When a city, school district or other local government agency gets into financial trouble and pulls out of the California Public Employees' Retirement System because it can't make its required contribution to the pension fund, that bodes ill for the benefits it has promised its retirees.
At best, current employees will see their future retirement benefits frozen at what they’ve already accrued. And if their employer fails to pay the termination fee
Right now in Sacramento, there's a debate over who should have to tell employees when a local government or agency is pulling out of the pension fund. The CalPERS board wants the employer to make the notification because, after all, it was the employer — not CalPERS — that made the promises to employees that proved unsustainable.
But this argument misses the bigger point. It's a little like arguing over who gets to tell the ship's captain about the gigantic iceberg ahead instead of taking action to avoid it. Knowing whom to blame certainly won't help retirees of the city of Loyalton and the East San Gabriel Valley Human Services District, who got letters from CalPERS in August telling them their checks were going to be eviscerated — a reduction caused by their employer's failure to pay its CalPERS termination fee.
The CalPERS board voted last week to seek legislation next year that would require a local agency to notify current employees and retirees within seven days when the agency moves to terminate its contact with the $343-billion fund.
It would be infinitely preferable if there were no bad pension news to be delivered. But as yet there hasn't been the necessary political will to allow a financially strapped city, for example, to make adjustments to its benefits, such as reducing or ending automatic cost-of-living hikes or reducing the benefits for years of work not yet performed, so it could afford to continue to pay both retired cops and those still on the beat.
Pension commitments should be sacrosanct; governments or agencies should not be able to abandon their retirees just because the local economy hits a rough patch or a new governing board is elected with a different set of priorities. And under California law and court rulings, public employee pensions were long seen as precious close to untouchable. Once workers were hired, their pension benefits could not be reduced in value — they could only be improved.
The promised benefits, however, often demanded a bigger-than-expected annual financial contribution from agencies, as costs proved to be greater than expected and pension fund investment returns smaller. As shortfalls emerged, larger cities and agencies had several cost-cutting options they could pursue with employee unions, including layoffs, pay freezes and less generous pension plans for new hires. But smaller cities and agencies didn't have as much flexibility, and soon found themselves choosing between making the pension contributions CalPERS required and providing core services.
Making matters worse, troubled cities or agencies can't withdraw from CalPERS and expect the fund to fulfill the pension promises they made; they have to pay the retirement fund the full projected cost to CalPERS of their employees' pensions. If they don't — and the agencies withdrawing from CalPERS rarely can afford to — CalPERS won't dun other cities or agencies to make up the difference. Instead, the fund will cut the workers' pension benefits to match the amount their employer previously contributed.
Recent bankruptcy court rulings have raised an alternative that seems no better for workers: Insolvent cities may be able to break their CalPERS contracts through the bankruptcy process, potentially treating employees and retirees like creditors who have to settle for less than what they're owed. No city has tested that possibility yet, however.
Will a cascade of retirees seeing their retirement checks slashed change the political calculation for meaningful reform? We may soon find out. Retirees of Trinity County Waterworks District No. 1 will be getting their checks trimmed next, and those of the Niland Sanitary District near the Salton Sea will follow.
So, yes, California legislators should change the law to require notification when any of the roughly 3,000 cities, school districts, fire service districts and other public agencies in CalPERS decide that they can't afford to continue their CalPERS contract. Then they should change the law to make that requirement moot.