Pension reform in 17 states, but not California

A new study says the economic downturn has prompted 17 states to make cost-cutting public pension reforms during the last two years — lower benefits for new hires, extended retirement ages and bigger payments from workers.

California is not among them.

An attempt to put an initiative on the November ballot to reduce pension payments and extend retirement ages for new state and local government hires was suspended last week.

Marcia Fritz, president of Californians for Fiscal Responsibility, warned that the reform drive might switch from trimming monthly pensions to giving new hires a 401(k)-style individual investment plan common in the private sector.

“If legislators do nothing to reduce pension costs next year, we will try again to qualify a pension reform initiative — except one that provides for a defined contribution plan, not a defined benefit plan,” Fritz said on the group’s website

The group had hoped to get major funding from Meg Whitman, a wealthy Republican candidate for governor. Whitman said in an article in the Orange County Register last week that she supports a switch to 401(k) plans and more.

“On pension reform, we need to align public employee retirement benefits to those available in the private sector,” Whitman wrote. “New state workers should receive a 401(k)-style defined-contribution plan.

“For most existing state workers, we need to increase the retirement age from 55 to 65, require longer vesting periods, and ask them to contribute more to their retirement benefits.”

A Public Policy Institute of California poll in January said two-thirds of Californians (67 percent) favor switching new public employees from monthly pensions to a 401(k)-style individual investment plan.

Changing the pension benefits of current workers may be difficult, unless they consent. Most pension reforms focus on new hires because the courts have ruled that pensions promised current workers are vested rights, protected by contract law.

Reformers argue that the current level of public employee pensions is “unsustainable” and will divert too much money from education, health, law enforcement and other public services.

A deep economic recession, punctuated by a historic stock market crash, punched a big hole in the investments expected to provide 75 percent of the money for pension funds like the giant California Public Employees Retirement System.

Now the retirement systems plan to boost the annual payments from governments, a three-year phase in for CalPERS, to help rebuild pension funds — an untimely added cost during an era of huge budget deficits.

Some public employee union officials say they are willing to consider cost-cutting proposals. But any change should be done through labor negotiations, they say, not imposed by legislation or a ballot measure.

A proposal to switch new hires to a 401(k)-style plan is probably a non-starter in labor talks, particularly after the market crash illustrated how those near retirement have little time to regain investment losses.

A report on state retirement systems issued last month by the Pew Center on the States says in recent years only two states have switched to 401(k) plans: Alaska in 2005 and Michigan in 1997.

“In light of severe investment losses in 2008 and 2009 that resulted in decreased pension funding levels, policy makers are once gain openly discussing defined contribution plans,” said the Pew Report.

The report mentions Louisiana, Florida, Kansas and Utah as states where there has been talk of switching to 401(k)-style plans in which governments only make a payment into a worker’s individual investment plan.

For the employer, the “defined contribution” 401(k)-style plan avoids the long-term debt, and unpredictable future costs, that come with the “defined benefit” that guarantees a retiree a monthly pension payment for life.

“Because unions and other employee representatives often have vigorously opposed defined contribution plans,” said the Pew report, “it is unclear whether any state will find such a switch viable, or if such plans are primarily being proposed as a starting point for hybrid plans or other opportunities.”

Hybrid plans combine a smaller monthly pension with an individual investment plan. The city of San Diego and Orange County both adopted hybrid plans last year after negotiating agreements with labor unions.

City managers in San Diego County and the San Francisco peninsula are pushing for increased employee contributions and other ways to cut government pension costs. Pension reform ballot measures have been proposed in Los Angeles and San Francisco.

The Pew Center, which plans to study local pensions next, issued a report on state retirement systems that included CalPERS and the California State Teachers Retirement System.

The nationwide study found a troubling $1 trillion gap between current state pension funding and the cost of providing pensions and retiree health care promised in the future.

The California funds were placed in the middle rank, “needs improvement,” with a funding level of 87 percent. The minimum acceptable level or trouble line in the view of the U.S. Governmental Accountability Office and others is 80 percent.

But because of the long lead time for the sweeping study, the California numbers do not reflect losses in the stock market crash. CalSTRS is now reporting a funding level of 77 percent. CalPERS has dropped all the way down to 61 percent.

The funding level is the projection of the amount of future pension obligations that will be covered by the annual employer-employee contributions to the pension fund, along with investment earnings.

“The good news?” Susan Urahn, the Pew Center managing director said in a cover letter. “While the economic downturn has exposed serious vulnerabilities in states’ retirement systems, it also appears to be spurring policy makers across the country to consider reforms.”

