EDITORIAL: Time to address the pension problem EDITORIAL: Time to address the pension problem (December 15, 2004)

How long will it be before the California Legislature or the state's cities and fire districts drum up the courage to demand a rewrite of the gold-plated pension plan that permits public-safety employees to retire at 90 percent of their highest pay after 30 years service?

Some relief may come during the next legislative session, as noted in last week's cover story, an update on the pension problem. But the legislation promised by Assemblyman Keith Richman, a Granada Hills Republican, isn't likely to get much of a hearing unless local governments speak up. Mr. Richman says his bill, which would require a constitutional amendment, would set up a 401(k)-type system for all state retirement programs.

That would be substantially different from the "defined benefit" system in use today. Under that system's "3 percent at 50" plan, a hypothetical Menlo Park firefighter with 30 years service can retire at age 50 and receive a pension of $86,281 a year until death. Other municipal employees are now eligible to receive 3 percent at 60, or 90 percent of their highest pay at age 60 if they retire, although few if any cities in San Mateo County have adopted this plan.

These generous pensions, which far exceed the norm in private industry, have made retired California public employees some of the highest paid in the nation. A study of non-safety (miscellaneous) employee pensions by the state Legislative Analyst's Office compared benefits of California, Texas, Florida, Illinois and Oregon state employees. It shows that California state employees enjoy the highest average annual benefit at each age threshold studied. For example, at age 65, the average state employee in California retires at $46,500; Texas followed at $40,775; Oregon, $29,606; Illinois, $28,913; and Florida, $28,410.

Assemblyman Richman's measure is a welcome effort to right the unintended consequences of the pension law changes passed during the boom years of 1999 and early in this decade. The changes are now placing an ever-tighter grip on the shrinking revenues of local governments and special districts as those agencies pick up a sizeable portion of the tab for escalating pension costs they had hoped would be covered by investment earnings of CalPERS, the California Public Employee Retirement System.

The 1999 bill permitted, but did not mandate, California cities and special districts to offer the "3 percent at 50" option to public-safety employees at a time when, with housing costs soaring, local agencies were fighting desperately to retain their police and firefighters. It wasn't long before most cities and districts in the county adopted the package just to stay competitive, an easy decision because, at the time, the high CalPERS earnings covered the payout.

But when the stock market boom went bust in 2000 and wiped out CalPERS' investment profits, soaring pension costs fell more heavily on cities and special districts.

In Menlo Park, public-safety pension costs went from $260,000 in 2003-04 to $1.75 million this fiscal year. Next fiscal year's projected cost has already exceeded an earlier estimate by $853,000, and is expected to hit $2.59 million -- a 48 percent jump in just one year. These huge increases come at a time when all local government agencies are scrambling for every dollar.

At the Menlo Park Fire Protection District, pension costs jumped from $290,000 in 2002-03 to an estimated $3.5 million this fiscal year. Chief Paul Wilson defends early retirement options, saying they are needed in a field that places a premium on physical fitness. But although the Menlo Park district decided last month to forego a special assessment tax on property owners to cover revenue lost through state take-aways, it has been forced to make significant budget cuts in recent times.

The situation is magnified at the state level. Assemblyman Richman says state studies show a tremendous increase in pension-related costs to the state, running from $200 million in 2001 to $1.9 billion in 2004-05. Costs are projected to be $3.42 billion in 2009-10.

His legislation would create a ceiling on public agencies' contributions to pension funds as a percentage of payroll, although it would allow public safety and other workers to negotiate more generous deals than non-safety employees. And only those workers who entered the system after July 1, 2007, would be affected by the new plan, which would allow employees to invest their own pension assets.

State Sen. Jackie Speier, who represents Portola Valley and Woodside, has likened the pension problem to a "firestorm brewing," although she stops short of supporting Assemblyman Richman's bill. She said that local governments can address the problem in part by renegotiating pension benefits with their employees. But she agreed that, with the state's pension costs soaring, the Legislature is going to have to take action, including considering the option of "sun-setting" the "3 percent at 50" and other enhanced retirement plans.

Those are welcome words that lend some hope that relief is possible in the next few years. And we would welcome state Sen. Joe Simitian and Assemblyman Ira Ruskin to join and support Sen. Speier's and Assemblyman Richman's legislative efforts.

Last year in this space we suggested that the problem should be solved at the state level, reasoning that small jurisdictions could not take the initiative to drop benefits below that of competing fire and police agencies. This still holds true, but it doesn't mean that local governments should remain silent on the subject. We urge Menlo Park and other local officials to testify in support of public-pension reform.

We believe "2 percent at 50" or even "2.5 percent at 55" are generous and reasonable compromises to the budget-busting "3 percent at 50" plans currently in place. It will not be easy to overturn this gold-plated benefit, especially when we all value and respect the tremendous work that public-safety employees do for us every day.

Local and state legislators should not feel that a vote for pension reform is a vote against public-safety employees. We believe that support for reform will grow in the Legislature as more local governments explain the negative impacts of the bloated "3 percent at 50" retirement package. It is time for the Legislature to take action on this critical measure.

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