posted September 13, 2012
Callifornia’s New Pension Reform Law

On Friday, August 31, the California Legislature passed what it calls a major public workers’ Pension Reform bill, signed into law by California Governor, Jerry Brown, on September 10. Politicians in Sacramento—Democrats, Republican and other—argue that a major cause of California’s chronic State budget deficits has been over-generous payments of wages and pension benefits to California’s state and local government employees. The California Pension bill therefore targets the reduction of current and future pension benefits for California’s public workers as a major solution to its chronic State deficit problems. The State Pension legislation will no doubt serve, moreover, as a template for subsequent school district, cities, and other local government agencies’ reductions in pensions to follow quickly.

Under the California Pension bill, pension benefits will be reduced significantly. The age limit to start collecting a pension will be raised by 7-12 years, depending on one’s occupation. For the first time, moreover, a cap will be placed on the income level on which pensions are calculated. All California workers, current and yet to be hired, will have to pay significantly more each month out of their wages as their contribution to their pensions (to make up for failure in the past by the State to pay its share of required pension contributions since 2000): the State will in effect reduce its share of pension contribution by 24% (from current 19 cents per hour to 14 cents), while workers’ will increase their share of pension contributions by 56% (from current 9 cents per hour to 14 cents).

The Pension bill is thus the latest in a series of moves by California politicians to shift the costs of public services from the State to other levels: the shift of costs of state services to cities and other local agencies, the shift of taxes collected from local to the state level, and now the shift of costs of those who deliver state services—state workers—from the state to its employees.

Some Facts About California’s Public Pension Benefits

California is a State with one of the worst chronic state budget deficits. However, its State employee pension plan (PERS) is hardly one of the worst funded of public sector pensions in the U.S. The highly respected, non-profit research firm, ‘The Pew Center on the States’, estimates the California State Workers’ Pension (PERS) is 78% funded at year end 2010—the most recent Pew data. That likely has improved slightly for forthcoming year 2011, to about 80%. Generally, the US government’s Pension Benefit Guaranty Corporation estimates that defined benefit pension funds, like California’s PERS and STRS, are adequately funded at 85% and above. So 78%-80% does not represent an especially crisis situation.

Nevertheless, over the past few years since the current recession began in 2008 public media anecdotal horror stories have appeared almost daily about huge pension payouts for public sector retirees. These typically focused on high paid state administrators and managers, or wage workers earning special case excessive overtime pay, combined with the practice of what is called ‘spiking’—i.e. taking one’s last year pay and using it alone as the base for estimating future monthly pension benefits. ‘Spiking’ of course should be prohibited. But spiking by the few, mostly managers and the highest paid, is hardly a reason for attacking the rest of the public sector labor force whose pension benefits in California are quite modest, and even paltry in most cases.

For example, the fact is that CalPERS, the State employees pension fund, pays out barely $1,000 a month in retirement benefits to just under half of its current retirees. That’s only $12,000 a year—and well below the roughly $20,000 official national poverty income level. Another 30% of California’s public workers receive between $1000 and $3000 a month, before taxes. The median monthly pension benefit available to these 80% of California’s public employees is around $1500-$1800 a month, or barely more than the poverty level income nationally—and well below poverty level for living in cities like San Francisco or San Deigo, for example.

The National Picture on Pension Costs

At a national level, reflected as well in California, both wages and pension benefits and costs have hardly increased at all over the last decade, and especially so since 2008. According to the U.S. Labor Department, wages for State and Local Government workers in 2010 rose only 1.2%, which was lower than the official inflation rate. And that 1.2% does not include the reduction in total take home pay for the multiple ‘furloughs’ (days off without pay) initiated throughout the public sector in recent years. Nor does it include lost pay for the millions shifted from full time work to part time work (part time workers’ wages and pension cuts are not included in the annual wage and pension calculations). Nor does it account for the lost wages for the nearly 700,000 public workers who have lost their jobs since 2010. When these latter reductions in pay are properly factored in, the total wage gain by public workers in 2010 was almost certainly less than even the official reported 1% wage gain. In comparison, private industry workers’ wages rose 1.8% in 2010. In 2011, public sector workers’ wage increases were even less.

