Number of public retirees in $100K Club skyrockets, but they’re just part of the burden on state pension system

Aug. 5--Back in 2005 -- when Disneyland turned 50, George W. Bush began his second term in the White House and Microsoft released the Xbox 360 -- a mere 1,841 people collected pensions exceeding $100,000 a year in the massive California Public Employees Retirement System.

By 2009, when Barack Obama was inaugurated and Chesley Sullenberger landed an airliner on the Hudson River, this so-called $100K Club had more than tripled, to 6,133 retired workers.

In 2013, when Nelson Mandela died and Prince George was born, membership had nearly tripled again, to 16,838.

And in 2018, the number of public retirees collecting pensions of at least $100,000 a year skyrocketed to more than 26,000, according to an analysis of CalPERS data by the Southern California News Group.

Heading the group was a Santa Clara County attorney who received $935,028 in 2018 thanks to lump-sum payouts, CalPERS said.

Some denounce the $100K Club as a distorted lens on public pension challenges: "What makes the $100,000 Club some magic number denoting abuse other than the claims of anti-pension zealots?" the former chair of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees, said a few years ago.

But it can be considered the canary in the coal mine, signaling stresses on the system as a whole.

Such payouts also tend to inspire "pension envy" in private-sector workers who must depend on 401(k)s and Social Security for income in their golden years -- and who are ultimately on the hook for ensuring that public retirees get paid if CalPERS investments don't cover the costs.

The average Social Security benefit is $17,532 this year. Most Americans will never make $100,000 a year in their prime working years, much less in retirement, according to the U.S. Census Bureau.

"The bigger, broader issue here is that we have pension systems moving in the opposite direction to demographics -- allowing people to retire earlier, when people are actually living longer," said Pete Constant, a former San Jose police officer and city councilman who's now CEO of the Retirement Security Initiative, which seeks to rein in public pensions.

"People's retirement years are going to be greater than their working years, and that's not a recipe for stability or success," Constant said.

Payouts soar

SCNG's analysis of CalPERS data also found that:

* The total number of people getting checks from CalPERS -- including survivors and beneficiaries as well as actual retirees -- rose 41 percent from 2012 to 2018.

* Total payouts rose even more -- in excess of 50 percent -- from $14.4 billion in 2012 to more than $22 billion in 2018.

* While the average pension -- which includes comparably low payments to survivors and people with just a few years of service -- was $32, 224, workers with at least 20 years of service got $50,333, and those with at least 30 years of service got $66,373.

* Public safety pensions for police and firefighters, the most expensive, bestowed an average of $78,104 on retirees with 20 years or more of service.

Big pension payouts are a function of generous retirement formulas approved by city councils, school boards, county boards of supervisors and the state in the halcyon days after 1999, when retirement systems were "super-funded," governments halted payments, and actuaries said sweetened benefits would cost next to nothing because earnings on investments would essentially pay for them.

State and local officials signed on with abandon -- especially in the wake of 9/11, when they were "stepping over each other to bestow wage increases and higher pensions to all first-responders," as one observer said.

Those number crunchers were very, very wrong.

Is it 'unsustainable'?

Consider the home of Disneyland.

Anaheim paid $30.5 million to CalPERS to cover worker pensions in 2008. That soared to $50.9 million in 2013, and ballooned to $88.1 million in 2019-20, according to CalPERS valuation reports.

And so it goes for agency after agency throughout California.

In Long Beach, annual pension payments have more than tripled from 2008 to 2020, from $42.3 million to $137.3 million. In San Bernardino, they grew from $12.6 million to $38.7 million. In Riverside, from $23.1 million to $73.5 million.

Former Democratic Assemblyman Joe Nation, now a professor at Stanford University's Institute for Economic Policy Research, examined 14 public agencies and found that their average annual pension payments grew a stunning 400 percent from 2003 to 2018, while their operating expenditures grew only 46 percent.

That's a painful squeeze, and it's far from over. Annual pension contributions will jump another 76 percent from 2018 to 2030, Nation found.

The League of California Cities echoed his conclusions in a 2018 study.

"Rising pension costs will require cities over the next seven years to nearly double the percentage of their general fund dollars they pay to CalPERS," the league reported. "For many cities, pension costs will dramatically increase to unsustainable levels."

'Crowd-out'

When pensions swallow up more of the funding pie, that leaves less for other things. This squeeze is called "crowd-out," and it's happening right now.

"(P)ublic pension costs are making it harder to provide services that have traditionally been considered part of government's core mission," Nation wrote. "As pension funding amounts have increased, governments have reduced social, welfare and educational services, as well as 'softer' services, including libraries, recreation, and community services."

With pension costs outstripping revenue growth, many cites face difficult choices that will be compounded in the next recession, the league study said. Under current law, they have only two choices -- increase revenue or reduce services.

"Given that police and fire services comprise a large percentage of city general fund budgets, public safety, including response time, will likely be impacted," the league said.

Under official, optimistic return assumptions, total public pension debt in California stands at $285 billion, or $21,846 per household. When Nation assumes far lower returns, that debt surges beyond $1 trillion, or $78,334 per household.

Despite higher contributions, double-digit investment returns and the longest economic expansion in American history, CalPERS and other retirement systems are about 70 percent funded (official version) or about 50 percent funded (Nation's version).

