Ballooning pension costs unchecked - Pension cost pileup tied to change in rules

Changes in a national accounting guideline a decade ago helped set the stage for California's ballooning pension liabilities by obscuring the long-term costs of providing the richest benefits in the nation, a former CalPERS consultant says.

Under changes by the Governmental Accounting Standards Board, pension funds can amortize the cost of retroactive benefit increases over 30 years and public employee unions can negotiate to defer salary increases in favor of better pension benefits.

But the shifts meant officials often were unaware of the full costs of their decisions, Citrus Heights accountant Marcia Fritz wrote in a Sept. 30 letter to the board. That's because complex actuarial calculations are simplified to a percentage increase in the government's contribution to pensions for only the first few years.

"Within a year after the rules took effect (in 1998), public employee unions successfully lobbied for changes in funding policies that enabled them to receive increased pension benefits at younger retirement ages for their members and mask the costs to decision-makers," wrote Fritz, who has worked with Assemblyman Keith Richman on pension reform proposals.

Fritz's letter follows a recent Daily News review that found Los Angeles area taxpayers are on the hook for at least an extra $110 billion in the years to come to pay for retiree pensions, health care and workers' compensation benefits.

National pension expert Stephen D'Arcy, a professor of finance at the University of Illinois, agreed that stronger accounting standards could have given elected officials a more accurate picture of the impact of pension enhancements.

"The key problem really is that legislators are interested in gaining political support, and one way to do that is to be generous with pension benefits," D'Arcy said.

"It's possible to defer recognition of the costs of pension benefits to later generations, and unless taxpayers pay attention to this - making it a priority in the voting process - then it will continue, regardless of the accounting standards applied."

Several years after the accounting rule changes, board members of the state's largest pension fund - the 1.4 million-member California Public Employees Retirement System - made recommendations and state, county and city elected officials soon agreed to allow employees to retire at younger ages with more pay, Richman said.

The pension enhancements were retroactive and employees were allowed to calculate their pensions using their single highest salary year, Richman said, adding that California is the only state in the nation that does this.

"CalPERS went around the state and told cities and counties that increasing pension benefits was not going to cost them any additional money, and they were just wrong" said Richman, a Granada Hills Republican who plans to run for state treasurer next year. "As a result, the Legislative Analyst says pension benefits in California are 25 percent higher than the next highest state."

Rob Feckner, president of CalPERS' board of administration, denied Richman's charge.

"That is a stunning distortion of the truth," he said. "We told each and every public agency, in their customized reports, on how every single proposed benefit change would affect their immediate and long-term costs."

In her letter, Fritz noted that the changes coincided with a surge in pension income from stock investments. And she also noted that by using a methodology change allowed under 1999 legislation, the state actually saved $547 million in the first two years after the benefit increases.

But, she said, "When market values later decreased, the board again changed its methodology ... Each change reduced contributions and increased insolvency in pension funds administered by CalPERS."

Gerard C. Carney, spokesman for the independent, nonprofit GASB, which sets financial accounting standards for government agencies, said the guidelines that took effect in 1998 gave pension boards across the nation ample opportunity to assess their unfunded liabilities.

The guidelines just set new standards on how governments should disclose their pension obligations, allowing more flexibility in how pension increases were accounted for, he said.

"Ultimately, officials make the decisions on how to rationally and fully fund the pensions," Carney said. "We only set the financial reporting standards that, if followed, disclose the results of those decisions."

Robert Walton, assistant executive officer for governmental affairs at the California Public Employees Retirement System, said Fritz's assertion that the guideline changes created an atmosphere for pension abuse is "ludicrous."

Walton denied CalPERS underestimated the costs of enhanced benefits. CalPERS has an unfunded liability of $22.3 billion.

"CalPERS did not go around the state and tell employers that benefit improvements wouldn't cost anything," Walton said. "We just didn't do it. Anytime a public employer asks for a benefit increase, we are required by law to give them the cost of that increase."

But James F. Antonio, the retired state auditor of Missouri who served as chairman of the accounting standards board from 1984 to 1995, said he objected to the rule change a decade ago because it removed "virtually all of those constraints on funding approaches" and failed the "fiscal responsibility" test.

Antonio said the guideline didn't "go far enough in requiring recognition of pension costs. It had to do with the period of which we were amortizing the unfunded liabilities."

Mary Bradley, a member of the League of California Cities' Pension Reform Task Force and Sunnyvale finance director, agreed with Fritz that public employee unions persuaded elected officials to use the pension surpluses in the late 1990s to grant benefit increases.

Bradley said elected officials may have made poor decisions because the pension fund data some were presented was two years old and didn't reflect the debts that had begun to mount after the stock market began to drop.

In her letter, Fritz encouraged the accounting standards board to revise its rule and recommend government agencies fully amortize the costs of pension enhancements while employees are working.

"I would not say that elected officials are uninformed, but I can sure say that on complicated issues such as pension reform, they take staff recommendations," said P. Anthony Thomas, a pension reform lobbyist for the 478-member League of California Cities. "And the majority of the time staff are taking recommendations from actuaries."

Everytime I think that a Secretary who worked for the City of San Diego can retire at the age of 50 and collect full salary and benefits I become enraged. How did people let this happen? It's all over the State. How did they think future generation could support this?

state, county and city elected officials soon agreed to allow employees to retire at younger ages with more pay, Richman said. The pension enhancements were retroactive and employees were allowed to calculate their pensions using their single highest salary year

Meanwhile, back in the "real world" (i.e. private sector), workers are seeing corporate pensions reduced or eliminated, are forced to pay ever more into SS (the wage base is rising again in 2006), while bracing for shrinking benefits and increasing retirement age. And we have to foot the bill for these cast-in-stone, can-never-be-reduced, you're-set-from-day-1-on-the-job public retirement scams. We're gonna have lots of folks working till they drop dead to support legions of 50-something retired public employees.

Limited government is the best way to ensure that freedom will be preserved. The Scottish philosopher Alexander Tytler, who lived during the time of the American Revolution and writing of the US Constitution, summed these views:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure.

From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years.

These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage."

Public employee unions should be illegal. There is no protection for tax payers.

The hidden message here is that in the future one of two choices will have to be made: either cancel the absurd pensions fraudulently and negligently granted; or shaft the rest of the California taxpayers with intolerable dilution in the worth of their own, not so generous pensions.
Greed is its own reward. When push comes to shove, as the Airline and auto workers are about to discover, they lose!

I know, it just frosts me...that's one of the reasons I left California. I mean, I'm no math genius, but even I can figure out that these pensions will eventually bankrupts the State. They need to stop it, change the existing ones and be done with it.

Public employee unions should be illegal. There is no protection for tax payers.

And public-parasite pensions should be stopped. Let them do 401(k) plans like the rest of us - unlimited theft by government drones will results in decorated lampposts, eventually.

its the HAVE'S against the HAVE NOTS.....

the civil "servants" and the private workers....

its like living in Russia in times past.....you suck up to the govt and you will always win.....that's why the Soviets had such power...they bought off certain segments of society....

I lump all civil servants in together.....from military to police to teachers to court room stenographers......

wherever you have the govt giving away public money you will find obscene profiteering....

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