2/17/2005 1

George Diehr presents…

Standing Up forthe CSUAnd OurPensions

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CalPERS Board ofAdministration

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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Mike Peters, Dayton Daily NewsKings Features Syndicate

R

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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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LEGISLATIONAssemblymember 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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• 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-for-dollar match on up to 10% of employee pay. (P&I, 12/6/2004) [See “Backpedaling”]

• A DC plan would not protect against inflation.

Effects of Richman’s DC Plan

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BALLOT INITIATIVEThe 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 ReformPensions & 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

160 157

677

1,190

2,213

2,564

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

'95-96 '96-97 '97-98 '98-99 '99-00 '00-01

San Diego Union-Tribune headline:“State’s CalPERS payment surges 18-

fold in 3 years.”

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

1,1201,236 1,223

2,213

2,564

157160

766 677

1,190

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

'95-96 '96-97 '97-98 '98-99 '99-00 '00-01 '01-02 '02-03 '03-04 '04-05

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.

State contribution at 6% annual increase.

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Members All Public Employers

Investment Returns

1995 $1,290,624 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

Totals 14,564,367 12,713,404 87,356,284

Percents 12.7% 11.1% 76.2%

Sources of Income, CalPERS Retirement Fund(Amounts in 1000s)

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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

43%

36%

15%

38%

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"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-Us-Alone 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."

http://www.sourcewatch.org/wiki.phtml?title=Grover_NorquistKnow Your Friends and Your Enemies

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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/