Pension reform: Brown proposed most options

As Republican legislators work on pension reform, a good place to start might be Gov. Brown’s eight-point campaign proposal, which contains most of the pension reforms adopted in other states in recent years.

Brown proposed four of the five key reforms that a Pew Center on the States study issued last year, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform,” said seem “largely politically feasible.”

The four reforms in both the Pew report and the Brown proposal: lowering benefits and increasing retirement age, increasing employee contributions, keeping up with funding requirements, and improved governance and investment oversight.

The missing option, “share risk with employees,” includes a 401(k)-style individual investment plan instead of a pension, a “hybrid” combining smaller pensions and a 401(k), and basing annual pension inflation increases on investment performance.

Some reform advocates in California recently have proposed ways to cut costs by reducing the pensions earned by current workers, a change virtually certain to draw a legal challenge. Pension cuts so far have been limited to new hires.

A series of court decisions are said to mean that once a worker is “vested” in a pension, it’s protected by contract law and cannot be cut without providing a benefit of equal value. But some attorneys disagree.

One of the initiatives proposed by a pension reform group led by Marcia Fritz would declare a fiscal emergency and lower the pensions earned by current workers in the future, without cutting pension amounts already earned.

A proposal to cut soaring costs in the troubled San Diego pension system by Councilman Carl DeMaio would cap the amount of pay used to determine pension amounts, similar to the way Social Security operates.

This week, Brown was interrupted by applause during his State of the State address when he said, “We must also face the long-term challenge of ensuring that our public pensions are fair to both taxpayers and workers alike.”

Departing from his prepared text, Brown said, “So that’s ambiguous. Either side can read into it whatever they wanted to,” getting a laugh from the legislators. “In a sense, we want to welcome all possibilities and don’t close off too many.”

Brown’s proposal to close a $24 billion budget deficit is an attempt to hit an extraordinarily difficult trifecta: 1) Democratic approval of deep cuts in health, welfare and other programs, some rejected when proposed by former Gov. Schwarzenegger.

2) A handful of votes from Republicans who signed anti-new tax pledges to put a $11 billion-a-year temporary tax extension on the June ballot. 3) Approval by voters who rejected the tax extension in May 2009 when it was two years, not five as proposed now.

The tax extension contained a spending limit demanded by the six Republicans who voted for the taxes. Presumably, an incentive of some kind might attract a few Republicans needed for the two-thirds legislative vote to place the tax extension on the June ballot.

Responding to Brown’s address, Assembly Republican Leader Connie Conway of Tulare emphasized pension reform. Senate Republican Leader Bob Dutton of Rancho Cucamonga mentioned job-creating regulatory reform, but not pensions.

Sen. Mimi Walters, R-Laguna Hills, told the Contra Costa Times she is preparing a package of pension reform bills, including a 401(k) plan, that must be addressed before taking up taxes.

The Republican caucuses in both houses are expected to meet next week to discuss their policy agenda for the year.

The Senate Republican caucus has not taken a position on Walters’ pension reform proposal, said Jann Taber, a Dutton spokeswoman. Assembly Republicans plan to make a pension reform proposal, said a Conway spokeswoman, Sabrina Lockhart.

The Schwarzenegger administration negotiated pension reform in new contracts last year with five unions representing about 58 percent of the 223,000-member state workforce, including the giant SEIU Local 1000 after a record 100-day budget deadlock.

Employee pension contributions increased to 8 to 10 percent of pay, up from 5 to 8 percent depending on the union, while the state contributes 17 to 28 percent of pay. Pensions for new hires were lowered to the level used before a major increase, SB 400 in 1999.

The immediate state savings from the increased employee contributions enabled the California Public Employees Retirement System to cut $200 million from the state pension payment this fiscal year, dropping to about $3.7 billion.

Now the Brown administration must negotiate contracts with six holdout unions representing the remaining 57,000 non-management workers. More than half are in the California Correctional Peace Officers Association, a major Brown campaign contributor.