Considering benefits as well as wages, the U.S. labor Department’s total compensation for public workers—which includes wages plus all kinds of benefits not just pensions—rose only 1.8% in 2010. The all benefits (pensions, medical and other) portion of this 1.8% amounted collectively to only a 0.6% increase. In comparison, private sector workers’ total wages and all benefits rose 2.1% in 2010. The numbers were even less in 2011. The picture is similar for public workers’ wages and salaries nationally, by the way.

Pension benefit costs are typically no more than 30% of total benefits. So the 0.6% increase in all benefits means pension benefit costs rose no more 0.2% in 2010. Assuming an average hourly wage cost for a California state worker at around $25 per hour, that 0.2% translates into a miniscule cost of 5 cents an hour. If one assumes further that this 5 cents an hour is roughly the average of annual pension benefit cost increases for PERS workers for the past five years since the 2007 recession began, the total cost increase for PERS pension cannot exceed 25 cents an hour.

The official PERS pension shortfall (at 78% funding) is publicly reported to amount to $112 billion today. There is therefore no conceivable way that a pension cost increase of 25 cents an hour, at 5 cents a year for each of the past 5 years, is responsible for the $112 billion PERS funding gap.

So if California’s public workers pension benefits cannot be the cause of the State PERS $112 billion pension shortfall (and even less so the cause of California’s annual chronic budget deficit), what then are some possible causes of the $112 billion PERS pension gap (and the state’s chronic budget deficit)?

Primary Causes of California’s Budget Deficits

California’s budget chronic deficit problem has been more than a decade in the making. The weak economy since 2008 only exacerbated already long term structural problems in California public finances. This means that the real causes of California’s public sector (state and cities) deficits are not pension benefit cost increases, but mostly the following:

• the dotcom bust of 2000-01, the subsequent recession of 2001, and the very weak job recovery that followed in which 2000 employment levels were not regained until 2005. Weak job creation (2000-04 and 2008-12) results in low tax revenues as well as suspended pension fund contributions by the state and many cities. So the pension gap is a consequence of the state budget deficit, not a cause of it.
• the subsequent, second deeper recession of 2008-09 and the weak economic recovery since 2009 that has further devastated government tax revenues and caused public governments to put off even more legally required contributions to their pension funds
• additional cuts by legislatures (state and cities) in corporate and business taxes at since 2000, as part of a national corporate tax cut ‘race to the bottom’ by state and local governments over the past decade
• escalating Medicaid health care costs, caused by a health insurance sector and for-profit hospitals industry allowed to run out of control by Congress and state regulators
• collapsing local property values and property tax revenue at local government levels due to collapse of housing markets after 2006 and the deep recession and chronically slow recovery since 2007
• growing speculation by State and City pension funds since 2006 in risky financial securities and derivatives, like subprime mortgages and interest rate swaps, made possible by the federal Pension Act of 2006 and financial deregulation under the Bush regime
• rising costs of borrowing by states and cities in the municipal bond markets since the banking crash of 2008, plus the ending of municipal bond subsidies by the Federal government in 2011, both of which significantly raised the state’s and cities’ costs of borrowing since 2007

The key question is therefore not whether, or how much, public workers’ pension benefits are the cause of the State’s budget deficit, but how much of California’s annual budget deficits are due to reduced tax revenues, or due to price gouging of medical costs by insurers and hospital chains and drug companies, or to reduced federal subsidies for federal program implementation, or are the result of rising costs of borrowing by States in the bond markets since 2006? These latter are the primary causes of the State’s chronic budget deficit problem. Nevertheless, what we hear consistently in the media and press is that it is state public workers, and in particular their pensions, that are the primary cause of current and future state budget deficits.

What about the problem of the California (PERS) State pension funding gap? Is that also the consequence of unwarranted increase pension benefits granted to California public workers? No. Not any more than pension costs are the cause of California budget deficits.

Primary Causes of California’s Pensions Funding Shortfalls

Public pension fund managers over the last decade consistently speculated fast and loose with risky financial instruments like subprime mortgages and derivatives, in partnership with hedge funds and other ‘shadow banks’. That risky investing caused record losses in pension fund balances now for more than a decade, and especially since 2006. Those recent losses, moreover, followed after at least a decade of pension fund managers’ declaring ‘contribution holidays’—i.e. refusing to make required contributions to the pension funds—that further undermined the health of their pension funds.

