Wouldn’t it be nice to be able to give teachers salary increases without increasing pension costs? However, since public pension benefit formulas are based on an employee’s salary, this is not possible.
Therefore, while salaries in the public sector are increasing so that public employees can afford to live in the Bay Area, total compensation packages including the cost of pensions and other benefits are often now far greater than comparable jobs in the private sector.
There is a direct link between the huge increase in public pension costs over the past 10 years and the increased revenue needed to cover basic government services.
We have seen property tax revenue increase by huge amounts over that same period, yet we apparently still need the gas tax, more bridge toll increases, Marin Municipal Water District rate increases, additional money in the state budget for the California Public Employees’ Retirement System and California State Teachers’ Retirement System, and additional transportation-related taxes.
Despite these taxes, our roads and infrastructure are falling apart. Pension costs for teachers are causing layoffs and elimination of programs and budget problems for many school districts throughout the state.
The inflexibility of the public pension system is the direct cause of much of these problems.
I have worked in the private pension arena for 40 years. It is incomprehensible to me that the public pension system, unlike the private sector system, will not allow any changes to benefits — except to new employees where the effect will not be realized for many years into the future.
There are several things that could be done to make the public pension system work better for everyone. The following is one example:
Public pension system benefits are tied directly to salaries. Therefore, as stated earlier, one cannot raise salaries without raising pension benefits. Salary increases in the public sector are the direct cause of the huge increase in pension benefits and consequently pension costs.
All of the private union pension plans that I administer have wages and pensions as independently negotiated items. You can increase wages and not increase pension benefits. Pension benefit accrual formulas are based on the amount of contributions made for each participant, not salaries.
As an example, a construction worker has a negotiated $7/hour pension contribution rate and works 2,000 hours in a year. The pension benefit formula in the plan is a monthly benefit accrual of 1.25 percent of contributions. The construction worker then accrues a monthly pension benefit for that year of $7 x 2,000 x 1.25 percent = $175. If he works 20 years, he will have a monthly accrued pension benefit of 20 x $175, or $3,500/month.
This is but one example of a change that could help the public pension system. It would allow raises to teachers’ salaries without the corresponding increase in pension benefits that is the cause of budget problems in just about every school district in the state.
Our elected officials need to explore reforms that will make the public pension system better and sustainable long-term. There needs to be major reform that includes allowing changes to the future benefit accrual rate for all plan participants, not just newly hired employees.
The legal interpretation that no pension benefit provided to public employees can ever be withdrawn without replacement with some “comparable” benefit even if it only affects benefits accruing in the future, and even if the Legislature determines that it is a result of prior Legislatures’ mistakes, commonly called the California Rule, will be reviewed by the California Supreme Court in the near future.
Without this change, the public pension system will remain unsustainable and we will continue to see layoffs and additional taxes. In time, costs will become prohibitive, the plans terminate, and all public employees will be in 401(k)/defined contribution plans in the future.
Bob Bunnell of Novato is a pension compliance manager for a third-party administrator of private union pension plans. He is a member of Citizens for Sustainable Pension Plans, a Marin public pension reform organization.