No crisis?

As CalPERS and others push hard to get to 100 percent, a new report suggests that effort may not only be overkill, but harmful as well.

"Public pensions are often viewed as being in a state of crisis, with the threat of default looming -- but overall, our results suggest there is no imminent 'crisis' for most pension plans," said a study released in July by Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors and Louise Sheiner of the Brookings Institution.

The great increase in contributions from state and local governments comes at a significant "opportunity cost," they said.

"Despite a long economic expansion, provision of the core public goods provided by these governments remains depressed: real spending on infrastructure stands nearly 30 percent below its previous peak and state and local government employment per capita remains well below its previous peak.

"Notably, much of this relative decline in state and local government employment has occurred in the K-12 and higher education sectors."

Pension payments have pretty much hit their peak, and will remain there for two decades. After that, reforms will start to kick in, easing the pressure, they said.

Officials from Californians for Retirement Security point to the Brookings report as evidence that a "pension crisis" is malarkey.

"It's unfortunate that former politician Joe Nation, who lost an election to a pro-union candidate and has been on a jihad against public employees ever since, continues to make projections not based in reality," said Steve Maviglio, a spokesman for group.

"The sky is not falling. In fact, the sun is shining on our pension systems and will continue to do so for generations."

'Foundational changes' made

Nation agrees that there's no immediate crisis. "But despite record market gains, most pension systems are no better off than at the start of the great recession," he said by email. "And when the next recession hits, funding levels will be at 50%. Maybe that's when the crisis will be official!"

While the S&P 500 has more than doubled since 2009, CalPERS' funded ratio remains essentially unchanged, Nation said.

CalPERS said it has made "strong foundational changes" to address sustainability, including shortening the time employers have to pay down unfunded liabilities and lowering earnings expectations from 7.5 percent to 7 percent.

"Overall, our next decade is critical as we work on controlling rising pension costs," spokeswoman Amy Morgan said by email. "This includes giving employers more tools to budget and control their future costs under our new trust fund that provides an option for employers to prefund their required pension contributions."

Pensions are funded by workers -- who contribute up to 15 percent of their paychecks monthly -- as well as by public agencies, Morgan said.

In about 20 to 30 years, when workers with more modest retirement formulas replace those with sweetened formulas, cost curves will begin to bend downwards. Those reforms -- adopted under Gov. Jerry Brown in 2013 -- should save some $29 billion to $38 billion over 30 years.

$100K Club

In an article titled "Pension Puffery," Girard Miller denounced the half-truths spun out of the $100K Club.

Concentrating on this small subset -- fewer than 4 percent of CalPERS' total payees -- leaves the impression that "hordes of public employees are all raking in benefits that make them multimillionaires," wrote Miller, who recently was chief investment officer for the Orange County Employees Retirement System.

Still, a $100,000 lifetime pension with annual cost-of-living adjustments does make these folks millionaires, Miller said, with lifetime benefits of $1.4 million to $1.8 million, "far more than any private sector or nonprofit association worker can ever possibly accumulate over a 30-year career by saving for themselves. ... So these pension benefits are fair game for critics."

An analysis done by Transparent California, a nonprofit that seeks to rein in public pensions, found that $100K Club members collected 17 percent of CalPERS' payouts in 2018, even though the group constitutes less than 4 percent of payees.

"The only reason CalPERS matters is because of the cost imposed on taxpayers," said Robert Fellner, Transparent California's executive director, by email. "So it's like if I spent $10,000 a month on a yacht, and then argued it was relatively small amount because I made 500 other purchases that were all for $1 apiece. That doesn't make dilute the impact of paying for the yacht!"

CalPERS says retirees with pensions of $100,000 or more are "executives who hold seats in either city or county offices, or are physicians, or senior managers for police and fire departments." And, unlike the private sector, about one-third of CalPERS retirees don't get Social Security benefits, so their pension may be their sole source of retirement income, CalPERS' Morgan said.

Where to?

"Not everyone wants to blow up the defined benefit system," said Edward Ring, co-founder of the conservative California Policy Center, referring to the CalPERS' model of guaranteed payouts.

"I think defined benefit is a tremendous opportunity. It can be sustainable. It was sustainable. And then they jacked up all the benefits by 50 percent and made it retroactive -- basically doubled liability overnight. Now, they're not sustainable. Make them sustainable again."

That would require overturning the so-called California Rule, which holds that benefits can be adjusted up, but never down. Reformers are waiting for the issue to go to the state Supreme Court.

"If they say yes, we can make changes prospectively and start negotiating lower rates going forward," said state Sen. John Moorlach, R-Costa Mesa, who began warning that the system is unsustainable years before the issue pierced the popular consciousness.

"But it's awkward. Those judges are in a public pension plan."

Lawmakers understand the gravity of the situation, Moorlach said, but moving them to action is difficult. He was a co-author on Democratic Sen. Steve Glazer's bill that would have allowed new hires to choose a 401(k)-type defined contribution plan, with a guaranteed state pay-in, rather than CalPERS' defined benefit plan, with a guaranteed state payout. The bill died in committee.

"Things are developing exactly as all experts predicted," said Fellner of Transparent California. "Present and future taxpayers are paying more, and will continue to pay more, in order to fund pension benefits that are vastly richer than what the average California taxpayer will receive."

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