Brown’s newly appointed director of the Department of Personnel Administration, which negotiates labor contracts, is Ronald Yank, a retired labor attorney who has represented state prison guard and firefighter bargaining units in the past.

A basic position of the labor unions that have been willing to chip in with pension cuts during hard times is that the changes must be bargained, not imposed through legislation.

The Brown plan said that many public pensions, which have been getting 65 to 75 percent of their funds from investment earnings, adopted “pension programs that could not be sustained” when a soaring stock market turned out to be a temporary windfall.

“These problems grew out of policies established by legislation, regulation and collective bargaining and will need to be reformed through the same process,” said the plan.

In addition to higher employee contributions and lower pensions for new hires, the Brown plan calls for:

–Considering longer vesting periods and more employee contributions for retiree health care, now costing the state $1.4 billon a year. No money has been set aside for promises made to current workers, expected to cost $50 billion over the next 30 years.

–An end to boosting or “spiking” pensions by manipulating final pay. Schwarzenegger vetoed a bill to curb spiking in county systems sparked by windfalls for two Contra Costa County fire chiefs, saying AB 1987 didn’t go far enough.

–An end to employer contribution “holidays” when investment earnings soar. CalPERS dropped the annual state pension payment from $1.2 billion to $150 million during a stock market boom a decade ago.

–An end to retroactive pension increases for retirees. Retirees in CalPERS and the California State Teachers Retirement System received pension increases of 1 to 6 percent, depending on length of retirement, when the market boomed a decade ago.

–Monitoring by the state finance director of earning forecasts and investments. CalPERS, faulted for optimistic earning forecasts that mask debt, decided to include a range of forecasts in future reports, reinforced later by Schwarzenegger legislation.

As the plan notes, Brown is not new to pension reform. In 1982 the last budget in his previous term proposed lower pensions for new hires, saying a worker could retire at age 62 with more than 100 percent of their salary from CalPERS and Social Security.

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 4 Feb 11

17 Responses to “Pension reform: Brown proposed most options”

  1. Mike Says:

    You might look at some existing provisions – contrary to popular assumption and media frenzy, some of those limits already exist, including (from my experience):

    County system: retirees get cost/living raises only if investments do well enough.
    PERS/State Misc employees: highest/final salary calculated only on official salary, not OT and vacation cashout.

    As for reinstituting 15% furloughs — yes, that reduces cost, but with no realistic prospect for most employees of ever getting that back it’s effectively a permanent pay cut. At what point does that start affecting pension delivery considering that employee contributions are based on % of actual pay not theoretical scale? And of course it’s a golden buttkick – I’m already close to making more from retirement (with 30 years in) than I would working with a 15% pay cut – which either gets rid of the most knowledgeable and effective employees or the deadwood depending on your viewpoint (pretty sure I know yours). Many of us long-timers are now netting about what we did in the late 1990s considering minimal raises under Gray and the Repubs and the recent cuts – with no prospect of even a return to scale in the foreseeable future.

  2. nenebird Says:

    One obvious and substantial reform would be to drop state employees out of Social Security. Other government employees are not in SS. State Dept of Corrections doesn’t even pay into SS.

    Net savings? 12% payroll cost for a $12 billion annual payroll…..no service interruptions, no closed office.

    $ 1 billion savings in 12 years…..

  3. jskdn Says:

    Honest Social Security Reforms move all government employees into that system. It’s hypocritical that Democrats are the biggest defender of Social Security and then serve their government employees by keeping them from having to share in Social Security’s cost.

  4. jskdn Says:

    Defined-contribution is the reform that is needed and takes care of the other four.

  5. Dr. Mark H. Shapiro Says:

    Defined contribution pension plans are frauds that enrich the large financial companies that manage them at the expense of the retirees who are stuck in these plans. They almost always exhibit investment performance that underperforms in comparison to defined benefit plans.

