Unfunded liability. CalPERS and CalSTRS. Spiking and double-dipping. All the jargon makes it hard to stay focused on pension bill the Legislature sent to Gov. Jerry Brown on Friday.  But it’s worth knowing about because it’s bound to affect you — even if you don’t work for the government.

Think of it this way: Your friend Cal has run up a really huge credit card debt. Every month, Cal only pays a sliver of what he owes, so the debt just keeps getting bigger. To afford his minimum payments, he has moved into a smaller apartment, sold his car and stopped taking his prescription medicine. But still the debt keeps growing.

That’s the analogy suggested by Joe Nation, a Stanford University public policy professor who was himself a state assemblyman representing Marin County from 2000 to 2006.

Cal is California. And his credit card debt is the amount that the state government as well as most cities, counties, schools, universities and almost every other government agency have promised to pay workers after they retire. If you have kids in school, go to public parks, drive on city streets, depend on firefighters to protect your home or police officers to protect your safety, this problem affects you because government agencies are cutting more and more in order to pay for the pensions.

“Those pension costs are going to squeeze out everything else in the budget, whether higher education, or healthcare, or parks or courts,” says Nation. “You can draw a line from those other programs right back to pensions.”

Currently the state and local governments have promised to pay current employees and retirees about $403 billion over the next 30 years. But they have only set aside $240 billion, by Nation’s calculations. The difference between the two — $163 billion – is known as the “unfunded liability.”

A few years ago that number was estimated at $0. So how did we get into this mess? That depends on your perspective.

According to Nation, the problem dates back to 1999. In that year, the Legislature passed a law allowing state and local governments to make more generous deals with employees. The employees could contribute less to their retirement programs, and yet would get more generous pensions.

The generous pensions looked possible at the time because the government’s retirement fund investments were doing very well. Now investments are doing much worse, and the recession has taken a bite out of tax revenues.

Public employee unions take exception to the idea that they got too much. Dave Low, executive director of the California School Employees Association argues that the state of California can afford the payments it currently owes.

He acknowledges that cities, schools and counties are in bigger trouble. Some have already declared bankruptcy. “The biggest problem in these local jurisdictions is that they poorly managed their money,” he says.

Some of them stopped paying into their pension funds and instead spent the money on new projects like parking lots or ball parks.

Now employees are going to have to pay for those mistakes to the tune of $60 billion. That’s the maximum the new legislation is expected to cost them, in a variety of ways, most of which apply to future, rather than current employees or retirees. Here are some of the most important:

• It limits how much of a worker’s salary can be used to calculated a pension – to about $130,000 for public safety workers and $110,000 for everyone else.
• It forces workers to pay half the costs of their pensions.
• And it raises the age at which workers can retire with full benefits, up to 57 years of age from 50 for public safety workers and to 67 up from 55 for others.

Problem solved?

Here’s where Nation and Low disagree the most. Nation says the amount governments will owe for pensions is going to keep increasing because of higher costs and because the money will have to come out of other projects that could have provided value.

Calculated this way, he thinks the unfunded liability could reach about $600 billion. The $60 billion in savings will take care of only about 10% of that, and governments will have to keep slashing services until the public employees give up more, he predicts.

Low disagrees. Since state workers are paying more for their pensions — not tax payers — this is not money that the state would have had for other projects.

He thinks the $60 billion should just about cover the pension problem. Rather than credit card debt, he compares the unfunded liability to the mortgage on a home. Sure you owe more now than you have in the bank, but what’s important is that you can continue meeting your payments. The state can do that, he says.

Let’s hope the Legislature figures out who is right.

How California’s New Pension Legislation Affects You 31 August,2012Laird Harrison

  • TeacherLady

    I’m a public school teacher in California. I’m 55 and have worked in California for 25 years. I have also been paying 8% of my salary into STRS. If I were to retire today, I would GROSS $2,200 a month. Who can live on that in California??? Tell me, how will this new pension plan affect ME?

    In today’s Chronicle it said “… after the bill takes effect Jan. 1, a person retiring at 55 with decades of service would have a pension that is 48 percent lower than it is today.”

    So now my pension will be reduced to $1,200 a month??? What the heck? I’m wondering if I shouldn’t retire next week . . .And I bet a lot of other “old” teachers are wondering the same thing . . .

  • SAWZ

    Its all meant to scare you Teacher Lady. Your pension is protected by law; a new teacher beginning work on or after Jan. 1, 2013 will look forward to a pension that is 48 percent lower than what you expect to receive.




    On August 8, 2012 the National Conference of State Legislatures hosted a panel discussion relating to the contractual nature of public pension obligations. The panel included Professor Amy Monahan of the University of Minnesota School of Law . . . an advocate of allowing governmental entities to change the rate at which public employees accrue pension benefits. The panel discussion was titled: “How Much Can States Change Existing Retirement Policy?”

    The panel also included Douglas Greenfield, an attorney with a Washington D.C. law firm who refutes Monahan’s legal analysis. As part of his presentation, Douglas Greenfield presented a paper outlining his arguments and analysis . . . “In Defense of State Judicial Decisions Protecting Public Employees’Pensions.”

