Michael McDaniel
Executive Director of Sierra Environmental Studies
Foundation
What to ask our local politicians
this campaign season
“How do they plan to fix the broken public employee pension plan system?”
The Problem: Nevada County, Grass Valley,
and Nevada City taxpayers and employees should be
alarmed by the current unfunded debt associated with our local government
agency pension plans. Past elected officials have handed current community
leaders pension debt in the tens of millions of dollars. How do the current and
future leaders plan to fix the problem?
Pension payments promised to current public employees continue to go
unfunded by today's leaders. In
the City of Grass Valley's case, they recently acted to make the problem worse
(amending the pension plan from a 2% at age 55 TO 2.5% at age 55). A
recently published report by Sierra Environmental Studies Foundation identifies
and explains the dire condition of our community’s public employee pension
plans. Our areas pension plans are in the red as follows (approx):
- Nevada County $48,000,000
- City of Grass Valley $4,000,000
- City of Nevada City $677,000
The problem lies in the outdated defined benefit pension plans currently
offered to public servants. In a defined
benefit pension plan the employer promises each employee an income stream at
retirement age (as young as age 50) based on the number of years worked and the
highest annual wage earned. Public
safety employees for Nevada County,Grass Valley and Nevada City earn 3% of their highest years pay for each year they work as long as they
retire after age 50. Each agency is
instructed by CALPERS to set aside a certain amount of money annually to insure
that enough money will be available upon the public servants retirement. As noted, our current leaders are sitting on
pension plans that are upside down.
To compound the problem employee unions have become juggernauts which are
seen as untouchable. Governor
Schwarzenegger built a balanced committee complete with 6 democrats and 6
republicans to design a plan to fix the states unfunded liability problem
(estimated to be over $46,500,000,000). After a year of closed door meetings
the committee decided that the state could not afford a battle with the employee
unions. The same argument is cited by
our local leaders. “The public employee
union is too big and too powerful, our hands are tied.”
Solutions:
The unfunded pension plan crisis is an epidemic throughout the United States. A number of agencies have taken action to
improve the situation. The most rational
solution being implemented across the country is a move away from defined benefit
pension plans to a 401k style retirement system. A 401k retirement package
shifts the investment risk, inflation risk, and plan management risk away from
the taxpayer and to the individual employee. Retirement plans similar to 401k retirement plans more accurately
reflect the retirement packages offered in the private sector.
Solutions being enacted across the US include:
- Updating retirement packages for new
hires to a 401k style program.
- Reneging on past pay raises to public employees
(Orange County)
- Not filling “open” positions (Nevada County)
- Privatizing typical agency tasks
- Raising taxes (New Jersey)
- Decreasing the cost of living adjustment to
existing plans (Kentucky)
- Property Tax increases on ballots (Illinois)
- Longer probation periods before employees become
eligible (Kentucky)
- Raising retirement age (Rhode Island)
- At least five states—including Ohio, Washington
and Oregon—offer hybrid pension plans that combine elements of both defined
benefit and defined contribution plans.
Case Study:
Be a Nevada County Deputy = Be a millionaire by age 50!
The private sector does not use defined benefit plans because of the
expense.
A recently retired deputy sheriff has kept his name in the media for double
and tripple dipping. Who pays for it? You and I. I thought it
might be enlightening to review the math. First, a public safety employee
earns 3% of his salary for every year he works times his highest 1 years salary
(3.0% X years worked X highest years salary = pension at retirement). In our case the Deputy retires at age 50 with $8,000 of monthly income
(to be adjusted upwards each year for cost of living adjustments)...
In order for a non public employee to retire with an
$8,000/month pension plan at the age of 50 he would need to have saved over
$1,500,000. That's the rub. The income stream of $8,000 per month
obtained by way of an immediate annuity (self funded pension) would cost over
$1,500,000 at age 50.
It is the responsibility of our leaders to insure that the
$1,500,000 per employee is saved. What
is your politician prepared to do to solve this crisis?
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