George Diehr presents…
Standing
Up for
the CSU
And Our
Pensions
2/17/2005
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CalPERS Board of
Administration
13 members set policy for…
• Ensuring a secure retirement
• Investing for optimum risk adjusted
return
• Negotiating for quality health care at
reasonable cost
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R
Mike Peters, Dayton Daily News
Kings Features Syndicate
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Traditional Defined Benefit (DB) Pension Systems
• Each party contributes to the retirement fund; the
employee contribution is almost always fixed—i.e., does
not vary from one year to the next.
• The retirement benefit is guaranteed, and is usually
based on age, “final” salary, and years of service: e.g.,
“2% @ 55” (see example).
• The money is managed in a pool to reduce overhead.
• Investment risk is the responsibility of the employer.
• Risks are spread over time.
• Often provide inflation protection and disability and
death benefits.
• Have some degree of “portability” depending on
reciprocal agreements with other public agencies.
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Example CalPERS Pension Benefit
Common plan: State Miscellaneous, 2% at age 55
• Assume 30 years of service, age 63 at retirement
and final salary of $6,000 per month.
• “Standard” retirement benefit is almost 75%
(=30 years times age factor of 2.5%) of final
salary.
• Pension = 75% * ($6,000 - $133) = $4,400.
• Formula: Yrs * Age Factor * (Highest Salary - $133)
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DC Plans—401(k), 403(b): Characteristics
• Employee usually responsible for investment.
• Employer typically provides some contribution,
possibly on a matching basis.
• Investment management costs are generally higher.
• Often vest faster than DB plans; employee owns the
investment.
• In general, feature better portability than DB.
• “Actuarial” and “market” risks fall to employee.
• Lack explicit inflation protection.
• No disability or death benefits.
• Make excellent supplements to DB plans.
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DC Plans: Think You (or Your Broker)
Can Beat the Market (& CalPERS)?
“Fund managers lagged behind market indexes in
’04,” San Diego Union-Tribune, 1/23/05
“Fund managers lagged indexes in 8 of 9 …
investment categories… ”
“The S&P 1500 … outperformed 51.4% of
actively managed domestic equity funds.”
“Expenses also dragged down total returns…
Fees for managed funds tend to be much higher
[than indexed funds], sometimes upward of an
entire percentage point…”
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“Equivalent” Defined Contribution Plan
Under optimistic assumptions, what percent of
salary must be saved to purchase an annuity
equivalent to the DB pension of $4,400/month?
• Assume: starting salary $1,388, increasing 5%/year for
30 years (=$4,400); 8% investment return.
• 22 year life expectancy at age 63 (IRS standard, male).
• Need fund of $716,000 at retirement; return of 4.8%.
See http://www.totalreturnannuities.com/
• Requires contribution of over 21% of salary.
• AND: no benefit to survivor, no inflation protection, no
death or disability benefit.
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Three Proposals That Attack
Fundamental Retirement Security
• A budget proposal that shifts more of the
costs onto employees: employees share in
the investment risk.
AND
• Legislation that ends the current defined
benefit system for new employees;
OR
• A ballot initiative that ends the DB plan.
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BUDGET Proposal
• Most common CalPERS Plan: employer
contribution = 17%; the employee contribution
fixed at 5%.
• The budget proposal: equal sharing of the
contribution by the state and employees means
employee contribution would more than double to
11%—effectively, a 6% pay cut.
• $469 million in pension contributions would be
shifted to K-14 teachers for the 2005-’06 fiscal
year.
• And more: state contribution to health care
premium frozen, …
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LEGISLATION
Assemblymember Dr. Keith Richman proposes elimination
of a defined-benefit plan for ALL PUBLIC employees
• The proposed amendment to the state constitution
known as ACA5, would put all new employees
into a “defined contribution” plan--e.g., 401(k).
• All investment risk would be placed on the
individual.
• Employer contribution would be limited to 6% for
most plans.
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Legislation, continued
• Richman’s plan would require use of private money
managers—e.g., CalPERS could not manage the DC
plan. (This provision may have been dropped.)
• Richman’s staff may be developing a separate bill that
would create plans that would have a dollar-for-dollar
match on up to 10% of employee pay. (P&I, 12/6/2004)
• The DC plan would eliminate disability retirements and
death benefits provided by DB plans.
• A DC plan would provide no protection against
inflation.
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Effects of Richman’s DC Plan
• Would eliminate disability retirement and death
benefits even for survivors of police and
firefighters hurt or killed in the line of duty.
• Might require use of private money managers like
Charles Schwab—e.g., CalPERS could not
manage the DC plan.
