SACRAMENTO – A group representing several large public employee unions released a statement last week that mischaracterizes comments by California’s two largest public pension systems about a study of pension reform issues by California Foundation for Fiscal Responsibility.
“It’s no surprise that such a sensitive issue would elicit such overheated rhetoric. However, if you look at what CalSTRS and CalPERS actually say about the substance of the report, you will see that they do not make any claims that fundamentally attack its conclusions and findings,” said Mike Genest, former state finance director and principal of Capital Matrix, which conducted the study.
In May, CFFR released the first two parts of the Capitol Matrix analysis. Chapter 1 describes significant differences in the value of retirement plans among government employees. Correctional officers, for example, retire seven years earlier than teachers with benefits that are 77 percent higher. A mid-level local government employee will retire at age 57 with retirement benefits valued at almost $1.2 million while a comparably paid teacher will receive $500,000 and an employee of a large corporation less than $400,000.
Chapter 2 found that salaries and benefits paid to local government employees are generally higher than the salaries and benefits paid to state government and private sector employees. State and local government employees in California earn similar salaries as their counterparts in the private sector, but generous retirement benefits push total compensation costs significantly higher than private companies.
On August 12, CFFR released Chapter 3, which estimates taxpayer savings that could be expected from two alternative reform proposals. The analysis found that local governments would save $2 billion annually, beginning immediately, if employees pay half the cost of their retirement benefits. Local governments would save $4 billion annually if new employees are offered retirement benefits comparable to those offered by the federal government, but not until the current workforce retires.
The benefits modeled to calculate these savings are still more generous than those offered by California’s largest private employers. Similar reforms would produce significant but smaller savings to state government due to recent benefit reductions and increases in employee contributions.
CalPERS and CalSTRS comments on Chapters 1 and 2 and the authors’ responses follow:
CalPERS: The report is based on artificial models, does not use real data, is short on specifics and lacks comparative data.
Capitol Matrix: The study models 21 different hypothetical employees and compares the value of the pensions and retiree healthcare benefits under several different pension systems. The employee profiles analyzed were carefully chosen to reflect a realistic range of income levels, service years, retirement dates, and other relevant factors. The report and its extensive appendices describe the reform provisions that were used in our calculations and document all data sources and assumptions.
CalPERS: The private sector sample is unrepresentative of California private sector plans.
Capitol Matrix: This is true by design. The report compares public pension benefits to six of California’s largest companies, three of which still offer defined benefit plans (which are disappearing from the private sector). A truly representative sample would have shown far lower private sector benefit packages, making public pensions look even more generous by comparison.
CalPERS: A “results driven” discount rate of 6 percent was used to calculate the present value of employee benefits under the defined benefit program.
Capitol Matrix: The choice of a discount rate is always going to be controversial. While CalPERS argues for a higher discount rate, many economists and financial experts would argue that our assumption was too high. A discount rate of 6 percent is charitable to public sector funds. The current implied interest rate to purchase an annuity on the private market is only about 4.5 percent. Had that rate been chosen, the value of employers’ contributions to public pensions would have soared, maybe even doubled in comparison to the results presented.
The CalPERs criticism also fails to acknowledge that the 6 percent discount rate applies to both pension benefits and retiree healthcare. CalPERS currently uses a 7.75 percent discount rate for pension benefits (based on its expected long-term rate of investment return on pension assets), but California uses a lower 4.50 percent rate to discount future retiree health benefits. Overall results would not have been materially different if we had used these separate rates instead of 6.00 percent for each.
CalSTRS: Unreasonable assumptions were used about projected future salary growth.
Capitol Matrix: No one actually knows what future teachers’ salaries will be, especially in this fiscal environment, but CalSTRS correctly points out that Chapter 1 assumes a 4 percent annual wage growth and omits future merit increases. Had we included those, the relative value of the CalSTRS pension benefit as compared to private sector, federal pensions or the CFFR alternatives would have increased under certain scenarios. It would not, however, have changed our basic conclusion that CalSTRS pension benefits are less generous than other public funds.
“CFFR has crafted a reform proposal that balances the interests of taxpayers and public employees,” said Marcia Fritz, president of the California Foundation for Fiscal Responsibility. “The Capitol Matrix study provides credible data documenting the savings that can be achieved. Now it’s time for lawmakers to do their job and fix one of California’s most critical problems.”