  6. tough love Says:

    The ROOT CAUSE of California’s (and other States) Pension problems is OVERLY GENEROUS benefits.

    The following table shows (for a 30 year career starting at age 25 and ending at age 55) the level annual percentage of pay necessary to fund the total cost of a Defined Benefit pension of 2% (and 3%) per year of service, and with and w/o 3% annual COLA increases.

    2 % per yr of service 3 % per yr of service

    w/o COLA W COLA w/o COLA W COLA
    29% 39% 44% 58%

    The portion of these percentages not ACTUALLY paid by the employee must be paid by TAXPAYERS. The absurdity of these bills handed taxpayers is quite obvious when these percentage are compared to what Private sector employers generally pay towards THEIR employee’s retirement …. generally between 3% and 7% of pay.

    My point of showing this (other than the obvious …. excessive benefit level), is that reform efforts directed at increasing employee contributions will never work ….. because they cannot be sufficiently raised.

    The ONLY effective solution is a VERY significant (50+%) reduction in the level of pension accruals for FUTURE years of service for CURRENT employees.

  7. tough love Says:

    The table above got condensed. Here is a more readable version:

    2 % per yr of service – w/o COLA – 29%
    2 % per yr of service – with COLA – 39%

    3 % per yr of service – w/o COLA – 44%
    3 % per yr of service – with COLA – 58%

  8. john moore Says:

    Defined Benefit plans will not,do not work. That is because when a large investment loss occurs,it is impossible to catch up. For example: Here in Pacific Grove,the pension plan lost 31 million dollars in 2008-9. Last year,the plan earned 12.2%. 7.75% met the actuary investment rate,leaving 4.45% surplus to reduce the deficit. The plan had 51 million in it,so 4.45% of that was about 2.3 million,reducing the 31 million deficit by that amount. But during the past year,the Dow went from about 6600 to 12,000. It bounced back by over 90%,but the deficit was barely affected.The Dow is fully valued and a bond bubble is predicted to burst. Pacific Grove issued a 19 million dollar in pension bonds in 2006,to pay up for getting into 3@50(illegally) without any surplus like many other cities. The bonds cost 1.6 million per year for 30 years. PG just received notice of a huge pension rate increase,which it can’t pay except by cutting safety(everything else is gone). And by the way,the 31 million dollar loss,was 17 million for 3@50 and 14 million for 2@55,so going back to 2@50 for new hires is a cop out,just a bit slower road to financial disaster. And,Pacific Grove is MUCH better off than most of our neighbors,except for Carmel and Pebble Beach.Electors need to get real Politicians like Brown and Repubs, will not even suggest real reform because it must eliminate defined pension plans.Sorry.

  9. SeeSaw Says:

    John: DB pension plans have existed in CA for 97 years. CalPERS has been around for over 70 years and never failed its beneficiaries. Your problem in PG seems to be something different than what most entities are dealing with, regarding pensions. The fact that PG managed poorly, and is having severe problems with its CalPERS membership, should not be reason to threaten other entities that have been working to amend their respective DB plans, so that they will be sustainable.

    We elected JB to lead the state. He has some big items on his plate, including the proposals to extend certain taxes that were passed in 2009, and completing the Collective Bargaining processes with the various state employee groups. The plan of Mimi Walters and other Republicans, who threaten that they will not cooperate with the Governor unless he does what they want him to do regarding pensions, is Black Mail, pure and simple.

  10. tough love Says:

    Quoting SeeSaw …”The fact that PG managed poorly, and is having severe problems with its CalPERS membership, should not be reason to threaten other entities that have been working to amend their respective DB plans, so that they will be sustainable. ”

    Balony !

    “Sustainability” would require EMPLOYEES to contribute an ADDITIONAL 25% of pay or accept a 50% reduction in pension accruals for future years of service.

    Employees will agree to that When Pigs Fly !