• Richman’s staff is developing a separate bill that
would create plans that would have a dollar-fordollar match on up to 10% of employee pay. (P&I,
12/6/2004) [See “Backpedaling”]
• A DC plan would not protect against inflation.
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BALLOT INITIATIVE
The Howard Jarvis Taxpayers Association wants to break
the promise of a defined-benefit pension.
• Their purpose is to hinder/obstruct the
right of employees to bargain over wages
and benefits by using the ballot to end our
retirement system.
• It is like having voters approve every
contract we negotiate.
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Other Notes and Comments: Backpedaling?
Tom Campbell, Director, State Department of Finance,
presentation to CalPERS board, 2/15/05:
– Fundamental goal is that employees, not taxpayers, bear
market risk.
– CalPERS could manage DC plan, continue corporate
governance activism.
– Nothing set in stone—other than that the retirement plan
cannot be DB.
– When asked if market forces might result in salary
increases that would offset reductions in retirement
benefits and, therefore, result in no savings to the state,
Mr. Campbell said YES.
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Will Killing the DB Save Money?
Letter to Bill Lockyer, Attorney General, from
Legislative Analyst & Campbell, 2/11/2005:
“Offsetting Employee Compensation in Other Areas.
Reduction in retirement compensation … could lead to
increases in other types of employee compensation. For
instance, in order to attract and retain employees, some
governments might need to increase salaries to
compensate for lower retirement benefits. Over time,
these types of increased public employer costs could
offset a significant portion of the retirement savings.”
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More Attacks…
• At a recent legislative hearing (Feb. 14 or
15), Senator Tom McClintock expressed his
intent to freeze DB benefits at current levels
for all employees.
• He was not persuaded that laws and cases
have held that this cannot be done.
Point is: We can expect every effort will be
made to reduce benefits or shift costs to
CURRENT employees—YOU!
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Comments/Notes on Pension Reform
Pensions & Investments, 1/10/05
• All public defined benefit plans in the state would be closed to new
employees [starting 7/1/2007] although existing employees could
continue to participate. It also would transform every public fund in
California run by a state agency — including cities, counties, utility
districts and possibly the $39 billion University of California
Retirement Plan [into defined contribution plans].
• The governor favors Mr. Richman’s proposal, which, under a new
revision, would cap employer contributions between 6% or 9% of pay
for most government employees. [6% for almost all CSU employees]
• According to the CalPERS data, administrative costs of defined
contribution plans are typically 1-2% of assets, vs. 0.18% for
CalPERS, the nation’s largest defined benefit plan.
• CalPERS’ research also shows that 80 cents of each $1 in a defined
benefit plan is paid out in benefits, vs. 50 cents in a defined
contribution plan. For benefit payments to be the same, contributions
would have to increase substantially, according to the National
Conference on Public Employee Retirement Systems, Washington.
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Comments/Notes continued
• Some union leaders suggested the governor’s defined contribution
proposal piggybacks on President Bush’s plan to privatize Social
Security. “This is the California version of Social Security
privatization,” Carroll Wills, spokesman for California Professional Firefighters.
• Others suggest a backlash toward CalPERS for its activist corporate
governance positions.
• … opponents of a shift to public defined contribution plans worry that
participants are not prepared to manage their own retirement assets.
“You’re putting so much risk of the stock market onto each individual
person, they become in danger of losing retirement protections,” Art
Pulaski, executive secretary, California Labor Federation, AFL-CIO.
• “It’s a hard thing to make the public understand about our pension
systems, and why we need them,” Fred Nesbitt, executive director of
NCPERS.
• "There's an old saying, so goes California, so goes the rest of the
nation. That's exactly what they're worried about. You talk about
pensions. What do you think, it's just about California? No. If
California's pension system goes, now it will go like an avalanche.”
Orange County Register, January 25, 2005
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Myths: Exploding Pension Costs,
Extravagent Benefits
• During the 1970s and 80s, employer
contribution rates exceeded current rates.
• The state and public agencies enjoyed
dramatically reduced contributions during
the market boom.
• Had agencies banked contribution savings,
the situation today would be quite different.
• Average pension is only $1,669/month.
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State Pension Contributions, Millions $
The Critics' Myopic View
$3,000
$2,500
$2,000
San Diego Union-Tribune headline:
“State’s CalPERS payment surges 18fold in 3 years.”
2,564
2,213
$1,500
1,190
$1,000
677
$500
160
157
'95-96
'96-97
$0
'97-98
'98-99
'99-00
'00-01
In his State of the State address, Schwarzenegger said the state’s pension system is “another financial train
on another track to disaster.” The state’s pension contributions have soared to $2.6 billion from $160
million in just four years, he noted.
