a full pension - and full medical/dental/vision coverage. When Social Security started, in the mid 1930's, full retirement age was set at 65. Average lifespan has steadily increased since then. Full Social Security age is now 67 and there is serious talk of making it 70. Why do HWD workers deserve to retire at an age so much younger than that set for Social Security?
HWD employees are able to retire with pensions greater than the salaries they drew while working. With the current 2.5% multiplier an employee can draw 100% of salary after 40 years - and it is difficult to argue that a full career today is less than 40 years. If an HWD employee worked even 40 years, their pension would be 130% of final years salary (100% from CalPers and 30% from Social Security). As previously mentioned, most financial planners advise that about 75% of final salary is enough to maintain lifestyle. Why should ratepayers provide a pension so much more generous than that?
Ratepayers bear all of the risk of increased costs for the very generous pension packages provided to HWD employees. When CalPers fails to meet earnings projections, ratepayers are required to pay more (the employee portion - even should you relieve the ratepayers of the burden of paying it - is fixed). Increased costs can pass on to people who didn't receive services from the pensioners they are required to support. Why is it right to obligate the ratepayer for all of the risk of higher pension costs? Many ratepayers must also accept the risk for management of their own pensions.
"Maybe you plan to right these inequities at the next MOU negotiations," I wrote to the Board. "You had a chance to do so at the last MOU negotiations and didn't. I therefore ask that you reduce pension costs before you require ratepayers to pay more for water." To me, that means doing three things:
1. Require current employees to pay the 'employee portion' of pension costs.
2. Implement a revised (second tier) pension program for new hires (the 1.5% at 65 option that CalPers offers those participating in Social Security). That program includes a high three-year computation for pension payments - thus making spiking more difficult. Note that 1.5% is considerably higher than the multiplier I just argued for - but CalPers doesn't offer anything less generous. I wonder why not?
3. Freeze the proposed rate increase until the above actions are completed and the cost savings are factored into the water rate calculations.
There are some who would argue that even the program I suggested here is too generous to HWD employees and/or too risky for ratepayers. They might be right. They might urge HWD to change to a defined contribution type of plan. That, too, would be fine by me. What is most important is that we implement significant pension reform now - at HWD and every other public sector agency with unreasonably generous pensions.
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