New California pensions drop back toward pack

A six-part Bloomberg News investigative series that began last week found that California has the nation’s highest-paid state workers. Pensions could have been added to the lucrative list.

State pensions were boosted by the same forces cited in the series that pushed up pay. But while the high wages, overtime and lump sum payouts revealed by Bloomberg may continue, pensions for new hires will be cut beginning Jan. 1.

Gov. Brown, urging action to aid voter approval of a major tax increase, persuaded a Democratic-controlled Legislature to impose cost-cutting pension rollbacks for new employees of the state, schools and most local governments.

As the stock market boomed more than a decade ago, creating state budget and pension fund surpluses, the first Democratic governor in 16 years, Gray Davis, faced a pent-up demand to boost pay and pensions held down by his Republican predecessors.

A bill sponsored by the California Public Employees Retirement System, SB 400 in 1999, gave active state workers a large increase in the promised pension, retroactive to the date of hire. Those already retired received a 1 to 6 percent pension increase.

Higher pensions spread to local government. The pension bill gave the Highway Patrol a trend-setting 50 percent increase (from 2 percent of final pay for each year served at age 50 to 3 percent at 50) and authorized local police to bargain for the same formula.

Another bill, AB 616 in 2001, added three high-end formulas for most local government workers. CalPERS told legislators investment earnings would cover SB 400 state costs and offered to inflate investment values to help pay for higher local pensions.

Experts say pension comparisons are difficult because of variables: formulas, pay factors, retirement ages, worker contributions and whether Social Security is received in addition to pensions (common in California except for police, firefighters and teachers).

In one of the few professional comparisons, the Legislative Analyst’s Office said California had the most generous typical state worker pensions of 15 states surveyed in 2004, based on starting at age 34 and retiring at age 55 with $60,000 final pay. (see chart)

“For longer term employees or those covered by particularly generous formulas at the local level, some can receive more annual income in retirement than when they worked,” said the analyst’s budget “Perspectives and Issues” for 2005-06.

Most state workers have a SB 400 formula, “2 at 55,” that provides a pension equal to 100 percent of pay after 40 years of service, CalPERS benefit charts show. One of the local government formulas, “3 at 60,” provides 120 percent of pay after 40 years.

In addition to the pension, the typical state worker receives federal Social Security. Eligibility for retiree health care, which includes dependents, begins after 10 years of service and reaches full coverage after 20 years.

State workers can boost pensions by buying up to five years of “air time” service credit. Only California uses one year’s pay to calculate pensions instead of three years, getting the highest base and enabling pay manipulation to boost or “spike” pensions.

A Sacramento Bee investigation in 2004 found that the one-year rule was a last-minute addition to a state budget agreement in 1990, the price of approval from unions concerned that accounting changes might shrink retirement benefits.

“The one-year pension rule became law with little fanfare,” the Bee reported. “Yet workers who retired in the past four years have received 5 percent more in pensions than they would have under a three-year system.”

State workers hired before Jan. 1 will continue to get current pensions, regarded as “vested rights” protected by contract law under a series of long-standing court decisions, which allow cuts only if offset by a new benefit of equal value.

Legislative Analyst's Office: Perspective and Issues 2005-06

Legislative Analyst’s Office Perspective and Issues 2005-06

After Jan. 1 new employees covered by the reform, AB 340, will get a pension that drops back toward the national average. The legislation affects CalPERS, CalSTRS and 20 county systems, but not UC retirement and independent big-city systems.

Formulas are reduced to the pre-SB 400 level or lower, retirement ages extended, “air time” eliminated, “spiking” curbed and pensions are capped at up to 120 percent of the maximum income taxable for Social Security, $136,440 next year.

A pension collected by a city of Vernon official, Bruce Malkenhorst, reached $540,876 a year before CalPERS cut it to $115,848 last May. The “$100,000 club” posted by a pension reform group has 12,338 CalPERS members and 6,609 CalSTRS members.

The reform calls for an equal employer-employee split of “normal” pension costs, the amount actuaries say covers pensions earned during a year. Employers will continue to pay all of any “unfunded liability” or debt from previous years, the major pension risk.

Most current state workers are paying half the normal cost, 9 percent of pay for most. The state payment is more than twice that amount because of the large unfunded liability.

For roughly a third of state workers, who are not currently paying half the normal cost, the reform legislation will increase their contribution to CalPERS by 1 to 3 percent of pay over the next two years.

The SB 400 pension formula that has received the most public attention is “3 at 50” for the Highway Patrol, capped at 90 percent of pay. The formula set a new benchmark for labor bargaining and became widely used for local police and firefighters.

These safety workers are a big part of local government budgets. Arguments that public pensions are “unaffordable” and “unsustainable” sometimes cite the “3 at 50” formula as an example of excessive retirement benefits.

The reform legislation authorizes three formulas for new safety employees: “2 at 57,” “2.5 at 57” and “2.7 at 57.” The three levels are intended to be lower versions of current state safety formulas that vary with the level of responsibility.