  11. john moore Says:

    SeeSaw: Why don’t you describe the financial condition of other entities(cities),then you will see that DB plans will never work in a boom/bust environment. Calpers just had a 12.2% year and it did nothing. Why? Because entities on average had a 35% deficit which created an off-setting deficit on that lack of funds. So if a pension plan of 100 million,when fully funded, had a 35% unfunded deficit,that deficit grew by the actuarial investment rate of 7.75%($2,712,500). The 65 million in the plan grew by 4.45% over the 7.75% investment rate($2,892,500). So a 12% year is a draw because of the unfunded deficits. And the stock market recovered 95%! I agree with you about Calpers history,but most of that history was before it could invest in stocks and private deals. And most of the success was before an actuarial investment rate of 7.75%.(And if you cut the investment rate in two,you need twice as much money)And we are in a bond “bubble” because pension plans and the fed are buying bonds at ridiculously low rates of return. When rates rise,those bonds will be like sub-prime mortgages.Yes,we had real corruption in PG,which makes its’ unfunded deficit 15% higher than most cities;but,PG passed real pension reform and if the Council does not allow Staff to sell the city out to Safety and Calpers,PG will be the model for every city in Ca..Staff,of course,has a huge conflict of interest because it hopes to be a Calpers millionaire. Our Asst City Manager just retired at $159,000,per yr.(There is a 90% cap on safety,but none on Misc).I wish there was a conceivable way for DB to work,but with a 7.75% investment rate,last years results prove beyond a doubt and then some, that Calpers will continue to fail.3@50 destroyed 2@55 because of the huge investment rate it requires.

  12. SeeSaw Says:

    John: I am not an accountant or an actuary. If I spent all my free time going over these figures like you and TL, I would probably be in the throws of a nervous breakdown. I do know that when an entity is preparing its budget, it must calculate out a percentage of payroll, that is required to be remitted to its respsective pension plan.

    I don’t know about the kind of trouble your City got into, regarding CalPERS, but I suspect that it paid some pretty high salaries to its workers. My employer, a very modest-sized muni, has the lowest salary scale, for the rank and file, of other munis in the surrounding area.

    I agree with you that the retirement salary of your Asst. Ctiy Manager is quite generous. The managers retiring from my former entity are recipients of the same-type largesse. (That is why I frown so heavily on all of the rhetoric, blaming the public sector unions for the economic problems. These managers, like your example, were not in unions.) Anyway, I do not choose to spend time wallowing in resentment, toward those who have larger pensions than mine.

    My former employer began amending pension formulas for new hires, using Collective Bargaining, several years ago, and is still in the process of adjusting and cutting down the contracts. The active employees have lost several benefits, such as holiday pay and sick leave redemption, and are paying extra toward their own pension percentages, and are taking furloughs.

    I am confident, that I am not in any danger of having to pay increased property taxes on my home, due to any pension problems of my City. I hope things go better for PG, than you expect.

  13. tough love Says:

    SeeSaw, You keep repeating that the Pension problem is only due to the higher paid. That is not correct. The dollar payout will be proportionately smaller with smaller salaries, but the excessive benefits (vs what Private Sector taxpayers get) exists for Civil Servants at ALL salary levels from the lowest to the highest.

    Almost all California pension formulas range from 2% to 3% of pay per year of service, with safety workers on the upper end. As I understand it, all Public Sector pensions in CA receive post-retirement COLA increases. As I stated in an earlier comment (with the table of percentages repeated below) with a 2%/COLA formula, that pension requires a level annul contribution of 39% of cash pay, rising to 58% for those with the 3%/COLA pensions. Contributions from the employees (when the city isn’t picking this up as well) generally pay for about 10% of this cost …. with the Taxpayers on the hook for the balance (or so you hope).

    So please …. it an EXCESSIVE benefit problem that benefits ALL of you.

