pensions

By Ed Mendel
Monday, August 19, 2013

An issue in the San Jose pension reform trial, a “13th check” bonus for retirees when investment earnings exceed the annual forecast, reflects a widespread attitude that added to public pension debt.

In its starkest outline: When pension fund earnings are above the target, it’s a surplus or windfall that can be distributed to employees and employers. When earnings are below the target, it’s a shortfall that must be paid by taxpayers.

The notion that pension fund investment earnings, now often expected to cover about two-thirds of pension costs in the future, could be regarded as “excess” or “surplus” can seem out of step with the times.

Growing costs of under-funded pensions are taking money from other programs. Optimistic earnings forecasts are said to hide crushing debt. And the long-term viability of public pensions is questioned as similar private-sector benefits disappear.

A belief that pensions have excess or surplus earnings might have been a step in the evolution of actuarial practice, still struggling with volatile stock-market risk after a shift from predictable bonds authorized by voters with Proposition 21 in 1984.

Or declaring earnings excess or surplus might have been a backdoor way to give employees more money and employers short-term budget relief, knowing from the outset future generations were likely to get a larger pension bill.

But whatever the cause, treating investment earnings as an excess or surplus, in ways large and small, has skimmed off money that could have been invested, adding to pension debt rather than lowering it.
The Economist magazine cover, July 27-August 2 2013 issue

The Economist magazine cover, July 27-August 2 2013 issue

In lawsuits to overturn a San Jose pension reform, unions and retirees argue that the “13th check” bonus, totaling about $13.4 million this year, is one of the vested rights, protected by contract law, that are violated by the voter-approved measure.

The city argues that the bonus has been suspended during the last several years, that unions have proposed eliminating the bonus in bargaining, and that the city charter reserved the right to change pension benefits.

An attorney for the city, Arthur Hartinger, described the Supplemental Retiree Benefit Reserve during a five-day superior court trial last month merging several union and retiree lawsuits.

“What it would do is if, for example, in a given year, the fund performance measured in a given year showed that it exceeded the actuarial assumption, you’d take that money, and then subject to the discretion, you could give it away, even though you’re facing a multi-billion-dollar unfunded liability,” Hartinger said.

San Jose’s actuaries assumed investments would earn 7.75 percent a year, regarded as too optimistic by critics but similar to the earnings forecast used by other California pension funds.

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