An example might be the Highway Patrol, correctional officers and nurses in correctional facilities. Employers must offer new hires the formula closest to the one for current employees in the same classification, with a lower benefit at age 55.

Labor bargaining that moved employees up the old formula menu is still allowed for new safety workers — but only for a lower formula on the new three-level menu, not for an increase.

The legislation authorizes a single formula for new non-safety employees in CalPERS and the county systems, “2 at 62,” lower than the “2 at 55” for most current state workers and lower than the “2 at 60” bargained for new state hires two years ago.

The new formula for non-safety employees moves the earliest retirement age to 52, up from 50 under the old formula. The new “2 at 62” formula provides 1 percent of pay for each year served at age 52, reaching a maximum 2.5 percent at 67, up from 63.

The reform gives new members of the California State Teachers Retirement system a “2 at 62” formula, lower than the current “2 at 60.” The earliest retirement is at age 55 with 1.16 percent of pay per year served and a maximum of 2.4 percent at age 65.

CalSTRS savings under the officially titled Public Employees Retirement Act (PEPRA) are projected to be $22.7 billion over 30 years. CalPERS savings are projected to be $43 billion to $56 billion over 30 years.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 17 Dec 12

9 Responses to “New California pensions drop back toward pack”

  1. Tough Love Says:

    Quoting … “State workers hired before Jan. 1 will continue to get current pensions, regarded as “vested rights” protected by contract law under a series of long-standing court decisions, which allow cuts only if offset by a new benefit of equal value.”

    While the pensions for workers hired after Jan 1 remain WAY more generous than their private sector counterparts, the structure described in the above quote is the reason why CA Plans will ultimately fail leaving many workers in a very bad position.

    There is no financially sound solution that does not incorporate a very significant reduction in the pension accrual rate for all CURRENT workers.

  2. Carl Olson Says:

    California pensions, including PERS, STRS, University of California etc. lost billions of dollars in the fraudulent financial fiascos. They should sue the companies and the auditors for damages.

    Here is a short list:

    1. PricewaterhouseCoopers — AIG, Freddie Mac
    2. Deloitte & Touche — Merrill Lynch, Fannie Mae, Washington Mutual, Bear
    Stearns
    3. Ernst & Young — Lehman Brothers, IndyMac Bank
    4. KPMG — Countrywide, Wachovia

  3. jskdn Says:

    “…pensions are capped at up to 120 percent of the maximum income taxable for Social Security, $136,440 next year.”

    I believe it is defined-benefit pensions that are capped at that. As I read it, compensation above that can be subject defined-contribution pensions on up to $250,000 of income, with employers paying up to the same rate on that higher portion of income as they pay toward that subject to the defined-benefit pension.

    “Most current state workers are paying half the normal cost, 9 percent of pay for most. The state payment is more than twice that amount because of the large unfunded liability.”

    What’s the dollar amount of that additional money going toward the unfunded liabilities? I’d like to see an amortization schedule along with the implicit assumptions being used that retire the unfunded liabilities.

    “The reform legislation authorizes three formulas for new safety employees: “2 at 57,” “2.5 at 57” and “2.7 at 57.””

    In practice, wouldn’t “2.7 at 57” be the plan that would apply to almost all safety employee units?

    “The reform gives new members of the California State Teachers Retirement system a “2 at 62” formula, lower than the current “2 at 60.” The earliest retirement is at age 55 with 1.16 percent of pay per year served and a maximum of 2.4 percent at age 65.”

    Does 1.16% at 55 represent the actuarial equivalent of 2.4 % at age 65?

    “CalSTRS savings under the officially titled Public Employees Retirement Act (PEPRA) are projected to be $22.7 billion over 30 years. CalPERS savings are projected to be $43 billion to $56 billion over 30 years.”

    Are those nominal dollars? If so, what’s the net present value of the savings from PEPRA using discount rate that CalStrs and CalPers assume in their actuarial calculations? That would enable an apples to apples comparison of the projected savings to the system’s current unfunded liabilities.

  4. Tough Love Says:

    Carl,

    Better yet, CALPER should sue the CalPERS Board members in place when they promoted (via SB400) the huge RETROACTIVE increase in Pensions … as having no cost.

  5. SeeSaw Says:

    No, TL, the ones who should be sued are the perpetrators of the world-wide, financial collapse in Sept. 2008. Nobody including CalPERS could forsee that. CalPERS was the richest it had ever been in its history in Oct. of 2007. Wall Street made sure that CalPERS did not remain there for long. The CalPERS Board members are not responsible–you cannot sue people for fraud that was not intended.

  6. captain Says:

    jskdn Says:

    ““CalSTRS savings under the officially titled Public Employees Retirement Act (PEPRA) are projected to be $22.7 billion over 30 years. CalPERS savings are projected to be $43 billion to $56 billion over 30 years.”

    Are those nominal dollars? If so, what’s the net present value of the savings from PEPRA using discount rate that CalStrs and CalPers assume in their actuarial calculations? That would enable an apples to apples comparison of the projected savings to the system’s current unfunded liabilities.”

