October 2004

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Guest Commentary

Reed L. Royalty is president of the Orange County Taxpayers Association. Mr. Royalty has challenged retirement benefits that are unnecessary and that will over-obligate Orange County taxpayers. Passage of such ill-advised benefit packages demonstrates the tremendous influence of public employee unions.

The Orange County Board of Supervisors recently approved pension benefits of “2.7% at 55” (2.7% of highest year’s salary times number of years of service at age 55).  Next year, general (non-safety) county employees will be able to retire at age 55 with over 80% of salary.

That’s a nice deal for county employees. But it’s unfair and risky for taxpayers, and it’s not needed.

First, the new benefit is unfair to taxpayers.

Governments justify their retirement and other benefits by comparing themselves to other governments. To be fair to taxpayers, they should compare themselves to the taxpaying private sector, where people are not retiring earlier and richer. In fact, they are deferring retirement, sometimes into their seventies, to support themselves and to pay their taxes. While doing so, they will have the dubious pleasure of watching county employees retire early with inflation-adjusted pensions sometimes approaching 100% of salary. Whether or not the proposed pension increase works actuarially, it’s just not fair to taxpayers.

Second, the proposal is risky for taxpayers.

• The employees will help pay for the increased benefit by foregoing pay raises for three years. But the taxpayers’ liability lasts 30 years. When the three-year contract expires, employees may not choose to renew their contributions, because the California Constitution locks in the new liberal benefit. Once it’s granted, it cannot be taken away. In three years taxpayers may have no choice but to pay the costs that employees agree temporarily to absorb today.

• In 1999, taxpayers were told that “3% at 50” (for police and firefighters) would “cost nothing” because of generous pension-fund investment earnings.  The promise was false: part of Orange County’s $1 billion retirement-fund deficit is attributable to 3% at 50. The same may happen with the new 2.7% at 55 for general employees. We can only hope the Orange County Employees’ Retirement System investment portfolio will help pay for the benefit by earning the assumed 7.5% per year. A majority of the county’s supervisors pointed to last year’s earnings of 20% as justification for the pension increase, but in the past five years (including last year) the portfolio earned only 5%. So far this calendar year it’s earning 1% (and doing as well or better than other pension funds). In the future the portfolio will have to earn far more than 7.5% to erase the deficit created by present low earnings. The new pension benefits are a risky step in the wrong direction.

Third, the proposed increase is not needed.

• The ports of Los Angeles and Long Beach recently advertised for longshoremen. They got over 300,000 applicants. It’s a buyer’s market for labor. Orange County doesn’t need to enrich benefits to attract employees.

• County employees claim to be undercompensated in salary and benefits.  There’s a test for that claim: how many quit this year to take better-paying jobs in the private sector? The answer probably is close to zero.

• If the county truly wants to retain employees, it makes no sense to give them a retirement package that so strongly encourages them to retire early.

• County supervisors claim that paying workers to retire early will save money because they will be replaced by new, lower-paid employees. It doesn’t work that way. Taxpayers will spend more because we will be paying two people per job: the early retiree, and the person hired to take his or her place.

In addition to the $1 billion unfunded liability in the pension system, Orange County taxpayers face a deficit of $1.3 billion in the county’s employee health care fund and still owe $800 million to pay off the county’s notorious 1994 bankruptcy. Yet in conservative Orange County, three Republican county supervisors voted to grant an unfair, risky, and unneeded increase in pubic employee pensions. Go figure.