GOP raises public-private pension gap issue

A proposal from Senate Republicans last week would bring public employee pensions and retirement ages “in line with the private sector.”

But how serious are they?

The waste bins of the Capitol have been the crumple zone for more than one charge of the light brigade to stake out a negotiating position, make a political point or seek the halo effect of reform and big ideas.

The changes in pension benefits are two of about a dozen points in the “Senate Republican Roadmap to California’s Future” issued after voters rejected a package of state budget-related measures last week.

It’s not a plan to close the current budget gap, now estimated to be a staggering $24 billion. The roadmap is a way to “cure the underlying disease,“ Senate Republican Leader Dennis Hollingsworth of Murrieta said in a written statement.

He said Republicans will work to enact the plan over the next 18 months. No details of the pension proposals are available. Legislation is expected to be introduced in the weeks and months ahead.

Senate Republicans are a minority, holding 15 of the 40 Senate seats. But a quirky California rule requiring a two-thirds vote (27 senators) to pass a budget or a tax increase gives Republicans power, notably used in recent years.

For the final vote on a budget deal in February, Sen. Abel Maldonado, R-Santa Maria, blocked an increase in the gasoline tax and got two measures placed on the ballot. Voters last week approved a legislative pay freeze during budget deficit years.

An “open primary” measure on the ballot next June would allow the two top vote-getters in a primary, regardless of party, to advance to the general election. The goal is to ease partisan gridlock by electing more candidates with a broader base of support.

Two years ago a budget that passed the Assembly was blocked for a month by Senate Republicans. They gained little more than showing the powerlessness of Gov. Arnold Schwarzenegger, who was unable to get the single vote needed for passage.

Now there are no signs that a pension overhaul is on the menu for Schwarzenegger. New budget cuts he proposed last week included a savings of $100 million from the California Public Employees Retirement System.

It’s a two-month “holiday” in state payments for Preferred Provider Organization health care used by some state workers, a move approved by the CalPERS board because the fund has a surplus.

The governor’s revised budget proposal earlier this month renews his plan to save $132 million by getting lower-cost health coverage for state workers, either through CalPERS or by going directly to insurers.

The $132 million would be used to begin paying for the state’s massive unfunded liability for state worker retiree health care, estimated by the governor’s pension commission last year to be $48 billion over 30 years.

The governor’s budget plan would take a big bite out of the unfunded liability, a 38 percent reduction, by requiring that new state employees work at least 25 years before becoming eligible for free lifetime health care.

For most workers, the state currently pays 50 percent of retiree health care costs after 10 years of service and 100 percent of retiree health care after 20 years of service, with 5 percent added for each year between 10 and 20 years of service.

The last big reduction in state worker pension benefits was imposed by a Republican governor, Pete Wilson, during his first year in office in 1991, when he faced a huge budget shortfall.

Wilson created a new “tier” of pension benefits for new state hires. The state saved money, workers did not have to contribute to their retirement, and retiree benefits were reduced.

Eight years later when Davis became the first Democratic governor in 16 years, the labor-friendly CalPERS board sponsored legislation, SB 400 in 1999, that gave state worker pensions a major increase.

The formula for most state workers (miscellaneous) became “2 percent at 55,” meaning 2 percent of the final salary per year of service at age 55. The old formula was 1/50th of final salary at age 60.

The new monthly pension payment increases to 2.5 percent of salary at age 63 and above. So, for example, a person retiring at 63 after 30 years receives 75 percent of final salary and after 40 years 100 percent of salary.

“There is no limit on the percentage of final compensation you will receive,” says a CalPERS retirement pamphlet. “It can even exceed 100 percent.”

The legislation in 1999 increased the formula for the Highway Patrol to 3 percent at age 50 (up from 2 percent at 50) and for state firefighters to 3 percent at age 55 (up from 2.5 percent at 55).

CalPERS told the Legislature that the benefit increase would not cost the state more money. But state payments to CalPERS jumped from $159 million in 1999 to $2.5 billion in 2004, though mainly because a stock market drop cut investment returns.

The CalPERS board also pushed for similar pension benefit increases by the 2,000 local government retirement plans it serves under contract with 1,500 public agencies.

What kind of cut would Senate Republicans propose to bring public employee pension benefits “in line with the private sector?”

