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BENEFITS BEAT
Rialto’s Pension Give-Away
Retroactive pension increases waste taxpayers' money.
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Pity the taxpayers in Rialto, California. Their city council just approved a 50 percent pension increase for police officers in a dubious attempt to keep up with the Joneses. Their officials reportedly say it's necessary "to attract and retain" officers.
Nice try, folks, but only half-true. I won't argue about future service credits, but I sure have a bone to pick about making this whopping 50 percent benefit increase retroactive. If this decision stands, taxpayers will pay a huge bill to fund a windfall to incumbent employees and get nothing of real value in return.
As I've written in previous columns, retroactive pension benefit increases are usually a sneaky move by public officials to win a union contract while they punt the costs to future taxpayers.
Here's what's wrong with Rialto's picture:
1. Granting a pension increase retroactively does nothing to "attract" new recruits, nor to "retain" existing employees: New recruits only care about the future crediting rate that applies to their prospective years of service. They have no interest in what incumbent employees are paid for past service. In fact, they haven't even met the incumbents. As to retaining employees: If incumbents get a retroactive benefit, the perverse financial result is that they can then retire earlier and receive the same benefits they had previously expected to earn after a lifelong career, which completely backfires on the employer and especially taxpayers. How does that promote retention?
2. Under prevailing pension financial practices, the resulting unfunded liability will be amortized in the future and thus paid by the community's children, for work done years ago in service to the prior generation. This defies all logic, to say nothing of fairness in taxation and financial policy.
3. To retain employees, the city could easily make additional contributions to their 457 deferred compensation plan accounts (or a supplemental defined contribution plan) with a future-vesting requirement so that the "retained" employees actually have to stick around in order to enjoy their costly new benefits. This arrangement would also ensure that the cost of the sweetener is paid for by current taxpayers who, presumably, are getting the benefit of this "retention."
4. Alternatively, the sweetened retroactive benefits could become effective only after the incumbent employees work another five to 10 years and/or reach age 62, with a graded vesting schedule that pays them to stay on the job long enough for the city to pay for this new benefit. If they leave earlier, they should take an actuarial reduction.
5. To properly finance all this, the city could demand something in return, such as reform of its retiree medical benefits program so that future hires are put into a less costly program that could still offer far better benefits than most Rialto taxpayers are likely to receive. City negotiators and city councils need to demand a quid pro quo when they give away this kind of money and burden future taxpayers.
6. There is nothing wrong with a benefits policy that limits a new, sweeter pension formula to the years worked after the new benefit is put into place. That avoids creating a new unfunded liability, which is a new debt that will be payable entirely by taxpayers. Think of it this way: The city council would never think of floating a bond issue and obligating future taxpayers without first holding a full public hearing and perhaps even holding a referendum.
I'm not here to bash police officers or the firefighters who are waiting in the wings to win similar benefits when their contract expires (the public safety buzzword is "parity"). In fact, I deeply appreciate the valued service these professionals provide in times of emergency. (Last fall, I wrote a special column after the public safety teams saved my neighborhood in the Malibu fires.) These first responders deserve fair and competitive pay and benefits. And I fully appreciate that Rialto officials face huge pressure from their public-safety employees to have benefits comparable to other neighboring jurisdictions. But as my dad used to say, "Two wrongs don't make a right."
Eventually these retroactive pension increases could lead to taxpayer backlash, as in the case of the California taxpayer group that is promoting the idea of a "Pension Prop 13" to outlaw all retroactive pension increases and put curbs on the payout formulas. A little common sense by municipal management personnel and elected officials would help avert that kind of a statewide effort. Otherwise, Rialto and others will become the poster children for a political debate they will wish they had never entered.
A final thought: If the city wants to pay future employees 90 percent of their salaries at retirement — and hopes to have the financial wherewithal to afford that — it would be far wiser to require age 62 for normal retirement at such generous levels so that the workers are actually employed longer than they are retired at taxpayer expense.
Perhaps it's not too late to fix these oversights before they become irreversibly costly. And hopefully, other public employers and elected officials will begin to pay closer attention to the nasty, unintended consequences of retroactive pension benefits.
Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities. More biographical information.