The report found that at least a third of the states are reviewing their retirement systems with commissions, task forces or research groups. During the last two years, 17 states have enacted reforms.

“Ten states increased the contributions that current and future employees make to their own benefit systems,” said the Pew report, “while ten states lowered benefits for new employees or set in place higher retirement ages or longer service requirements.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 2 Mar 10

5 Responses to “Pension reform in 17 states, but not California”

  1. jelincic Says:

    “On pension reform, we need to align public employee retirement benefits to those available in the private sector,” Whitman wrote.

    She is right. Everyone should have a sucure retirement. America’s CEO are keeping their defined benefits. So should all workers.

    Today’s contribution for the 2/3 of state workers who are non-safety is only 0.03% if payroll higher than the who decade of the 1980s. Does 30 cents per thousand dollars of payroll make a crisis?

    Maybe this is some other agenda

  2. ryan Says:

    “On pension reform, we need to align public employee retirement benefits to those available in the private sector,” Whitman wrote.

    As long as she aligns my (and my team’s) salary to those available in the private sector as well, I might not complain (as much). Being an IT Pro for the state means being ludicrously underpaid in my field when you don’t factor in the benefits and retirement. Somehow I think a pay raise bringing us up to (or even close to) market level is not on the agenda.

  3. Jennie Duggan Says:

    People who choose to go into a job option with somewhat of a lower pay than out in the business world accept that the pay may be lower (I can’t get all the toys I might like), but that there will be a defined benefit when they retire. Switching to a 401k mentality (defined contribution) is no what will keep the caliber of personnel that businesses/education wants in these types of jobs.

    We understand that we must trust the investors of CalPers and CalStrs to not be a Bernie Madoff. We also accept that there is a certain level of risk as the investors look for high yields for their workers. We understand that unless they said everything is invested in gold that risk (which might include some level of failure) is involved. (Although a colleague discribed gold as a rock with value when copper should be more valuable). We also hear you when you say that CalPers/CalStrs is solid since everyone is not reitring at once.

    But please continue to defend Defined Benefits for those of us who entered into this field of work (education) knowing the pay we would receive. (Of course we love to work with students, but bottom line still requires that we pay rent/mortgage, food, gas, etc. which we manage to do knowing that there is a pleasant retirement to come.)

  4. Adair Says:

    People who choose to go into a job option with somewhat of a lower pay than out in the business world accept that the pay may be lower (I can't get all the toys I might like), but that there will be a defined benefit when they retire. Switching to a 401k mentality (defined contribution) is no what will keep the caliber of personnel that businesses/education wants in these types of jobs.

    We understand that we must trust the investors of CalPers and CalStrs to not be a Bernie Madoff. We also accept that there is a certain level of risk as the investors look for high yields for their workers. We understand that unless they said everything is invested in gold that risk (which might include some level of failure) is involved. (Although a colleague discribed gold as a rock with value when copper should be more valuable). We also hear you when you say that CalPers/CalStrs is solid since everyone is not reitring at once.

    But please continue to defend Defined Benefits for those of us who entered into this field of work (education) knowing the pay we would receive. (Of course we love to work with students, but bottom line still requires that we pay rent/mortgage, food, gas, etc. which we manage ti do knowing that there is a pleasant retirement to come.);

  5. Richard D. Greenfield Says:

    The California state employees pension fund, CalPERS, has been plagued by “pay-to-play” scandals and other reasons for incredibly imprudent investment practices. Throughout the country, the pension funds’ shortfall in assets to pay benefits may well be caused by some of the same practices that have caused extremely high losses to CalPERS and the pension funds of other states and localities. We are presently investigating these practices in several California localities as well as by CalPERS and CalSTRS. While overly generous compensation packages with arguably generous pension benefits may well have contributed to the problems of pension funds, particularly in states such as California, where the state’s current contribution is about $4 billion, it is important to note that not only are all taxpayers going to have to foot the bill, the employees themselves will have to reach into their own pockets to add to the governmental contributions in order to fund their pension benefits.

    In our clients’ pending class action in New Mexico, we have sought a recovery from the Trustees who have mis-managed pensioners’ money as well as those persons and entities who have been engaged in “pay-to-play” as a means of obtaining New Mexico’s investment business. A copy of the Complaint may be obtained free of charge by e-mailing me at the address below.

    Richard D. Greenfield Attorney-at-Law 250 Hudson Street 8th Floor New York, NY 10013 whitehatrdg@earthlink.net

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