Want to know how California finds itself in debt at the state level by tens of billions each budget cycle? Why three of their cities have already declared bankruptcy this year, and more may be on the way? Here’s a cautionary tale from Stockton, one of the three Golden State cities to shield itself from its creditors this year, where they pay a retired police chief in pension slightly more than half of what the President of the United States makes. That’s a fine reward for devoted service of … eight months?
He lasted eight months and left the now-bankrupt city at age 52 with an annual pension that pays more than $204,000 — the third of four chiefs who stayed in the position for less than three years and retired with an average of 92 percent of their final salaries.
Stockton, which filed for bankruptcy protection on June 28, is among California cities from the Mexican border to the San Francisco Bay confronting rising pension costs as they contend with growing unemployment and declining property- and sales-tax revenue. The pensions are the consequence of decisions made when stock markets were soaring, technology money flooded the state, and retirement funds were running surpluses.
Actually, it’s the consequence of the pension structure itself. California, like most other states, use defined-benefit pensions for their public employees, rather than the defined-contribution plans used by almost everyone in the private sector. The latter either utilizes a 401K plan or something similar, where both employees and employers deposit funds, which get invested over the time of service. When employees retire, they own their own fund and draw off of it for their retirement income, which leaves no overhang of debt for the employer and gives the employee control over the investment strategies used.
The defined-benefit structure, on the other hand, guarantees certain levels of payment regardless of whether the retirement fund has actually performed to that level or whether the employer has made the requisite deposits. The payout levels usually hinge on the average compensation paid during the final three to five years of service. This structure lends itself to all sorts of mischief. People work large amounts of paid overtime to pad the average and boost their retirement checks, for instance. Employers defer plan payments in order to cover other spending, figuring that contemporary tax receipts will cover the eventual costs of retirement; that is why San Diego and San Jose were forced to offer referendums to revise their benefit plans, because those costs ate over 20% of the operating budgets of both cities. Finally, that kind of retirement leads to very perverse outcomes for people who only work a short period of time, and who draw the same kind of pension as those who have worked for decades.
That’s also one of the main problems for San Bernardino, which declared bankruptcy last month:
San Bernardino, a city of 209,000 about 60 miles (100 kilometers) east of Los Angeles, is typical of the phenomenon. Its city council voted July 18 to approve an emergency bankruptcy filing, about six years after the panel unanimously lowered the retirement age for public-safety workers to 50 from 55.
The council acted in August 2006 even though Aon Plc, the city’s risk-management consultant, had warned it that such a change would add millions of dollars to San Bernardino’s long- term pension costs. In the fiscal year that ended in June, pensions consumed 13 percent of the city’s general fund, up from 9 percent in fiscal 2007.
Two of San Bernardino’s former police chiefs receive pensions above the $200K mark. Keith Kilmer actually took another job — as interim police chief in Seal Beach.
Update: A reader objects to this post, as former chief Morris spent more than 30 years on the Stockton police force. That doesn’t change the fact that he’s getting the pension for a chief after only eight months on the job, and that the pension for that position is more than half what we pay the President of the United States for actually being on the job. In fact, the President “only” gets $191,300 in pension per year after retirement.