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Commentary: Cities, workers can hash out good pension plans

March 05, 2012|By Keith Curry

Recently the Concordia Center for Public Policy hosted a program on managing pension costs. Rapidly escalating pension expenses have dominated the news and forced the issue to the top of every local government agenda.

The rapid increase in pension costs is due to the poor investment performance of pension funds such as the California Public Employees' Retirement System, or CalPERS, changing assumptions regarding mortality and longevity and rapidly escalating salary and benefit levels, which have pushed up pension payments. Today's crisis in pension funding can be traced to 1999, when CalPERS actuaries testified that the California Legislature could enact a 3% at 50 pension formula for public safety workers and that it would be "at no cost" to local governments due to the investment performance of CalPERS pension funds at that time. This induced a bi-partisan enactment of the new formula, signature by then-Gov. Gray Davis and adoption by nearly every local government in California.

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In retrospect, it is now clear that the 3% at 50 formula did not work as a matter of mathematics. The investment returns, increasing contributions and mortality assumptions to make it work simply cannot be achieved. CalPERS' testimony to the contrary stands as an act of financial malpractice much greater in scope and cost than the Orange County bankruptcy, for which people went to jail.

Gov. Jerry Brown, Stanford University, the Little Hoover Commission and local elected officials of all political persuasions have all used the same word to describe this systemL: unsustainable.

In my own city of Newport Beach, the projected increase in pension costs between 2010 and 2014 is estimated to be about $9 million based on the most recent CalPERS announcements. That amount would enable us to more than double the expenditures on our library system or to double our parks, recreation and senior services budget. It is this crowding out of public services by increasing pension costs that has led some so-called liberal communities such as San Jose and San Francisco (where there are more retired than active city workers), to call for pension reform.

Recently, Brown has proposed some far-reaching pension initiatives. The most significant is to require public employees to pay half of their pension costs and to create a hybrid, second tier system for new employees. These are substantial reforms that would have a major impact on pension funding.

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