Tuesday, October 8, 2013

How Much Would Capping Pensions Help Stockton?

I participated in an issue forum on Measures A and B, Stockton's proposed 3/4 cent sales tax increase, last night.  I was the economist pointing out pros and cons of the tax plan, but not taking a stand one way or the other. 

The most outspoken opponents of the tax are generally opposed to the City's approach to bankruptcy and want the City to cut pension benefits in bankruptcy.  They score a lot of points when they talk about six-figure pensions.  The enhanced pension benefits that allowed safety employees to retire at 90% of their highest salary levels certainly created some ex police chiefs who are collecting nearly $200,000 per year while retired in their fifties. 

The tax opponents' solution: cap pensions at $100,000 per year.  It's an appealing idea, especially when one considers the inequitable impacts of the City's approach to cutting retiree benefits entirely by eliminating healthcare benefits.  That hit lower income retirees the hardest, and if the City was going to take more from retirees by addressing pensions, I would agree that these high pensions or "spiked" pensions would be the first place to look.

But how much would that solution save?  And how hard would it be to implement?

I pondered that after the forum, and looked up some numbers to get a rough ballpark estimate.  Before quoting these exact numbers, I would reemphasize the word rough.

Pension reform advocates have posted the names and pension payments of the 98 Stockton retirees receiving over $100,000 on the web.  In FY 2012, those 98 folks received $12.2 million in benefits from CalPers.  If they were capped at $100,000 each, they would have received $9.8 million from CalPers, reducing CalPers payments by $2.4 million.

I looked up the City's CalPers actuarial reports for FY 2011 (most recent available).  CalPers made a total of $66.3 million in benefit payments to the City's retirees that year.  If there had been a $100,000 cap in effect, that total would have been reduced to about $64 million or only about 3.6%.

But that $2.4 million in benefit reductions should not be confused as an annual savings to the Stockton budget, as CalPers is not a pay as you go system like the discontinued retiree health benefit.  CalPers is making these payments from their investment portfolio.  Saving that $2.4 million payment, and a similar amount in subsequent years, would reduce the City's liability to CalPers which would then translate into lower CalPers contributions from the City.  But the annual savings to the City budget, would be substantially less than $2.4 million, probably no more than half that amount.

So the tax plan opponents have only offered up about $1-2 million in annual savings from this measure, less than 1% of the City's general fund spending.  (Yes, the City needs to find all the savings it can, but the benefits of this action shouldn't be overstated.) 

What would it cost for the City to gain that savings?

The City would have to change its approach to bankruptcy and take on CalPers to reduce pension benefits, and thus invite the precedent setting case that would pit federal bankruptcy laws against state law protecting pensions.  The outcome of that effort would be uncertain, the City could lose.  The only two certain outcomes is that Stockton would end up paying millions of dollars more for lawyers, and that the City would be stuck in bankruptcy for a much longer time.  Even if Stockton prevailed in an effort to cap pensions, it isn't clear that City would have gained much more than it spent in legal costs and time. 

Thus, I see the proposal that the City should try to cap pensions through bankruptcy as a feel good measure that would cost the city more in the short-run than it saves, and may not even accomplish much net savings in the long-run.  The main beneficiary of the City's efforts would be other cities who might benefit from the precedent if Stockton succeeded.  But a City in bankruptcy needs to focus on how to solve its own problems.

Stockton's pension reformers should team up with other like minded people around the state to try to change state law.  For example, the San Jose mayor is working on a statewide initiative that would give Stockton and other cities new powers to adjust pensions.  They should put their energies towards those reforms, and then press Stockton to take advantage of it if they succeed.

For Stockton right now, that energy can best be directed at making sure new employee contracts that will soon be negotiated are sustainable in the long-term.  Pensions are a burden, but they are only part of an overall compensation package, and pension reform is only one way for a City to control its costs of delivering services. 


  1. I agree with most of your comments. The very first requirement, however, is proper, comprehensive accounting so we can see the full amount of pension and OPEB liabilities as part of regular financial statements. The liability effects of MOUs should be considered and pro forma booked into financial reports, then folks can see the true costs. Right now, with no financial statements, no audits, no fully booked pension and OPEB, and only a narrow general fund focus, you really cannot determine the complete picture. A defined contribution DC plan would have many benefits over a classic pension plan. A DC plan can be very generous and used to purchase competitive annuities providing lifetime retirement income. Further, there are substantial assets that are valuable and available, and would be reflected on City-wide financial reports, but there does not seem to be much discussion of those alternatives. The City needs to get much better at financial reporting, internal control, "financial literacy" and transparency, e.g., last night management submitted to EMMA (akin to the SEC) a 6/30/2012 Water Fund Audit report that apparently has not been reviewed or approved by the Audit Committee or the City Council, and the auditor engagement docs have not been disclosed. This is all very irregular. We need substantial improvements in City administrative capability before definitive agreements are reach on a bankruptcy exit plan, and similarly, a Novemeber 2013 vote favoring a sales tax is premature given the paucity of comprehensive, reliable financial information.

  2. Ned,

    Since you commented on defined contribution plans, I will add something I left out of the post.

    I believe if the City were to change bankruptcy strategy and target pensions for cuts, it would only be worth the effort and risk it if they were seeking a much larger change to the system like a conversion to a defined contribution plan. I agree that a defined contribution plan is a better system, but I don't see anything close to the political support needed for that kind of change in strategy. At best, there might be support for caps and claw backs of spiking. I think pension reform advocates overstate the savings from those more limited measures, and may underestimate the cost of achieving them.


  3. Yes, without drilling into the numbers, I suspect you are correct that “caps and claws” would have a small effect. And I know there is probably political resistance to changing retirement plans. But I see your comments as adding force to my call to get comprehensive numbers so we can all see the full costs of current arrangements and alternative plans. Then there can be a rational discussion of a defined contribution (DC) vs a CALPERS style pension plan. Employees could see how substantial and safe benefits would be under a sensible DC plan, and then the political resistance to change might lessen. The City might have the opportunity in bkr to transition from a costly, opaque, quasi-irrational DB plan and move to a sensible DC plan, but that opportunity might be lost if there is not careful, proper analysis before a bankruptcy exit plan is adopted