Retirement Costs Inflate State, Local Budgets

Marcia Fritz
CPA and President of the California Foundation for Fiscal Responsibility

State and local government employees in California earn similar salaries as their counterparts in the private sector, but generous retirement benefits push total compensation costs significantly higher than what California’s largest companies spend, according to a study released today.

California’s largest employers typically spend less than one-third what state taxpayers spend on employee pensions and retiree health benefits. A state employee earning $60,000 annually will accumulate pension and retiree health benefits valued at $19,000 a year. A comparably paid employee of a large California company will receive retirement benefits worth less than $6,000.

California’s 2011-12 state budget includes $6 billion for the major state retirement plans. The study compares only the employers’ cost of benefits; it does not include the value of contributions employees make to their retirement plans.

If taxpayers spent what California’s top companies spend on employee retirement benefits, the state would have $3 billion more this year for schools, public safety and other essential services. The rationale for generous public pensions used to be that public employees accept lower salaries, but that doesn’t withstand scrutiny any longer.

“Governments can’t manage their budgets when they can’t adjust wages and benefits to changing economic conditions,” said Michael Genest, former state finance director and principal of Capitol Matrix, which authored the study sponsored by the California Foundation for Fiscal Responsibility. “This is a fundamental public policy question that California must resolve to regain control of its financial future.”

State retirement benefits are generous, but they are far more generous for some employees. Prison guards and California Highway Patrol officers can retire seven years earlier than teachers with benefits that are 77 percent higher. Prison guards and CHP officers also collect larger benefits than FBI agents and other federal law enforcement officers. A 53 year-old California public safety employee with 26 years service and an annual salary of $140,000 will be entitled to retirement benefits valued at $2.2 million, according to the financial analysis. A federal agent’s benefits would be worth $1.6 million.

Teachers’ retirement plans were designed for teachers who retire after 30 years in the classroom. Today’s teachers are more likely to work ten years and leave to start a family or a new career. Some enter the teaching profession in the middle or later stages of their careers. A teacher who spends eight years in the classroom at a young age leaves with retirement benefits that are worth less than the teachers’ own contributions to his/her own plan. In the same period, a comparably paid local government employee has accumulated benefits worth $58,000.

Brad Williams, former chief economist for the Legislative Analysts’ Office and principal author of the report said, “Salaries and benefits paid to local government employees are generally higher than the salaries and benefits paid to state government and private sector employees. There is also a striking difference in the value of retirement benefits provided to career employees. A local government employee who begins a career at age 27 with a $45,000 starting salary and receives normal wage increases can retire at age 57 with retirement benefits totaling almost $1.2 million. A similarly situated teacher will receive $500,000 and an employee of a large corporation less than $400,000.”

Pension reform doesn’t mean retirees must lose benefits. Public employees will always keep what they’ve earned. But reform is desperately needed to reverse the course that has produced pension debt our grandchildren’s grandchildren will be paying for. A state constitutional amendment aligning public and private retirement benefits will save billions of dollars now and into the foreseeable future.

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