Briefing Book

White House Conference

California Public Employees' Retirement System Lincoln Plaza, 400 P Street Sacramento, CA Executive Office P.O. Box 942701 Sacramento, CA 94229-2701 Statement of James E. Burton, Chief Executive Officer, California Public Employees' Retirement System White House Conference on Social Security December 8, 1998 The Administration is considering - and several bills include - mandatory Social Security coverage of newly hired public employees and their employers. We understand that this is part of an overall program reform. The General Accounting Office says the revenue from this specific "reform" will support the Social Security program for only 2 of the program's 75-year horizon. The issue, the advocates say, is simply a matter of "fairness," that the Social Security program should be "universal." "Fairness" is in the eyes of the beholder. It is an anomaly that those who - in other forums - advocate greater attention to public education and law enforcement would, in the name of "fairness," take funds from State and local agencies responsible for those same public services. It is important to remember that the Social Security Act of 1935 did not establish a "universal" program. State and local governments and their workers were initially specifically and intentionally excluded. Because of this, those State and local governments that had not already established their own retirement systems did so. Years later they were given the option to join Social Security voluntarily. This new proposal would have the effect of penalizing those local governments that took responsibility for their own employees by establishing their own retirement systems. The proposal would likely be funded immediately by a mix of reduced public services, higher fees, and reductions in salaries and other benefits paid to the affected public workers. Newly hired workers and their employers could ill afford paying both Social Security taxes & contributions to their long-standing public employee retirement systems. As a result, these established retirement systems - systems that have helped build America's capital structure over the past five decades - would experience reduced new cash flow. Over the long term - 10 to 12 years from enactment of the proposal - even fully funded public employee retirement systems would be forced to begin preserving cash to fulfill their contractual obligations to send monthly retirement checks to shrinking numbers of beneficiaries over decades. In most State and local jurisdictions, retirement benefits become part of the employee's vested contract rights upon employment. When conflicting financial obligations are imposed upon the governmental employer, that employer must look to other options - raising taxes or decreasing services or non-vested benefits - to pay for these pension obligations. Health benefits which are generally not vested rights are likely to become one of the first casualties of the out-year impact of mandatory coverage. There would be statewide impact in California, Alaska, Colorado, Connecticut, Illinois, Kentucky, Louisiana, Massachusetts, Missouri, Nevada, Ohio and Texas. There would be localized impact in places such as Baltimore, Phoenix and Tucson, Miami and Tampa, Winston-Salem, Memphis, and elsewhere. Nationwide, there are an estimated five million public workers currently not covered by Social Security. In California, there are more than 1,800 public agencies currently employing about 750,000 employees - most of them teachers - not covered by Social Security. The proposal to compel 688 California counties, cities and special districts and their newly hired workers to become a part of Social Security would require them to remit $5.5 billion over 10 years. This would be offset by reduced services to senior citizens and the disabled; and for libraries, refuse collection, recycling and parks and recreation; and perhaps even public safety. The State's 1,026 school districts, 71 community college districts and 58 county offices of education, would be forced to pay billions of dollars. It is estimated that new costs would equal 7 percent of the $16 billion current annual teacher payroll or a cumulative $11.2 billion over 10 years - $11.2 billion that would otherwise be spent on new teachers to meet new reduced classroom size requirements; books for the children; and long-delayed school building maintenance. At a time when State and local governments are being asked to do more with less, unfunded mandatory Social Security would exacerbate fiscal problems by adding enormous and complex labor issues. Newly hired employees would be required to receive lesser benefits than existing workers - maybe even lower pay. The negative impact on labor relations, recruitment and employee morale would be significant. Devastating reductions of local public services, sharp cutbacks in education and jeopardy to existing public pension systems are very, very high prices to pay for a short-term, two- year fix for the Social Security program.