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State Contribution Liability and Cumulative
Reserve with Fixed Contribution Rate
$5,000
$4,500
$4,000
$3,500
If the state contribution had continued to
grow at a 6% rate and earn 5% interest,
the cumulative savings would amount to
over $4.4 billion at the end of 2004/05.
$3,000
2,564
$2,500
2,213
State contribution at 6% annual increase.
$2,000
$1,500
1,120
1,236
1,223
$1,000
1,190
766
$500
677
160
157
$0
'95-96
2/17/2005
'96-97
'97-98
'98-99
'99-00
'00-01
'01-02
'02-03
'03-04
'04-05
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Sources of Income, CalPERS Retirement Fund
(Amounts in 1000s)
Members
1995
Investment
Returns
1,578,934
12,504,528
1996
1,338,045
1,850,103
13,137,202
1997
1,379,744
1,986,282
20,455,866
1998
1,443,233
2,289,526
23,518,905
1999
1,552,508
1,598,317
17,622,527
2000
1,751,290
362,614
16,582,658
2001
1,766,256
321,619
(12,248,341)
2002
2,154,743
800,965
(9,699,793)
2003
1,887,926
1,925,044
5,482,732
2004
2,266,445
4,261,347
24,272,573
14,564,367
12,713,404
87,356,284
12.7%
11.1%
76.2%
Totals
Percents
2/17/2005
$1,290,624
All Public
Employers
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Experience in Other States
• Florida: DC alternative established in 2002.
State contributes 9% of salary. 5% of existing
employees transferred; 19% of new employees.
Mgmt cost for DC plan: 1.7%.
• Michigan: Since March 1997, new employees
have DC (only) plan. 40% of assets are in
plan’s default money market fund.
• Nebraska: After 20 years of DC plan, state
converted back to DB. DC returns were 6-7%;
DB plan returned 11%.
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The Social Security “Crisis”
• “The net PV of the shortfall in revenues over the
next 75 years is $3.7 trillion [assuming a very
cautious 1.6% growth rate of U.S. economy], only
about 1/3rd of the NPV of the Bush tax cuts of
2001 and 2003.” Laura D’Andrea Tyson, Dean,
London Business School, Business Week, 1/17/05.
• “It really is that stark: Any [stock market] growth
projection that would permit the stock returns the
privatizers need to make their schemes work
would put Social Security solidly in the black.”
Paul Krugman, NY Times, 2/2/05.
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Cost of “Saving” Social Security
“A Menu” for Solvency,” San Diego Union-Tribune, 1/30/2005
Action/Change and % Reduction in Shortfall at Year 75
1. Raise cap on taxable wages to $140,000
2. Increase payroll taxes 3/4% (3/8% for
both employer and employee)
3. Invest 15% of SS funds in market index
account
First three would eliminate 94% of shortfall!
4. Raise retirement age to 70 by 2083
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43%
36%
15%
38%
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Know Your Friends and Your Enemies
http://www.sourcewatch.org/wiki.phtml?title=Grover_Norquist
"My ideal citizen is the self-employed, homeschooling,
IRA-owning guy with a concealed-carry permit. Because
that person doesn't need the goddamn government for
anything," he said describing members of the "Leave-UsAlone Coalition".
Even within conservative circles, Norquist's combative
personality has made enemies. Conservative columnist
Tucker Carlson once called him a "mean-spirited,
humorless, dishonest little creep ... the leering, drunken
uncle everyone else wishes would stay home."
Jill Zuckman, Conservative operative is in the right place at the right time Orlando
Sentinel, June 15, 2003: "Norquist is highly specific about his ultimate objective....
'The goal is to reduce the size and scope of government in half over the next 25
years,'.... Norquist and the White House are so close that it is sometimes difficult to
discern who is influencing whom. But such Bush initiatives as privatizing Social
Security, … bear all the marks of Norquist's thinking."
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What Can We Do To Protect The
Promise of Retirement Security?
• CFA is part of the Pension Protection Coalition.
• CFA is working with SEIU on the Secure Retirement
Campaign.
• As individuals, we must persuade the voters that it is
not in the state’s interest to eliminate the DB pension
for public employees.
• Diehr will be visiting most CSU campuses to explain
the threats of budget changes and legislation.
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Be Informed. Get Involved.
Resources & Contacts:
George Diehr: gdiehr@csusm.edu
CFA: secureretire@calfac.org
Web: www.calfac.org
CalPERS: www.calpers.ca.gov
AFL-CIO Center for Working Capital:
www.centerforworkingcapital.org/RetirementSecurity/
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