How Long Can Public Pensions Continue?

Combine a burst housing bubble (and all the attendant vanishing tax revenues) with poor investment returns and a system that was unsustainable to begin with and you have the public pension system in California as reported by Bruce Bialosky at Town Hall.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.

Caution would probably be advised here as we have friends and relatives in both California and Pennsylvania who are retired from the state educational system, now benefiting from this sort of government largess (though not to the same degree as the fire chief above).

It's probably no coincidence that both states had big problems balancing their budget this year and would have had to let thousands of workers go if not for the many billions of dollars that came pouring in from Washington D.C.

Last I heard, there were more than 4,000 retired public sector employees pulling down more than a hundred grand a year in California with Illinois apparently not far behind as reported here. Over the years, cities such as San Diego have been rife with double-dipping like Chief Nowicki above, what does not appear to be an isolated case.

In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?

...

Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement.

The voters in California sent a strong message earlier in the year when they rejected the budget changes proposed by Sacramento and that's probably just the beginning (of course, lots of people are now voting with their feet in the Golden State).

It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground.

On the topic of "fixing" the public schools, one recent conversation went like this:

Retired teacher: "Doubling the number of teachers and cutting the classroom sizes in half is the only surefire way to provide consistently better education. You can't have 35 kids in a classroom and expect a quality education."

Me: "Where does the money come from to pay all these teachers?"

Retired teacher: "The taxpayers!"

Comments

[User 353732:]

1. Pensions are guaranteed by law based in the constitution. Property and personal rights are also guaranteed by the constitution. The California oligarchy as well as the US Regime are now eroding and soon will demolish, unless stopped decisively, the constitutions of both state and Nation. Once property and personal rights are replaced by entitlements, favors, patronage, caprice and the whim of the autocrats, then public pensions too will be subject to whim and caprice and will become instruments of reward and coercion. Some will get princely pensions, many( especially the security and secret services, various informers, propagandists, indoctrinators) will get modest to large pensions as long as it pleases the autocrats to bribe them and some will get no pensions for having engaged in "anti-social activities that harm The People's Republic of California and The Soviet of America". This is how all corrupt and voraciously greedy elites behave when they have absolute power.

2. The constitution may remain intact but may be modified by a transforming, peaceful, reform and regeneration by the productive middle class and all entitlements may be recalibrated and redesigned, including public pensions

3. The State may simply go bankrupt and pay pensions partly in cash, of declining purchasing power, and state scrip(of high nominal but very low real value) ..Or pensions may be "temporarily delayed" first by weeks and then by months: this too happens in economically failed polities

4. There may be a dangerously vindictive revolt in a few years as California descends to third world status and adopts the social and cultural tropes of the third world. The revolt may lead to a new "Constitution'" that allows the new autocrats to retroactively label people Nihilarians which then triggers "legal " revocation of all pension claims by individuals or entire groups.

When economies, polities and societies fail the financial, moral and intellectual bankruptcies are first too gradual to be felt and then too sudden to be stopped.
What follows next is something new and strange and its traits and consequences cannot be anticipated in advance. It does seem, however, the greater the rapacity with which public pensions are demanded and extracted from a steadily impoverished economy and tax payer base, the more violent and punitive will be the inevitable culmination of unsustainable and unjust trends.

Nov 04 01:10 PM

[Pat C:]

This is a very serious issue that should be addressed as soon as possible. We can't expect normal taxpayers that have no such retirement benefit to pay for this.

Nov 04 03:08 PM

[EEB:]

Surely, Tim paints with too broad a brush. He states, "It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground."

I would suggest talking to more people, and talking to people in states other than California. In the Southeast and some other states you will not find excessive public pensions and benefits. For instance, in North Carolina the public pension system and the state health plan for employees are anything but overly generous.

I do agree that in California, and some other states, municipalities, etc., the politicians (really the voters) have simply been far too generous. I don't even think that the voters in California pay any attention to fiscal matters.