    2 % per yr of service – w/o COLA – 29%
    2 % per yr of service – with COLA – 39%

    3 % per yr of service – w/o COLA – 44%
    3 % per yr of service – with COLA – 58%

  14. SeeSaw Says:

    TL: It depends on the contract. My contract calls for a COLA of 2% or less/yr, depending on the CPI for each year in question. First of all, a COLA for any respective retiree does not begin until the second calendar year, after the beginning of the retirement. This past year, the tier of retirees, who were due their first COLAS, got zero. I got 1.4%, and I don’t know what the situation is with the CPI for this year. I don’t follow why you say COLAS are an excessive benefit. Without COLAS we would fall further and further behind the cost of living. My spouse’s, private sector, DB pension was frozen in 1986, and did not draw one penny of interest during the subsequent 22-year period that followed, until he actually collected. It is a tiny, tiny pension, with no COLAS. Could you imagine my spouse saying that I should not get a COLA because he doesn’t get one?

    It is really puzzling to me that you, who is very well set economically, as you describe, would spend all your time, pouring over figures, looking for a way to take retirement benefits from someone else.

  15. tough love Says:

    SeeSaw,

    To clarify:

    (1) I didn’t SAW COLAs are excessive, I said that the pension, with all it’s components (rich formulas, early retirement ages with unreduced pensions, inclusion of COLA provisions, etc.) is excessive.

    (2) the 39% and 58% assumed 3% annual COLA increases, If the annual COLA is capped at 2% and starts in year 3, these %s would instead be 35% and 52% respectively. Lower yes, but barely changes the conclusion.

    (3) Civil Servants represent about 15% of all workers. The complaints and shortcoming you see in your spouse’s retirement package is just what the other 85% of Private Sector workers feel. You see WE are the real world and Civil Servants have be elevated (thanks to incompetent/corrupt politicians) to a higher level with excessive/unsustainable pensions & benefits. With cash pay relatively equal in the Public and Private Sectors, why should WE (the ones with LOWER pensions & benefits ) pay for the excess granted you when 90% of the bill is assumed to be paid by US ?

    (4) I’m very well versed in pension design & funding issues, and the numbers I show take little time for me to develop. I’m quite comfortable (I didn’t say well off … but of course that’s all relative). However, I have many friends and work associates in the Private Sector who make middle-middle-class salaries, say in the $40K -$100K range. I find it terribly unfair to them that their pensions will generally be 1/4 to 1/2 that of the comparably paid Public Sector worker (and universally with no pre-Medicare retiree healthcare), yet THEY (via their taxes) will are expected to pay for 80-90% of Public Sector pensions. Yes, there is a real element of altruism in my dogged comments to demonstrate a grave injustice. That being said, my numerous comments are intended (via clear facts, demonstrations, and commentary) to attract the attention of those in the media (to spread the word) and HONEST elected officials who want to address this issue BEFORE we become Greece (and I’m NOT kidding).

  16. john moore Says:

    SeeSaw: You are trying to treat Pacific Grove as a special case. Even if PG was only 34% down in its’ plan(the state norm),it,like all other cities except those which never entered 3@50,would be irrevocably under water because of the 7.75% actuarial investment rate required for 3@50. Look,no one is going to take your pension,but what I see is city after city cutting services and now safety services. I admire your “hope” that everything is going to be ok,but I don’t see it with DB plans requiring a 7.75% annual return on a fully funded plan. Last years experience proved my case(unfortunately).

  17. SeeSaw Says:

    John: I am no expert. But, a City that has voted itself out of CalPERS, is a special case. My own former employer has amended its pension formulas for new hires, negeotiated higher pension payments and cut certain benefits for active employees, and invoked furloughs. We have not yet lost any services in my community, safety or otherwise. Now it is facing the loss of Redevelopment Funds. That means that more rough times are ahead. CalPERS had a return of 13+% last year. I prefer to look on the bright side when it occurs and do not blame the wrong people when things aren’t looking so bright.

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