State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.

Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in incomparable jobs. This justified a better pension & benefit package.

Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRNT employees is “questionable”.

Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.

Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.

But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.

Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

I appreciate your analysis of challenging the status quo for CURRENT workers. Thanks for this.

Sorry Marsha

State Engineers only got caught up in the last five years to pay parity with Public Employed Engineers in California and still are about 10 to 15% behind the Private Sector. That means I was paid 35 to 50% less than a private engineer for the first thirty five years I worked for Caltrans and was still 10%+ less paid when I retired after 40 years. You can’t ignore that. I know it is the case because 15 years or so ago I was constantly getting phone calls from prvate companies for a considerable raise in pay.

Making some catch up lately doesn’t change the fact that by far the bulk of my earnings over my career were considerably lower than private and to say I don’t deserve my reasonable promised for four decades pension at this point because of the latest figures is an irresponsible statement. I don’t doubt that some lower classifications are paid better than in private, but not at the professional levels. Private sector employees should demand to be treated better.

A trillion dollar hole? Spread out over thirty years or more? Obama spent a trillion dollars in one year bailing out banks while their CEOs were getting multimillion dollar bonuses.

And at least partly in California “the hole” exists because Public Employers took a Pension Holiday for years when Calpers was earning well. Please quite twisting the figures. Calpers was more than 100% funded ten years ago, the last I heard they are 87% funded now. And I think they will be close to or better than 100% funded in a few years from now.

Do something useful and go after the crooks who created the financial collapse.

Actuaries did not anticipate that wages would increase at the rate they did over the last few years (to get parity with the private sector) and did not increase contributions to handle these spikes. That is why we are underfunded. The only way to make the funds whole without increasing taxes is to cut labor, which means reduce the number of government workers. I expect that the % of wages needed to shore up pension funds, after the cuts, will be well over 50%.