What Happened?
Taxpayers in Ventura County, California, are proposing an initiative to reduce its $1 billion unfunded pension liability by changing pension plans for new public employees and elected officials. Currently, the county has seen annual pension costs increase by 260 percent from $45 million in 2004 to $162 million in 2013.
The Goal
The Ventura Taxpayers Association and the Committee for Pension Fairness filed the initiative in an effort to reduce the growing pension debt that now accounts for 17 percent of the county’s budget. If the proposal is approved in November, new officials and employees of the county will be offered a 401(k)-style defined contribution plan rather than the previously issued defined benefit plans.
Many cities are adopting defined contribution plans that resemble retirement funds issued by private sector employers. The design of the plan guarantees county contributions to employee retirement accounts. Employees will have control over their 401(k)-style account and freedom to contribute any amount they see fit to their retirement. Furthermore, pension-based salary increases would be limited for five years to avoid extremely high pension payouts that could increase the county’s debt.
How It Got So Bad
The Committee for Pension Fairness reports 80 percent of retired public employees from the county receive pension payments exceeding $100,000 annually – well above their salary range. Ventura County may have fallen prey to pension spiking – which occurs when soon-to-be retirees factor in lingering vacation, sick pay and other benefits when determining their final salary figures to define their pension payout.
Pension spiking is a problem being reported nationwide causing pension liabilities to skyrocket despite tightened budgets. Critics of the various proposals to adopt a 401(k)-style benefits plan argue cities run the risk of reducing the quality of public services to residents when employee benefits are reduced or altered. One way many municipalities have remained competitive in recruitment in the past is through attractive benefits programs.
New York Challenges
On the other side of the country, public school districts in New York City are struggling to overcome pension liability concerns. The city’s $144 billion public pension fund system averaged a 7.6 percent return in the last decade, which is almost average across the country. New York City’s annual pension costs make up 11 percent of its overall budget, totaling $8 billion in 2013.
The Economist argues if the city could increase returns by 1 percent, an additional $1.4 billion could be added to the budget to help reduce the annual pension expenditure. To achieve higher returns, however, the city would have to create five unique pension plans with individual investment policies and trustees for different categories of public workers.
Such a structural change would increase the complexity of the pension system, as well as create new costs for third party management and consulting – creating a new set of obstacles in the way of significant cost reductions.
Eyeing the Pensions
Gov1 has followed different strategies for pension reform across the country such as shared-risk initiatives.