In California, Getting Public Employees To Pay Their Fair Share Is Harder Than It Should Be

Over the last decade, Californians have had increasing amounts of their hard-earned money taxed to be spent on unsustainable public employee pension schemes. The average California Public Employees’ Retirement System (CalPERS) pensioner retires by age 60 and receives monthly checks of $2420 (or, about $29,000 per year). According to figures from CalPERS, 78% of pensioners receive $36,000 or less per year, 21% receive $36,000-100,000 per year, and “only” 1% (or, about 15,000 retirees) receive $100,000 or more per year. CalPERS and the state, county, and city governments and agencies that pay into it are far short of fully funding the program. As the front page of the CalPERS website features, the pension program is, using the best case investment scenarios, only 73% funded as of 2011. Translated into dollar figures, this amounts to least a $30 billion shortfall, according to the latest state budget.

The high unfunded liability has put significant pressure on governments and agencies to devise ways of making the program solvent for the over 1.6 million retired and active public employees who are depending on the checks continuing to arrive and the fund continuing to exist there when they retire. Meanwhile, rising pension costs have grown to be an financial burden on state and local governments, which must divert money that could be used for providing services towards paying for increasingly costly pension obligations.

One obvious way of easing this burden is to end the practice of pension pickups for all employees as quickly as possible.

CalPERS sets contribution rates for both the “employer” (governments, also known as, “taxpayers”) and the employees who will be benefiting from the program upon retirement. Therefore, public employees are supposed to be contributing a certain percentage of their paychecks to go towards their generous pension plan (which often comes with annual cost-of-living increases and health care assistance as part of negotiated retirement benefits). The average contribution rate for employees is 8%, to be taken out of their paychecks.

However, in defiance of common sense, governments and agencies across the state (and, the nation) have long engaged in a practice called the “pickup,” or, making the retirement contributions that employees are supposed to make, for them. Even the Public Employees’ Pension Reform Act of 2013 retained the practice for employees hired before January 1, 2013; those hired after then are not eligible for this perk, though they may continue to receive the same pickups as older employees until the bargaining agreement they were hired under expires, is amended, or is renewed.

CalPERS hasn’t tracked the extent of these pickups and in their books, a 7-9% contribution made by employees has been indistinguishable from a 7-9% contribution made by taxpayers on behalf of the employees. This therefore makes determing the cost to taxpayers difficult to determine and it is generally necessary to track down and read through bargaining agreements to see if pickups are being made.

According to a recent investigative report, at least 51 Bay Area governments engage in pickups for public employees, most of whom pay into CalPERS. Last year, Bay Area taxpayers paid at least $221 million to cover contributions that public employees were supposed to make. For example, transit workers for the Bay Area Rapit Transit (BART) system haven’t had to pay a cent towards their pension plan, at a cost of $17 million a year for taxpayers. The BART employees even went on a four and half day strike last month after being asked to start paying their fair share and are threatening to do so again, unless they receive a 15% pay increase and an additional 6.5% pay increase to offset any contributions to their own pensions.

Fortunately, at least some governments are making the common sense policy change, to an extent, if only because of a mutual understanding between unions and government that both groups will suffer widespread financial losses if the pension system collapses. The cities of Santa Barbara, Thousand Oaks, and Chico are three of them.

Santa Barbara in 2010 negotiated with its police force to pay 2.266% of their paychecks for their pensions. Police officers did so on the condition they receive a pay increase, which they did. Negotiations are presently underway for police to begin paying their full 9% commitment. Not surprisingly, the officers, who benefit from an average of $98,000 a year in pensions upon retiring in their early 50s, have stalled negotiations and are demanding further pay increases to “offset” their contributions.

As part of two-year agreements with the three unions, the Thousand Oaks City Employee Association, the Thousand Oaks Management Association, and the Senior Management Association, employees agreed to contribute towards their pensions. Taxpayers will continue to pay for the “employer” contributions to CalPERS, of over $3 million a year, naturally, but the agreement with the labor unions will take off most the other $2 million in annual contributions taxpayers had to make on behalf of public employees.

“Most” because while the state contribution rate is 7-8%, depending on the Unit the employee is in, the unions agreed to contribute 3.5% of their salaries beginning in July 2013 through July 2014, at which point they agreed to contribute 7% of contributions. It is unknown how many employees will still be receiving a 1% pickup. In exchange for this deal, city officials in Thousand Oaks offered to reinstate merit-based pay as part of the two-year contract. Draft copies of the three agreements, which were ultimately adopted, can be read here.

At the very least, beginning July 6, city employees in Thousand Oaks began contributing towards their own pensions, which average approximately $25,000 a year for public employees in Thousand Oaks, who earn average salary of $79,000 according to a CalPERS actuarial report. The system is currently short at least $30 million in funding, and while the agreement doesn’t necessarily make a dent in that unfunded liability, it at least gives taxpayers some breathing room and makes possible more serious discussions in the future. In California, this is progress.

The city of Chico also took a stab at asking city employees to contribute towards their pensions, considering that it has an unfunded pension liability of over $60 million. Last year, Chico taxpayers paid $1.8 million to cover the pension contributions of city employees. According to the Chico Enterprise Record, between 2012-2013, “only one of nine city unions paid their full employee share. Two paid nothing and the remaining six paid a range in between.” As part of 2012-2013 contract negotiations, two of the nine city unions agreed to pay their full contribution rate, and the other seven will contribute partially or not at all towards their share of paying for their pensions. The city reportedly rejected offers by city unions to increase salaries in exchange for having employees contribute more towards their pensions.

Combined, the pickups for BART, Santa Barbara, Thousand Oaks, and Chico public employees cost taxpayers over $20 million last year. This is money that taxpayers shouldn’t have had to pay at all, and it doesn’t include the cost to taxpayers that was attached to salary increases for public employees who, on average, probably make more than they do. Even worse, these piecemeal pension adjustments don’t address the high unfunded liabilities of these systems. Using the best case investment scenarios:

• BART has an unfunded liability of $187 million
• Santa Barbara has an unfunded police pension liability of $57 million ($220 million in total)
• Thousand Oaks has an unfunded liability of over $30 million
• Chico has an unfunded liability of over $60 million

Combined, just these four agencies and local governments have unfunded liabilities of over $300 million. This is just the pension side of things. California is also short tens of billions of dollars in funding public employee health care as well, not to mention the other pension systems, state and county administered, that are in trouble across the state. California governments and agencies apparently have hard enough of a time getting employees to pay their fair share, making the prospect of California politicians seriously addressing such massive shortfalls any time soon difficult to imagine. That it is even considered a success to have all public employees pay their own contributions in full is a clear indication of how fractured the notion of good governance is in California.