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Reneged pension promises

By Barbara Whelehan · Bankrate.com
Friday, June 8, 2012
Posted: 5 pm ET

The pension landscape this week underwent a tectonic shift in California, a state well known for its natural and financial disasters.

Earlier this week, referendums passed in two California cities that changed the pension promises made to public sector workers. Seven out of 10 voters in San Jose voted to require municipal workers to make a choice: either contribute a heck of a lot more money to their pensions or get a smaller pension payout in retirement.

In recent years, pension cutbacks have been implemented in various cities and states around the country. But this one in San Jose, dubbed Measure B, is significant because it affects the benefits of current workers and retirees, not just those of future workers, as is usually the case. Measure B almost certainly will be challenged in court by San Jose's public workers unions on the premise that pension benefits are contractual obligations that are legally binding. But if the voters get their way, similar pension changes are expected to spread across the country like an uncontained wildfire.

According to an article in The Wall Street Journal, San Jose's police officers and firefighters say they made sacrifices over the years, giving up higher salaries in return for the promise of pension benefits. Those public servants who have retired since 2007 collect pensions of $95,336 on average, according to that article.

In my opinion, you can't pay cops and firefighters enough money during their careers to put their lives on the line in the course of their duties. But public servants in California and throughout the country have been goosing their paychecks by "pension spiking," a type of abuse where sick leave and unused vacation days are used in the calculation of pension payouts. Governor Jerry Brown presented a pension reform plan earlier this year that called for curbing the practice and instead calculating pensions on base pay over three years prior to retirement.

Reform measures

Public safety workers in San Jose, who already contribute 11 percent of their salaries toward their pensions, may have to fork over another 16 percent if they want to keep the same level of benefits, according to The Wall Street Journal. The mayor of San Jose told the publication the ballooning pension deficits hanging over the city caused it to reduce library hours and cut police personnel in recent years. With the $25 million that San Jose will save in the first year the reform is implemented, the city can open four libraries that have been sitting unused because of a lack of operating funds.

In San Diego, voters passed a less ground-shaking measure, called Proposition B, by a 2-to-1 margin. Unlike the changes in San Jose, that reform probably didn't register on the Richter scale. It calls for the introduction of a 401(k)-type plan for future public workers (except police officers). And it would freeze pensionable pay for a five-year period, according to an article on ai-Cio.com by contributing editor Benjamin Ruffel.

Ruffel's conclusion about this week's events: "Coming on the heels of municipal bankruptcies in Alabama and Rhode Island, exacerbated by unaffordable pension benefits, the success of these twin referendums in California may demonstrate to other ailing municipalities that pension reforms are not the electoral poison that they were long assumed to be."

However, whether or not they'll withstand challenges in court is another question. "Judges in several states have approved (cost-of-living adjustment) freezes or reductions, but to my knowledge any major reforms applying to current pensioners have all been rejected by the courts," Ruffel wrote me in an email.

What do you think should change, if anything? Should state and municipal workers get the pension benefits they had been promised, or should they accept less and revise their retirement planning because of revenue shortfalls in their city or state? Is it fair to cut their benefits unless they pony up more money?

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15 Comments
Eric
July 16, 2012 at 10:57 am

95k pensions? In Virginia I recall the average pension being around 23k a year last time they posted the numbers. No one makes 95k in pensions except university football coaches, presidents, and high end executive equivalents.

SUNRISE
June 25, 2012 at 3:18 pm

The taxpayers are going to have to pay up. The shortage of these retirement funds are because the public sector employers are not making their payments, or they are stealing the money for other projects. These projects are for the benefit of all taxpayers, so the taxpayers should reluctantly make up the shortage. The other alternative is to prosecute the people who stole, did not pay into the pension funds. Hold them responsible for the damage that was done! Also freeze or impound their assets.

David
June 23, 2012 at 11:44 pm

There are lots of problems that need to be addressed regarding public pensions. First is the practice of "pension spiking" which comes in many forms. In my state, state workers can work overtime (at time and a half) and because the state takes retirement contributions out of the overtime pay, the worker can include that extra income onto their final average compensation which is what the pension is based on. That is just one example. Some people forget that many pension funds are in bad shape simply because of some politicians using the funds as their personal piggy banks for their pet projects or they have simply underfunded the pension funds. There is no excuse for that, and if that is the case then the public entity should be required to make the funds solvent and replace all the money that they either stole or failed to put into the fund in the first place.

Invictus
June 10, 2012 at 10:39 pm

These bloated pensions cannot be sustained. Bring them back into the world of affordability, or the payments will be impossible no matter what was promised. The idea of somebody working a mere 30 years in a safe, minimally risky job, voluntarily retiring, and pulling down a pension almost as much as their salary while employed is obviously unaffordable and practically immoral.

When public employees draw pensions that exceed those of better educated and more productive private sector people in similar work, taxpayers have the right to "just say no."

gergames
June 10, 2012 at 9:48 pm

HEY Jeff...so you have to work 30 years to get your retirement...the private sector works 45-49 years. I agree police & fire should make more then teachers, simply on time served issued. A teacher, say age 22 to 52, 30yrs X 180 days is 5,400 days worked. Police & fire 30 X 260 = 7,800 days worked. 7,800 - 5,400 = 2,400 more days. 2,400/180= 13.333 more teacher years worked. Now...the poor sap paying your salaries, age 22 to 67 = 45 years X 260 = 11,700 days worked. 11,700 - 5,400 = 6,300 more days worked. 6,300/180= 35 more teacher years worked. Public employees retirering at over $90K is spitting on private workers, who get less retirement pay, & less time to collect it.