In what has been a futile annual ritual, CalPERS President Rob Feckner sent the governor and Legislature a letter last March urging advance funding of a closed judges pension plan, a change estimated to save $753 million to $2.3 billion in the long run.
Reform legislation two decades ago put new judges in a conventional pension plan with an investment fund to help cover future costs. But judges hired before Nov. 9, 1994, were left in a pay-as-you-go plan closed to new members.
Now for the new plan the state this fiscal year is paying $63.2 million (24.6 percent of pay) for the pensions of 1,407 judges (1,352 active). Judges Retirement System II is 95 percent funded with a debt or “unfunded liability” of $41.2 million.
For the old pay-as-you go plan the state is paying more than three times as much, $217.5 million, for the pensions of 2,251 judges (328 active). And the original Judges Retirement System I is only 1.6 percent funded with a big unfunded liability: $3.4 billion.
Gov. Brown’s finance department was silent on the judges plan last month when announcing that the new state budget proposed this month (Jan. 9) will begin advance funding of another long-ignored debt, state worker retiree health care.
But the governor said the judges plan is on his to-do list last year as he proposed a costly solution, later enacted, for another long-ignored retirement debt, the seriously underfunded California State Teachers Retirement System.
“Now this doesn’t handle it all,” Brown said last May as he proposed a revised state budget. “We still have retiree health. We still have the judge’s retirement system. We have got lots of other stuff here, and we will handle it.”
The administrator of the two judges systems, the California Public Employees Retirement System, and the nonpartisan Legislative Analyst’s Office both urge advance funding of the pay-as-you-go judges plan.
Instead of just covering the cost of pension checks sent to retirees each year, additional money would be paid into an investment fund yielding a return. The “advance funding” or “pre-funding” helps pay for the pensions promised current workers in the future.
It’s cheaper in the long run, saving taxpayer money. CalPERS expects its investment fund, valued at $296 billion last week, to pay about two-thirds of total pension costs.
It cuts debt passed to future generations. Pensions are generally regarded as deferred wages that, from an accounting viewpoint, should be paid while the worker is still on the job.
And it gives pension system members added assurance of getting a pension check, if for some reason lawmakers balk at payments. Feckner said in a previous letter the pay-as-you-go money had run out before the end of the fiscal year, delaying pension checks.
If the state begins advance funding of the closed judges plan, a staff report to the CalPERS board last March showed possible savings of $753 million to $2.3 billion over the life of the plan, depending on how quickly pension debt is “amortized” or paid off.
The biggest possible savings shown, $2.3 billion, would result from following the Governmental Accounting Standards Board rules, which base the annual payment to the pension fund on the average time active workers are expected to remain on the job.
The “estimated average remaining service life” of the 328 active judges in the closed plan last year (188 age 65 or over) is brief, 1.87 years. If the state followed the accounting rules, the payment this year would be not $217.5 million but $1.9 billion.
“Note that this last amount ($1.9 billion) is the Actuarially Required Contributions (ARC) under GASB Statement No. 27 and may be required to be disclosed in the State’s financial statements,” said the CalPERS staff report.
On the other hand, what happens if the state, again foregoing a chance to get long-term savings through advance funding, continues the current policy?
CalPERS expects the pay-as-you-go cost, $217.5 million this year, to continue growing for a few more years, peak at about $225 million in fiscal 2017-18 as more judges retire, and then slowly decline for about 60 years as age takes its toll.
Judges in the old and new systems had been contributing the same amount to their pensions, 8 percent of their pay. The old system can be more generous, mainly by allowing earlier retirement with the maximum benefit.
A pension reform pushed by Brown two years ago exempts judges, who tend to take office at a later age and also retire later, from most of the major provisions for new employees, such as lower pensions and a tighter cap on total pension amounts.
But judges hired after the Public Employees Pension Reform Act took effect on Jan. 1, 2013, are not exempt from a provision requiring a 50/50 split between employers and employees of the annual pension “normal cost,” which excludes debt from previous years.
Now these new judges are contributing 15.25 percent of pay for their pensions, nearly twice the 8 percent of pay contributed by other judges, who earn the same retirement benefits as the new judges.
Last month a half dozen judges elected by voters in 2012, but who did not take office until 2013, filed a lawsuit to avoid paying the higher contribution rate. Brown vetoed a bill last year, AB 837, that would have allowed the judges to pay the lower rate.
“This measure creates an exemption to the California Public Employees Pension Reform Act of 2013. I am unwilling to begin chipping away at these reforms,” the governor said in his veto message.
The reform bill that put new judges hired after Nov. 8, 1994, into an actuarially sound pension plan was recommended by a Select Committee on Judicial Retirement appointed by former Chief Justice Malcolm Lucas.
Former Gov. Pete Wilson vetoed a bill in 1992 that would have put judges into a less expensive pension plan. Judicial groups said the bill did not properly balance cost cutting with the need for a high-quality judiciary.
The select committee, appointed after the Wilson veto, found in a survey of 600 California attorneys that among 18 factors for becoming a judge pensions ranked third, after public service and intellectual stimulation.
“With all the pushes and pulls we faced — attracting experienced lawyers, saving the state money, keeping judges on the bench — we believe this plan is the best possible compromise,” the select committee chairman, former Legislative Analyst Alan Post, said in a news release in 1993.
The select committee recommended that the lawmakers adopt a “strategy for the liquidation of the unfunded liability” in the old judges plan. Reaching full funding by a deadline of 2002 was estimated to cost an additional $100 million a year.
But instead of paying down the debt in the old judges plan, the bill creating the new pension plan (SB 65 in 1993) repealed the 2002 deadline for reaching full funding in the old plan. Avoiding the short-term cost seems a likely reason for the repeal.
No explanation was given as an Assembly floor analysis listed among the bill provisions: “Repeal the statutory requirement that the actuarial unfunded liability of existing tier of benefits, known as the Judges Retirement System (JRS), be eliminated by the year 2002.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 5 Jan 15