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Old Mendocino County Courthouse Around 1915

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Retirement benefits including pensions can be structured many different ways. However, in the US we typically think of two (way too simplistic - see Note 1) models - "Defined (or) Guaranteed Contribution" and "Defined (or) Guaranteed Benefit".

Defined (or) Guaranteed Contribution

Almost all retirement benefits in the private sector are Guaranteed Contribution plans - like 401k's, IRA's, etc. The employer pays a certain amount into a retirement fund while the employee is working. Once the employee leaves the company, the employer's obligation is over.

It's easy to figure out the finances of this benefit from the employer's point of view. The expense to the employer is simply the amount paid into the retirement plan each year. And, the employer has no debt.

In very simple (overly-simple, but that's another story) terms employees take all the risk about whether or not their savings will provide them the retirement security they want. Each retiree is "on his/her own" - there is no sharing of retirement security risk with other retirees.

Defined (or) Guaranteed Benefit Pension

Most state and local government pension benefits are Guaranteed Benefits. The Government agrees that retirees will receive a guaranteed pension during a their entire retirement. Even if a retiree were to live 100 years after retirement he or she will get a pension check every month.

The Government can't know with precision how much it's going to pay until the former employee's lifespan is over. Therefore, it doesn't really know how much its debt is. And its yearly expenses are estimates - not certainties.

In contrast to the "pure" (aka "simplistic") definition of a defined contribution system, the employer usually takes all the "formal" risk that the amount of money set aside in a defined benefit Pension Fund will be enough to pay all that is contractually due to retirees. If the Pension Fund runs short retirees aren't supposed to get less - the employer is supposed to pay more.

I say "formal" risk because two federal judges in the bankruptcy cases of Detroit and Stockton strongly state that the amount of pensions owed to retirees and employees CAN be cut in a municipal bankruptcy. Even more fundamentally - history is full of examples showing that when a debt gets to big to pay - it doesn't get paid no matter how much the creditors thought their claims were "unchangeable".

So - in very simplistic terms - individual employees seem to take all the retirement security risk in "pure" defined contribution plans whereas employers seem to take all the risk in "pure" defined benefit plans.

But the "truth" is much more complicated and ambiguous (but that's not a topic for this introductory section).

How Retirement Benefits Are Established & Their Legal Status

There are many "legal environments" in the various states regarding how pensions and other public employment retirement benefits are established and their legal status.

In Rhode Island - for example - public employee retirement benefits are established by acts of the State Legislature. The Legislature can and several times has changed what current local and state employees will receive in retirement and even what those who are already retired will continue to receive. This may be considered as one "edge" on the continuum of practice in the US.

Collective Bargaining Agreements
Pensions Are Established in Collective Bargaining Agreements

Most state governments - including California - require that public employee retirement benefits be established in "collective bargaining agreements" between governments and public employee unions (aka "bargaining units") within the constraints of state law.

But California and 12 other states that have followed California's lead have pushed this legal doctrine even farther to the other "edge" of practice in the US.

The "California Rule"

Through a series of decisions reaching back over the past century the California Supreme Court created what's called the "California Rule" regarding public employee pensions. Simply put - this "judge-created" law is interpreted as meaning that as of the first minute on the job the pension benefit for local and state government employees in California can never be reduced. It may be increased, but if it is then that becomes the new "floor". Pension benefits can "ratchet up" - but can't be reduced.

Every other aspect of employee compensation can be changed. Salaries can be reduced - as can other benefits. In fact jobs can be eliminated. But the State Supreme Court has set this one aspect of "compensation" into a special category - government employers can increase pensions for current employees and retirees but can never decrease them.

That means that pensions can only be reduced for new employees BEFORE they work their first day on the job.

Twelve other states have adopted the "California Rule". Therefore this doctrine rules - at the state level - in 25% of the states. It does not exist in the other 75%.

There's much more to be said about the California Rule - but this is an "introductory" section. We'll have far more to say about this later.

Safety and General Employees

There are two broad groups of public employees in state and local governments. "Safety employees" are peace officers such as police, sheriffs, and fire fighters. Safety employees put themselves in significant risk of harm by the nature of their jobs.

"General employees" are just about everyone else - clerks, road crews, social workers ...

Safety employees have "more generous" pensions because the general belief is they deserve additional benefits as compensation for the extraordinary risk they assume on behalf of keeping the rest of us safe - and the nature of their jobs "wears them out" quicker.

There are often other groups of employees with their own pension "deals". Mendocino County Probation employees have their own separate pension "deal", for example. Other local and state governments may have separate pension benefits for - say - elected officials, judges, etc.

But Safety and General employees are the two main groups in terms of how pension benefits are defined.

Employee Tiers

From time to time governments and bargaining units agree to change the pension deal. These changes don't affect current retirees and rarely change the deal for current employees. Almost always only "new" employees will be in a new tier.

These different employee/retiree groups are referred to as "Tiers" in terms of pension benefits. The County of Mendocino has four "general employee" tiers, three "safety employee" tiers, and three "probation employee" tiers.

The Pension Formula

The collective bargaining agreements establish a formula for each new tier. Some of the most important factors in these formulas are:

  • The number of years an employee must work and/or how old must they must be to qualify to receive a pension.
  • The percent of "final pensionable compensation" the retiree will receive for each year worked.
  • The definition of "final pensionable compensation" which usually includes items other than base salary such as - for Deputies - uniform allowances.
  • The impact on the pension of a disability.
  • The upper limit on the amount of the pension - if any.
  • Cost of Living Adjustments (COLA) in retirement.

There are many other factors that determine what the benefit will be and how much employees will pay as their share of the cost of the benefit.

This shows some of the factors in place today for current and future Mendocino County employees. Other California Counties can and do adopt different values for these factors - but all counties (and basically all governments that offer defined pensions) have tables that generally look like this. I don't show Mendocino County's First Tiers because there are very few who haven't already retired. I also don't show Probation Tiers because they are the smallest of the tiers.

"Can Retire - Age/Yrs Srvc (Service)" is the earliest an employee can retire and how many years of service they must have at that age to do so. All employees can retire at 70 regardless of how many years they worked for the County.

An example - a "Tier Two" Deputy Sheriff can retire at age 55 and receive 3.0% of final pensionable compensation for each year they work. So - if they worked 25 years and final compensation were $100,000 and no other factors are involved (disability, etc.) then the pension will be $75,000 ($100,000 x 0.03 x 25).

  Can Retire
Age/Yrs Srvc
For each year of service - if retire at age or older:
Tier Hire Date 50 52 55 57 62 65 67
General Employees
  Two/Three Before 1/1/13 50/10 1.34%   1.77%   2.62%    
  Four On/After 1/1/13 52/5   1.00% 1.30%   2.00% 2.30% 2.50%
 
Deputy Sheriffs
  Two Before 1/1/13 50/10 2.29%   3.00%        
  Three On/After 1/1/13 50/5 2.00%   2.50% 2.70%      

 

NOTE 1: The debate in the US about public pensions is almost always based on an extremely simplistic "either this or that" concept about retirement benefits. It's either "Defined Contribution" like 401k's or "Defined Benefit" like most public pensions. I believe this rigid and brittle "either this or that" way of thinking is one of the biggest problems we face. Both the "pure" Defined Contribution and Defined Benefit models have very significant weaknesses - but there are ways of combining and modifying aspects of each to produce "hybrid" retirement systems that can avoid the weaknesses of both and build on the different strengths each has to offer. I'll discuss these "hybrid" methods in a future series in the "Goals of Reform" section.

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