It therefore needs to be asked of politicians in Sacramento about to pass the Pension Reform Bill how much of the $112 billion PERS pension shortfall is due to losses from speculative investments (like subprime mortgages and derivatives) gone bad over the past decade? And why shouldn’t the banks and hedge funds be made to reimburse states and cities for these fraudulent speculative losses? Other private investors are making banks pay up for similar fraudulent practices, reported almost daily in the business press. Why is California not similarly going after the bankers, as they did with Enron a decade ago for ripping off the state?

And while we’re asking questions, has anyone bothered to ask how much of the shortfall is also due to failure or refusal by politicians to make their share of required pension fund contributions since 2000? Why isn’t the State bringing pension fund managers to the bar to explain why they haven’t, for more than a decade now, contributed sufficiently to the pension funds as required by law—i.e. the ‘pension contribution holidays’ problem?

Speculative investments gone bust and failure to make contributions are thus the two primary causes of California’s current pension under-funding. And it appears they may be the major causes of the funding shortfall. Nevertheless, state and local politicians and the governor are manipulating the shortfall workers did not create, projecting it out in a simple extrapolation over decades to create the impression of massive state budget deficits to come attributable largely to public workers wages and benefits, and in particular pension benefits.

But the under-funding of public worker pensions is not primarily the result of excessive pension benefits—spiking and other bad practices notwithstanding. It is the result of a decade of risky speculative investing in subprimes and derivatives gone sour, of a decade of chronic low job growth, of pension managers simultaneously refusing to make the necessary required legal contributions to their pension funds, and of politicians looking the other way as bankers and speculators ripped off California pension funds at all levels of government.

The Pension Reform bill ‘solutions’—like raising the retirement age, making California workers pay more for their benefits while receiving fewer benefits, and creating a ‘two tier’ system of real pensions vs. ‘401k-like’ phony pensions—are really solutions designed to make the victims (bottom 80% of the state workforce) pay for the excesses of the top 20%, especially the top 1% of administrators and managers, with the collusion of elected politicians all along the way.

Public workers in California did not cause the PERS and STRS public pensions’ problems. To require them to pay for those problems is to make the victim pay while the originators of the problem continue to go free.

In conclusion, here’s some select proposals for readers to consider to achieve real public employee pension reform in California:

Alternative Solutions to the State-Local Government Pensions Crisis

• The Federal Reserve Bank should provide annual loans of $500 billion for the next two years to provide bridge loans to those States and Local Government pension plans with funding gaps below 85%. If the Federal Reserve can loan banks (which caused the financial crisis and much of the pension gap) $9 trillion, and foreign banks $1 trillion of that $9, then it can lend financial institutions like public workers pension funds, at least the same it loaned foreign banks. Moreover, the rates of interest on the loans should be the same 0.25% from the Federal Reserve that has been offered to other banks and financial institutions since 2009.

• Public workers pension funds should place a ceiling on the amount of pension payable to high salaried administrators, equal to no more than 125% of the highest hourly wage paid public employee in the system.

• Amend the Pension Act of 2006 to prohibit public pension funds from extending loans to Hedge Funds and other speculative investing financial institutions. Public pension funds should be prohibitive from investing in derivatives of all types, foreign exchange, or investments outside the U.S. and its territories.

• Banks, brokers, and other financial intermediaries should be required to ‘make whole’ financially those cities and school districts misled into participating in interest rate swaps from 2003 to the 2008-09 financial collapse.

• The federal government should reintroduce the BABs subsidy to States and Cities borrowing in the muni bond market to lower their rates of borrowing costs. A bank tax should be levied on banks, the proceeds of which would be used to finance the muni bond subsidy.

• The most fundamental, underlying cause of budget crises is the failure to invest and create jobs that would result in rising tax revenues for State and Local government. Low job creation results in low pension fund contribution. Business refusal to spend its $2 trillion hoard of cash on jobs is a major cause of state tax revenue decline and therefore state deficits. The federal government should therefore initiate an appropriate tax on businesses that don’t invest and create jobs and use the proceeds from the tax to subsidize local governments and reduce taxes to other businesses that do create jobs.

Dr. Jack Rasmus the author of the April 2012 book, “Obama’s Economy: Recovery for the Few?, published by Pluto Press and distributed by Palgrave-Macmillan. He hosts the radio show, ALTERNATIVE VISIONS, on the progressive radio network out of New York City on Wednesdays at 2pm eastern time. He blogs at and his website is:

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