    A PDF of Douglas Greenfield’s paper is available here:


    A video of the NCSL panel discussion, “How Much Can States Change Existing Retirement Policy?” is available here:


    In his paper, Douglas Greenfield makes a number of observations relating to contractual public pension obligations. A few interesting excerpts are provided below:
    Express legislative intent to create a contractual pension obligation is unnecessary:

    “There is no reason, and Professor Monahan offers none, why state courts may find state legislation has created enforceable contract rights only by identifying an express ‘legislative intent’ in the statutory language, particularly when these courts are considering the nature of their states’ employment contracts with public employees. As explained below, the state courts’ long-standing precedents protecting public employees’ pension contract rights against unilateral reductions are valid exercises of state judicial authority. Where recognized as contractual, public employees’ pension rights are protected generally under state constitutions (in a number of states) and under federal constitutional law, specifically the Contract Clause, against unilateral reduction or elimination by state government.”

    Even where a legislature has enacted an ambiguous statute, an implied-in-fact contract exists:

    “Even if a court were to re-examine the public pension programs within its jurisdiction and to conclude that the legislature that first created those laws did not ‘clearly and unmistakably’
    manifest its express intent to enter into a binding contract for itself and future legislatures – a result that even Professor Monahan would not favor on policy grounds – the court would nonetheless have more than adequate basis on which to decide that those pension laws created enforceable contract rights, based on surrounding circumstances as well as the court’s inherent power to find the existence of an ‘implied-in-fact’ contract.”

    Governments attempting to rid themselves of their own contractual pension obligations (e.g. Colorado PERA employers) will receive greater court scrutiny:

    “Under this test, once a contract is found is exist, the balancing factors are interrelated; the more substantial and severe the impairment, the greater the government’s burden to justify the impairment. Also, government actions taken to relieve the government of its own contractual obligations are viewed more stringently than governmental actions that affect only private contracts.”

    “Thus, the balancing test is applied with more bite when government seeks to alter a contract to which the government itself is a party, as courts reason that self-interest is more likely to be the motivation than public policy when the government is acting to eliminate or reduce its own financial obligations, rather than those of third parties.”

    A real or conveniently perceived “fiscal crisis” provides no justification for breach of pension contracts:

    “Courts applying this type of balancing analysis to amendments that alter public employees’ existing contractually protected pension benefits have almost unanimously treated these efforts as imposing ‘substantial” impairments’, and courts also have typically found governments’ justifications based on even real fiscal crises or emergencies insufficient. Most states therefore cannot readily reduce their existing pension obligations to their employees in an effort to solve a fiscal crisis, and until recently few even tried.”

    Governments have created long-standing expectations on the part of their public employees and retirees . . . these employees and retirees have acted based on those expectations in the employment exchange transaction:

    “In point of fact, the state courts typically have determined whether enforceable contract rights have been created with respect to state pension statutes or codes by evaluating the surrounding circumstances, including the express legislative language, the reasonable expectations of the parties, and the actions both have taken in performance of the contract, as well as the express
    statutory language.”

    In his paper, Douglas Greenfield cites the case Booth v. Sims, a case in which courts rejected legislative attempts to reduce state troopers’ pensions:

    “Unfortunately, the state troopers, secretaries, school service personnel, teachers, highway workers, maintenance employees, assistant prosecuting attorneys and other ordinary state and local workers are not sophisticated politicians who expect their government to lie to them. When, therefore, today’s legislature and today’s governor make those workers promises, those workers believe the promises and organize their lives in the expectation that their government and their employer will treat them honorably.”

    The commitment to use a COLA benefit as a means of paying a portion of the fixed (defined) pension debt is an essential element of the economic arrangement between the parties:

    “Commitments as to retirement age, accrual rates, cost of living adjustments, employee and employer contribution requirements, and vesting periods are all essential elements of the economic arrangement between the parties and also may be essential to the success of the pension program.”

    If courts have historically mistaken legislative intent, legislatures would have corrected these courts over the last fifty years:

    “If the courts had initially mistaken the legislative intent underlying these pension programs, and governments had not intended that they create binding contractual rights, governmental entities surely would instead have taken concrete steps, all these many decades, to correct the courts’ errors and to establish that they intended to have the freedom to revise such arrangements at will, as well as to ensure that newly hired employees understood the precariousness of the current pension arrangements.”

    “The wide-spread, long-standing acceptance by both legislative and executive branches of state government of their courts’ determinations regarding the contractual intent underlying the state pension programs provides equally strong support for the correctness of these state courts’
    recognition of the contractual nature of the pension programs.”

    ‘There is no sound public policy reason to conclude that these promises – based on the reasonable expectations of the contracting parties – should not be fully protected by the laws prohibiting or limiting the impairment of contracts.”

    Visit saveperacola.com, or Friend Save Pera Cola on Facebook.

  • Tough Love

    Low is simply a mouthpiece for the Unions.

    I GUARANTEE he wouldn’t bet HIS financial FUTURE on …” …He thinks the $60 billion should just about cover the pension problem.”

    And he knows he won’t have too …. he’ll be long gone before the Plans go belly-up and will have locked-up HIS piece of the pensions pie.

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