July 6, 2010 > Editorial: Reasonable compensation
Editorial: Reasonable compensation
The term "reasonable compensation" has taken some dramatic turns in past decades; its interpretation can be radically different within a myriad of contexts. Private enterprise and the public domain have always had a different focus since one is governed by entrepreneurial risk and the other public concern for the common good. Funding and stability within each group are controlled by different factors; the public sector focused on stability while the private sector concentrated on profit. In each case, compensation was designed to accommodate the level of risk and retirement benefits were commensurate.
In some economic bubbles such as Silicon Valley, "Ponzi" schemes flourished. Called a "New Economy," balance sheets were no longer considered significant and money flowed from investors based on ideas, often without merit. The resulting burst of this bubble foretold the larger national and international economic collapse; banking and other large institutions did not heed lessons of the Great Depression, gambling with investment "derivatives" that few understood. Billions of dollars were risked and lost. As a result, while the average American suffered in savings, retirement investments and jobs, there was a notable exception in the public sector. Although many did lose jobs, others have remained and not only withstood the economic storm, but retained expensive and guaranteed retirement benefits as well.
The balance between private and public pension plans has often been found in guarantees associated with them. Many private plans have foreseen problems associated with guarantees of a "defined benefit" plan. This type of plan assumes that, over time, investments will overcome fluctuations and result in promised fixed, inflation adjusted payments to retirees. Many private companies previously provided such plans but found that economic uncertainty can be extremely costly when a promise exceeds assets of the plan. In recognition of this, they began moving away from such plans toward those that fluctuate with market conditions such as 401(k) and defined contribution. Top level executives are often an exception to this behavior and compensation in board rooms is, at times, absurd and abusive. This is a matter for stockholders and, when detrimental to the general public, governmental controls.
Government has traditionally sought to compensate employees in retirement for relatively low pay due to low job market risk. In the past decade or two, this method of compensation has been turned on its head. Current public compensation in a depressed economy has risen above private resources and retirement benefits have skyrocketed. "Spiking," in which employees sandbag income to increase retirement benefits has exacerbated this problem.
In an era of "sustainability," the oft-used catchphrase of finding and retaining "the best and the brightest" has translated into pension arrangements that cannot continue in their current form. Employees who have benefitted from this system will drain it in a method similar to Social Security and the rest of us will be left "holding the bag." Much of the economic crisis befalling governmental institutions can be traced, in large part, to pension benefits.
The Alameda County City Managers Association and Contra Costa County Public Managers Association have issued a report, dated February 2010, that accepts the premise that the present form of retirement for public employees is "not financially sustainable." This inescapable conclusion recognizes the excesses of the 1990s when, what is termed "super funding," resulted in distended benefits based on inflated - and unrealistic - projections.
Although resisting a move toward defined contribution plans, even these folks recognize something must be done to curb the financial drain on their coffers. In good times, local public entities, most using a large management group called CalPERS, benefitted from excellent investment results but now the bell has tolled even for this massive fund. Cities, counties and the State have been forced to contribute unexpectedly, resulting in dramatic increases of personnel costs.
This is not the first time such inflationary pressures have come to bear on the economy and probably will not be the last, but it seems that each time this cycle repeats, lessons of previous incarnations are lost to greed. While public employees bargained for higher and higher benefits, public safety officers took the lion's share moving toward full pre-retirement pay by age 50. No one can deny the unique position of such individuals, but there are many competing places for public monies and rational allocation of funds demands a close look at such largesse.
Unfortunately, as the manager's report concludes, public backlash through the initiative process will be more draconian than a concerted effort by public entities to 'heal thyself.' It is time for them to act and not only curb pension benefits for the rank and file, but take a look at top management compensation and retirement. After all, these managers managed to float above the bargaining units and simply rode the wave to greater benefits for themselves.
As painful as the conclusions of this report may be for public employees, the remainder of the population simply cannot afford to fund these benefits any longer. It is hard to comprehend the level of public employment in this nation but on any State holiday, take a look at the significant reduction of traffic as an indication of just how pervasive it is. By the same token, any move through the legislature or public employee action will be tempered by self-interest and the powerful force of determined unions. Further delays will simply sink our governments into a greater financial hole.
Recommendations of coordinated action including greater employee participation and a two-tier system to replace existing and unsustainable plans should be implemented as soon as possible. It is not beneficial to promise unrealistic benefits resulting in additional severe cutbacks. This helps no one in the long run and is destructive to the concept of public service. Only with unified commitment toward sustainable and reasonable compensation will public employees, elected officials and their constituents feel secure.
Every citizen should read the Proposal for Regional Pension Reform. It is interesting that this report, dated February, 2010, is only now coming to the Fremont City Council for discussion. The report can be found as an attachment to the July 6 Agenda for the Fremont City Council (http://www.fremont.gov/DocumentView.aspx?DID=3950) or at the Tri-City Voice website: www.tricityvoice on the "City Desk" page.