Doing the Half-Latella

emily

I was delighted that no less a figure than Lani “Tax This!” Lutar herself took the time to respond to my humble (and, as in this case, bumbled) blog. The Dean of San Diego Tax Dissers (that’s right, Dick Ryder’s only a deputy dean) wrote a comment on my blog about the SDCTA municipal pension plan report–401k(illed)–in her usual elegant, intelligent and reasoned prose. (And I am very sincere in this. The LL C(ool)EO of San Diego fiscal frugality is always elegant, intelligent and reasoned. Which really just annoys the heck out of me! I mean, who wants to argue with someone who is always so darn elegant, intelligent and reasoned! Now kitschy Bob Kittle—arguing with him was absolutely guilt-free enjoyment! Miss you, big guy. Arguing with LL is just uncool—especially when she’s right and I’m plain wrong. Or, at least, partially wrong.) I copy her response in its entirety below to save you time, dear reader:

Dear Professor Luna:

Thank you for highlighting our report in your blog. We welcome dialogue and debate on public pensions at any time, especially with those that disagree with our viewpoint.

Please allow me to clarify a few inaccurate statements in your post.

“The only thing the report lacks is empirical proof of its basic thesis: that pension costs are driving tax increases in specific instances.”

If you read my quote in Calpensions (www.calpensions.com) I clearly communicate that pensions are not the only factor contributing to sales tax increase proposals. In both our press release and the pension report, we “link” pension costs and efforts to increase taxes. This is an observation—and nowhere in either document does it state that pension costs alone cause tax increases.

I will concede that we were comfortable highlighting the link between pension costs and tax increases because of fact-based knowledge from time series analysis we conducted in recent years for the cities with the highest pensions costs including El Cajon, La Mesa, National City and Chula Vista (all available on our website). We should’ve communicated this historical background more clearly within our report.

You also note our report is long on recommendations.

Actually, we have only two simple recommendations:
1. Cities should stop picking up the employees’ share of pension contributions.
2. Retirement benefit formulas should be reduced for new hires.

We never state anywhere in the report that defined benefit plans should be replaced with defined contribution plans (401k). And please stop putting words in our mouth: We do not claim that vested retirement benefits should be taken away from municipal workers.

You can argue that asking employees to contribute to their defined benefit plan is a backdoor way of asking for a pay cut. That is true. However, let me point you to page 26 and 28 of our report which debunks your notion that the only way public employees can contribute to their pension plans is via a 401k.

The purpose of our report is to shed light on the generous benefits and significant costs of public pensions provided to municipal employees. When pension costs alone consume 10% or more of a city’s general fund, everyone – city workers included – should be concerned about sustainability and solvency. An insolvent city or city on the brink of bankruptcy hurts communities and public workers.

Another important point you miss is that the majority of public workers contribute little to nothing toward their pensions and their retirement pay is boosted as a result of this practice. Rather than earning a $67,500 annual pension from a 3% @ age 60 formula in the example of a city administrator with 30 years of service, the employee would get an 8% increase in annual pension payments – or $72,900 – because they’re contributing nothing toward their retirement. Yes, you’re reading this correctly. In a bizarre twist, the less an employee pays into their CalPERS plan, the greater the benefit they receive upon retirement. Now that is lunacy.

Sincerely,

Lani Lutar
, President & CEO
, San Diego County Taxpayers Association

Good points, all. As to the point about empirical evidence in the report (or my allegation of lack thereof) I concede a split opinion. Lani concedes the report was not as explicit as it might have been in providing more detailed empirical support of the linkage between pension funds and taxes. I, in return, concede I should have written that the SDCTA was asserting that “pension costs are a causal factor” rather than “pension costs are the causal factor.” But demonstrating how causal a factor pension costs are in increasing taxes is not a minor matter. The SDCTA report calls on municipal employees to pay a price in increased pension costs. Not delineating how big an impact current pension plans have on municipal fiscal policy makes it more difficult to assess whether the pain thereby inflicted on the households of these employees is offset by likely gains to taxpayers, said gains being, I took and take it, the purpose of the SDCTA recommendations.

Lani also calls me to task for saying the report was “long on recommendations” when, if fact, it only had two. True dat. Mine is the guilt of fumbled rhetorical flourish. What I meant was that he report’s recommendations have significant—some might say profound—implications for municipal employees and the hiring of future, talented municipal workers. There might only be two of them but they have potential major significance.

More importantly, though, the LL points out I blew a big one in stating the goal of the report was to move municipal employees away from defined-benefit to defined-contribution plans. I confess I misread the report. I went back to it and read and reread it and cannot find the paragraph I was so certain the report contained stating that future municipal employees should be moved from their current defined benefits plan into 401k style plans. I got that wrong, plain and simple. The report calls for changing benefit calculation formulas and requiring employee contributions, but not for an abolition of the current defined benefit system. Lani is right. (As were getreal and CJ) . I was wrong. Mea and Culpa.

Or, in the immortal words of Emily Latella,  “Never mind.”

I still, however, stick by my principal, philosophical objection to the SDCTA report. I agree with Lani that there may well be inequities within the current pension plan, such as some workers paying less into the system getting more.  (I’m still trying to untie that now and figure out just how it works). I would argue, though, that is an unfairness between current employees within the same system and not, expo facto, an unfairness in comparison with employees outside of the system. A fundamental assumption underlying the SDCTA report is that the current pension plans for municipal employees are unfair or inequitable compared to workers in the private sector because most municipal employees contribute less than most private-sector employees to their retirement and get more in return. I must differ.

The claim that municipal employees do not currently contribute to their pensions is wrong. They are contributing to their retirement plans, no matter how much is or isn’t taken out of their base or take-home pay to fund their retirement plans. They are contributing simply by the fact that they are working for the city. Their labor is their contribution. Their retirement plan is part of their compensation package for said labor, just like their take-home pay and health benefits.

As I wrote in the original post, it is true most private-sector workers don’t have the advantage of such a benefit package. To call the municipal employee’s pensions “generous,” however, is a subjective, not objective, comparison.  One might instead argue that most private-sector employees have ungenerous pensions compared wih the fair and reasonable pensions municipal workers have. The fact that far more private-sector employees used to have similar defined-benefit pensions and the fact that an increasing number of private-sector employees are finding their current defined-contribution plans wholly inadequate to provide for the retirement security they worked for and expected to receive argues, in my opinion, toward this latter observation.

So, I retract my statement that the SDCTA report called for the replacement of current defined-benefit municipal pension plans with 401k-style plans. I stand, however, by the basic point of my piece: the fundamental philosophy underlying the SDCTA report rests on the assumption that it is unfair to taxpayers for municipal workers to have pension plans better than most private workers. And this assumption is incorrect.

“You get what you pay for”—pay municipal workers less and you’ll attract less talented workers, as our local police and fire departments have reported. Saving taxpayers money by cutting back municipal workers pension compensation may save short-term monies but could also cost more in long-term performance and efficiency. Or is it only Wall Street CEOs making gazillions of dollars who respond to the incentive of better pay?

Moreover, I stand by my argument that calling the pensions of municipal workers unfair or too generous compared with private-sector workers is a reversal of the real problem. I contend it is unfair that private-sector workers have seen the value of their pensions (not to mention paychecks) decline for the past generation and that eventually giving everyone in America a retirement the likes of municipal workers would be a national good. Which would be better for San Diego taxpayers—reducing other people’s pensions or increasing their own, after all?

I remain, however, flattered that Lani took the time to comment on my blog at all. Hope to hear from you again, LL C(ool)EO.

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