California leads the nation in total debt at $618 billion, more than twice as much as New York.
Governor Jerry Brown took action to reduce some of this problem last week with pension reform. Right now, California owes between $400 and $600 BILLION to retirees over the next 30 years. The State Controller estimates that retirement funds are underfunded by $163 billion while investment icon Warren Buffet and Vanguard’s founder John Bogle believe that the underfunding is closer to $270 billion and Moody’s believes the number is closer to $400 billion.
The reforms passed last week only apply to new employees. Benefits to new public safety workers will cap out at $130,000 while all other new public employees can receive no more than $110,000. Additionally, half of all pension costs will be paid by the workers. The age at which employees can retire with full benefits rises from 50 to 57 for public safety workers and from 55 to 67 for all other employees.
These changes are expected to save the state $60 billion over the next 30 years leaving the pension funds underfunded by anywhere from $100 to $240 billion. The state estimates that the increased payments made by government workers will cover the balance while external analysts disagree. Most external analysts believe that benefits paid to retirees must be reduced if the state is to avoid a financial calamity. Without changes, all services provided to Californians will be squeezed as increased monies will be needed to satisfy current retirement obligations. Herein lies a problem in that this approach would require the state to break written and agreed to contracts, a potential necessity given the mismanagement among elected leaders over the last decade. Additionally, most pensioners receive modest amounts. In CalPERs, the average benefit paid is $25,000 per year with half below $18,000. In CalSTRS, the retirement fund for teachers, the annual pension payment of $49,000. Currently, the average California teacher makes $67,871 a year, 14th best in the United States with a cost of living that is the highest in the United States.
Another significant problem relates to the increased retirement age of Police and Firefighters. The risk of injury increases significantly as people in those professions age. As it relates specifically to Firefighters, the average time that a firefighter lives after retiring is less than seven years. Clearly, they are not the problem.
Looking specifically at Riverside County, the average police or fire fighter earns $76,234 per the State Controller’s Office. By understaffing fire and police departments, existing public safety workers either have to work more overtime costing all of us more or safety coverage is lessened lowering our overall safety.
The real problems plaguing the pension system are: 1) the top 2% of pensioners, 2) Pension spikes, 3) Double dippers, 4) Lifespans of retired civil servants non engaged in public safety, and 5) Unrealistic pension fund return estimates.
Pension spiking is where the worker increases overtime or in some other way increases their salary just before retirement in order to increase their pension. Double dipping is where the public servant “retires” from one public service job, receives a pension and then works in another public service job where again work where they may build a second pension. This practice typically occurs with police chiefs, university presidents, school supervisors and elected officials. Unrealistic pension fund returns minimize the payments required of the future pensioners while reducing the immediate payment required by the employer.
As a large wave of retirees are expected over the next ten years, problems can be expected to get worse. The pension reform “fix” of last week will help incumbents in upcoming elections more than it will help to resolve overall problems with the pension system in the state.