National statistics show a growing gap, according to federal Bureau of Labor Statistics data reported recently by USA Today. Benefits earned by public employees averaged $13.38 an hour last December, compared to $7.98 for private sector-workers.

What public employee pension supporters may fear most is a move to switch from guaranteed monthly payments to the 401(k)-style retirement plans increasingly common in the private sector.

The 401(k) is a tax-sheltered individual investment account, which can rise and fall with the market. Many 401(k) accounts were hit hard by the stock market crash last fall, raising new concerns about whether they are an adequate retirement plan.

Former Assemblyman Keith Richman, R-Northridge, whose proposal to switch all new state and local government hires to a 401(k) plan was briefly supported by Schwarzenegger in 2005, had moved on even before the market crash.

Richman switched to increasing the retirement age for most workers to the Social Security retirement age of 65 to 67 and capping benefits at 60 to 67 percent of final salary when combined with Social Security.

Richman and the Foundation for Fiscal Responsibility are working on a revised plan they would like to try to get through legislation, before resorting to an initiative if necessary.

Could something like the Richman proposal become the Senate Republican legislation?

Although Richman is now seen by public pension supporters as a scourge, he was regarded by some as a political “moderate” in the Legislature. That’s a term rarely if ever applied to Hollingsworth and the Senate Republican leadership.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 28 May 09

6 Responses to “GOP raises public-private pension gap issue”

  1. Bull Says:

    Its about time ! But …….. it MUST NOT apply ONLY to NEW employees. The new approach must ALSO apply to FUTURE YEARS OF SERVICE for CURRENT employees ……… or we’ll be broke BEFORE we save ONE DIME.

  2. WillRetiresomeday Says:

    There are so many serious inaccuracies in this article. For example, most retirees (just like current state employees) have to pay a premium to keep their health insurance.

    Mendel writes, “the state currently pays 50 percent of retiree health care costs after 10 years of service and 100 percent of retiree health care after 20 years of service.”

    This statement is false. What really happens after 10 years is that CalPERS pays 1/2 the maximum contribution, and after 20 years CalPERS pays 100% of the maximum contribution, towards retiree health premiums. Note that is a percentage of the maximum contribution, not a percentage of the total premium. This is an enormous distinction that adds up to serious money.

    For almost 2 decades, the maximum contribution has not come close to covering the full premium for one person plus one dependent. The current employee, just like the retiree, must come up with the difference, which currently amounts to over $955 per month for one employee with one dependent.

    If you read Mendel’s words, you would think retirees with 20 years of service get free health care for life. the truth is very different. They pay about $10,000 per year for continuing health insurance. Mendel leaves out important details to the point of deception.

  3. Ed Mendel Says:

    It sounds like “Will Retire” is referring to a very expensive health plan. State retirees eligible for a 100 percent contribution can choose a basic health plan that requires little or no monthly payment. The basic plans do require co-payments when services are used. For example, $15 for an office visit, $5 for generic prescription drugs and $15 for brand drugs.

  4. A Worker Bee Says:

    I have better way to bridge the gap. Have the private sector return to defined benefit plans.

    401 (k) was not designed to be a “retirement plan.” It was designed as a supplemental plan. It is worth noting that defined benefit plans are still good enough for America’s CEOs. They should be good enough for the worker bees that make companies work.

    With the decline in unions, corporate America is walking away from any sense of responsibility for its workers’ retirement (except very senior executives). First it walked from defined benefits. It reduced its contribution and moved to transfer the risk to the employees. Now it is walking away from even making any type of match. Does anyone think they will come back?

  5. boffoTheclown Says:

    I have a better plan. Allow the public sector groups set up any pension plan they like, just don’t have their employer be responsible for the thing in any way.

    Instead, what tends to be produced is investment concepts that are based on a high rate of return but with no risk. Nice work if you can get it.

  6. Raj Jindal Says:

    You know I just love listening to you people whine. When times were good you used to laugh at us state employees because of our low paying jobs. You made fun of our benefits. I have worked for the state for 12 years in educational support, In that time I received ONE raise. Now I am facing either a reduction in salary or a pink slip. If it is the former I will continue to work where I am because I believe in our mission, to turn out the work force California needs tomorrow. I doubt if most of you are even capable of that much loyalty to your immediate family. You ask us as you have always asked us to sacrifice. Well, we have and we will continue to do so, which is more that most of you would ever do.

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