However, this problem of overcompensation is not limited to the public sector. Many executives at many corporations are being grossly overpaid. It seems to me that one of the major problems in the US is a lack of balance in compensation for work. Some people, like many corporate executives, college football coaches, college presidents and administrators, non-profit executives, prison guards in California, some firemen in California, etc. are paid way more than the market actually requires. (I'm not saying that these people don't work hard. It's just that others could be hired for much less money.) However, many others aren't paid much, don't have health insurance, don't get any paid sick leave, etc.

These imbalances seem to have started in the corporate world, but they have spread to all sectors of society. Public colleges are now giving presidents and administrators car allowances, special pensions, retreat rights where they are paid to "prepare to teach" for a year while transitioning from the administration back to teaching. Of course, those same colleges are using more and more part-time (adjunct) faculty who are paid poorly, generally lack health benefits, and lack political clout to fight against power grabs by the administrators.

Basically, if we would stop giving away money unnecessarily to the elites in all areas of our society we could move to balance our government budgets, or create more jobs paying $30,000 to $50,000 per year, or a combination of both.

In any case, this is certainly not a problem that exists only in the public sector.

Nov 04 09:05 PM

[nym:]

On another hand, Oregon public agencies, including the pension fund PERS, have been betting bond money on the markets: www.statesmanjournal.c...

Nov 04 10:22 PM

[Zmartmoney:]

The REAL problem here is that DC will back California to the hilt. Their precious takeover of the Republic depends upon places like Ca to look like the whole plan is working well "for the little people." Meanwhile, the little people are being carved up for dinner. But, the power elites (Dhimmicrats), with whom there is no fault found, must protect their Socialism incubator project with all their might...and your money. As soon as the velocity of money picks up, gold will skyrocket and your paycheck will shrink accordingly. Maybe we can monetize the retirement package debt, too!!

Nov 05 10:30 AM

[Random Number:]

The real reason for nearly adequate pay to public employees is to retain workers who otherwise would not put up with the constant criticism and disparagement of ignorant citizens who do not understand or appreciate the services they receive--as evidenced by this article and some of the responses.

True, one can find those who abuse every social system known to humankind, including public employment, but I have seen incredibly more fraud, cheating, stealing, lying, and greed in the private sector than in the public sector. Consider, for example, investment advisors who cannot as a profession demonstrate that they they contribute anything at all to the average investor yet who continue to leech high fees.

Nov 05 11:57 AM

[Vuke:]

Chief Nowicki's are everywhere today. They lurk, like hordes of rats, in banks, brokerage houses, mortgage brokers and are pervasive through every level of government.

Pyschologically, they could be described as sociopaths having little regard for any situation but their own. How this came to be will someday be described by someone like Tom Wolfe but how to get rid of them today is the problem. Riddled throughout, as they are, with like minds governments cannot do it by themselves, nor can many corporate organizations.

The answer, I suppose, in what happens when recessions don't do the job. That is, a depression, deep, dark and devouring.

Chief Nowicki, thank you and all others of your ilk. You've created your dream world at the cost of nightmares for others. May your accomplishments be your epitaph.

Nov 05 06:05 PM

[Old Trader:]

"I have seen incredibly more fraud, cheating, stealing, lying, and greed in the private sector than in the public sector."

Random..

I take it that you've never lived in Chicago.


On Nov 05 11:57 AM Random Number wrote:

> The real reason for nearly adequate pay to public employees is to
> retain workers who otherwise would not put up with the constant criticism
> and disparagement of ignorant citizens who do not understand or appreciate
> the services they receive--as evidenced by this article and some
> of the responses.
>
> True, one can find those who abuse every social system known to humankind,
> including public employment, but I have seen incredibly more fraud,
> cheating, stealing, lying, and greed in the private sector than in
> the public sector. Consider, for example, investment advisors who
> cannot as a profession demonstrate that they they contribute anything
> at all to the average investor yet who continue to leech high fees.

Nov 05 06:25 PM