    On a related note there is an excellent Editorial in the Contra Costa Times : “Flawed pension reform bill result of flawed process”

    Here is an excerpt:

    “while the pension bill was sold as reform, it wasn’t. It fiddled on the margins, a small down payment on a huge debt. The state has a pension shortfall of, conservatively, $257 billion. That averages $20,700 per California household.

    The California Public Employees’ Retirement System, the largest pension plan in the nation, has about $117 billion of the debt. Yet, by CalPERS’ quickie analysis, released last week, the present value of the savings from the bill was, at best, $15 billion.”

    CalPERS earned 1% in FY2011-12, on assets of 239.6 billion. That means they didn’t earn 6.75% of their Assumed Rate of Return which is 7.75%. 239.6B * .0675 = an additional 16.17 Billion in unfunded pension liability. Essentially we are in even worse shape with the so-called pension reform then we were just 1 year ago. It is even worse because some people will assume the problem is being addressed when it really isn’t.

    We’ve added over 16 Billion in taxpayer backed debt obligations (FY2011-12) while the present value of CalPERS claimed 40-60 billion in savings is, over the next thirty years, really only 15 Billion in present value numbers, at best.

    It should also be noted that the increased costs currently being charged to the state, counties, cities, and special districts – although already double to triple the normal cost (even more in some cases) of said pensions, are only designed to bring the funding level to 80 percent over the next thirty years. So, essentially, the present value of the CalPERS savings over the next thirty years has been completely WIPED-OUT in the period beginning July1, 2011 and ending June 30, 2012 (FY 2011-12), while charging taxpayers exorbitant rates that only aspire to bring the fund to a minimumally acceptable pension funding standard over the next thirty years. FOR ALL OF CalPERS CLAIMS OF PURSUING GOOD CORPORATE GOVERNANCE POLICIES THEY APPARENTLY ONLY EXTEND TO ORGANIZATIONS OTHER THAN THEMSELVES!

    CalPERS current year isn’t going any better almost halfway through their current fiscal year (FY 2012-13).

    When your goal is to fund the minimum acceptable threshold of 80%, and you’re failing, it only means that the costs currently being charged to member agencies (state, county, city, special district (taxpayers)) aren’t enough to support the current PONZI scheme. Costs will continue to rise forcing the continuation of: reduced services, road & infrastructure maintenance, the continuation of rapidly rising pension costs “at an increasingly deferred pace“ that does NOT actually represent the true cost, and the continuation of the unions and CalPERS efforts to do just enough to ensure those cost do NOT rise so fast that cities are forced to cut wages of their members. That’s why we continue to see every effort being made to defer as much debt as possible (and that is happening in the reworking of contracts in cities up & down this state (new forms of deferred compensation)) and the continued deferral of infrastructure and road repair – because people don‘t notice these deferrals.

  7. captain Says:

    … and all those deferrals are what are allowing cover for state and local politicians to continue spending beyond our means. CalPERS claims that these notorious “vested pension rights” – even going forward, are etched in stone provides cover for our elected politicians to claim they’ve done everything they can; they haven‘t. Of course now that the union funded Democrats have a super majority all bets are off regarding the acceleration of increased taxes & fees that will be necessary to cover the habitual overspending and continuation of the pension Ponzi scheme.

    My feeling is it will take the blatant truth that only real numbers can provide before we see real reform. Fortunately that day is coming. With the help of the new reporting requirements soon to come from GASBy, and the new ratings soon come to from Moody’s & others, and the ever increasing legal challenges to the CalPERS Castle coming from Bankrupt Cities and Bond Insurers – there just may be hope for real reform. Of course the Super Majority can continue to derail those hopes by imposing new taxes, thereby deferring one problem further into the future while creating even more problems in the present.

  8. Tough Love Says:

    Well Stated Captain,

    As I have stated many times, there are no substantive financial solutions that do not include VERY substantial reductions (of 50+%) in the pension accrual rate for FUTURE service for all CURRENT workers.

    And THIS just stops digging the hole deeper.

  9. BOPRN Says:

    From the article “In practice, wouldn’t “2.7 at 57” be the plan that would apply to almost all safety employee units?”

    At the state level, misc safety is going back to 2.0 @ 55. Badged safety has already gone back to 2.5 @ 55. CHP is the 2.7 @ 57 I believe.

    Examples:

    1) Doctor or RN working in safety goes from 2.5@55 to 2.0@55
    2) Correctional Officer, Correctional Counselor, 3.0@50 to 2.5@55
    3) CHP 3.0@50 to 2.7@57

    This is being done, in conjunction with many other things by Jerry Brown to fix the mess he was left with by both Davis and Schwarzenegger. There are other items in the pension arena being addressed as well. In addition, many functions of state level government have been altered/reduced to make up for (mainly) the Schwarzenegger administrations failings. Areas such as inmate medical, car allowances, even down to cell phone plans have been changed. Brown has done quite a bit in a short amount of time.

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