Pension focus shifts: hybrid, caps and the big one

As Gov. Brown seeks crucial budget votes, one reform proposed by five Republican senators would switch new hires to “hybrid” pensions, a cost-cutting combination of lower pensions and 401(k)-style individual investment plans.

The governor, who also must get votes from labor-friendly Democrats, reportedly could support a different plan: caps not only on the annual amounts pensions could pay, but also caps on the salaries on which pensions are based.

A reform group is talking about a third plan: an initiative that would take on what the Little Hoover Commission called the “elephant in the room.” A constitutional amendment would be aimed at allowing cuts in pension amounts not yet earned by current workers.

This new wave of pension reforms — hybrids, caps and current worker cuts — is somewhere in the middle between the polar opposites of previous cost-cutting plans.

The new reforms are not a long-term death blow to public pensions like shifting all new hires to a 401(k) plan, which may have lost some of its appeal after the stock market crash. Sen. Mimi Walters, R-Laguna Hills, has a 401(k) bill, but it’s a distant long shot at best.

And the new wave probably would yield more savings, and be less easily reversible, than the standard response to increased pension costs: negotiating labor contracts that increase worker pension contributions and give new hires lower pensions.

The Little Hoover Commission, a bipartisan state watchdog, last month recommended a hybrid, some caps and a court test of whether pension amounts not yet earned by current workers can be cut, while protecting the amount already earned.

The commission argued that urgent action is needed because pension costs are projected to rise by 40 to 80 percent in the next few years, particularly hitting local pension funds because personnel costs are a large part of their budget.

The nonpartisan Legislative Analyst last month recommended that new state hires be placed in a hybrid pension system or a “cost-sharing” plan, which would increase contributions from employers and employees if a pension fund needed more money.

State worker pension and retiree costs have increased from $1.4 billion to $6 billion during the past decade, said the analyst, while their share of the state general fund that pays for most programs increased from 2 percent to 7 percent.

The analyst said the pension systems are “too expensive and inflexible.” Others contend that the pensions are “unsustainable” because of overly generous benefits granted a decade ago, when their investment funds had surpluses from a booming stock market.

Now the pension funds must replace huge investment losses in the stock market crash and deep economic recession. Among other factors said to be pushing up costs: longer life expectancy, earlier retirements and payroll growth.

Supporters of the current pension system argue that the “pension crisis” is overblown and that their opponents are trying to take advantage of a “window” before a recovering economy improves pension investment earnings and government budgets.

State Treasurer Bill Lockyer and Jack Ehnes, the California State Teachers Retirement System chief executive, last week issued separate critiques of the Hoover report, sharply disagreeing with some of the conclusions and recommendations.

The five Senate Republicans, who have leverage as Brown seeks a handful of GOP votes to place a budget-balancing tax extension on the ballot, issued a letter last week proposing a federal-style hybrid as mentioned in the Little Hoover report.

In 1987 new federal employees were switched to a three-part hybrid plan that provides a smaller pension (1.1 percent of final pay for each year served), an employer 401(k) match of up to 5 percent of pay and Social Security.

“As of 2009, the pension system for federal workers had an actuarially funded status of 100 percent,” said the Hoover report. “The original plan, which remains in place for employees hired before 1987, is only able to meet 39 percent of future obligations.”

In an interview with Los Angeles Times columnist George Skelton last week Brown said “Democrats will come unglued” if Republicans try to push them too far during budget talks.

Brown doesn’t seem willing to adopt a hybrid system, said Skelton, “but the governor would support limiting the maximum amount of pensions and also the salary upon which pensions are calculated.”

(Some pension reform advocates say there also should be a cap on the amount that government employers contribute to pension funds. Currently, it’s the employer and the taxpayer, not the employee, who are on the hook when pension costs soar.)

The governor favors a ban on employees boosting pensions by purchasing “air time” or service years not actually worked, said Skelton, and he would “do something about local pensions, which are worse.”

The provocative attention-getter in the Hoover report is a recommendation that the Legislature “give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees.”

The report notes that a series of state court decisions are widely believed to mean that once an employee is “vested” their pension cannot be cut unless replaced by a benefit of equal value.

But some legal experts think there is wiggle room. The Hoover commission and others argue that troubled pension funds need to be able to quickly cut costs by reducing pensions earned in the future by current workers, similar to private-sector pensions.

A pension reform group has been talking since last year about the legal possibility of cutting pensions “going forward” for current workers, while protecting what they have already earned.

Marcia Fritz, president of the California Foundation for Fiscal Responsibility, told a Bay Area Council panel on pension debt last week that her group is working on an initiative that could test whether the pensions earned by current workers can be cut.

The foundation, which has failed for lack of funding to put pension reform initiatives on the ballot, is becoming a research and analysis group. A new political arm led by Dan Pellissier is working on an initiative.

Pellissier said a state constitutional amendment could authorize a cut in the future pension earnings of current workers, changing the legal foundation of state court rulings. He said federal court rulings in Baltimore and Puerto Rico allow pension changes.

A new regional pension reform group led by San Francisco Public Defender Jeff Adachi, who put an unsuccessful measure on the San Francisco ballot last November, met last week after the Bay Area Council panel.

A labor coalition on retirement issues hired a spokesman well-known at the Capitol, Steve Maviglio, and last week issued a statement urging lawmakers to protect the retirement security of workers who have taken pay cuts and negotiated pension savings.

The chairman of the labor coalition took a question via Twitter during the Bay Area Council panel last week about whether Brown, who received millions in campaign contributions from labor, can be expected to initiate pension reform.

“He put pension reform in his election agenda. We expect to see pension reform from the governor,” replied Dave Low of Californians for Health Care and Retirement Security.

“The difference between a Gov. Brown and a Gov. Whitman (Meg Whitman, the defeated Republican candidate) is that hopefully we will get a chance to sit at the table and get a chance to shape some of these as opposed to having things imposed on us,” Low said.

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 14 Mar 11

16 Responses to “Pension focus shifts: hybrid, caps and the big one”

  1. john moore Says:

    It is important to keep in mind that the pension deficits began with 3@50 and that cities with 3@50 are much,much worse off than the state. If 3@50 is not eliminated going forward, and unless there is a cap on salaries for pension purposes,pension reform for cities can’t work.Suprisingly,non-3@50 govt. workers don’t seem to appreciate the degree to which 3@50 and unbridled salaries have jeopardized their pensions.

  2. IT Pro Says:

    “Suprisingly,non-3@50 govt. workers don’t seem to appreciate the degree to which 3@50 and unbridled salaries have jeopardized their pensions.”

    Not all of us, John. Many of us do understand, and want to see sensible reforms without wrecking the whole system. A cap is absolutely justified, but the numbers some people throw around ensure everybody on a pension would be relegated to the poor house. Your run-of-the-mill Misc-2% can’t spike their pension or get a partially tax-free pension for being disabled on the job, and would have to work 40 years and be 63+ to even get 100%… and how many of them are even close to that number? Having said that, I’d still support a hard % cap over a hard dollar amount.

    An although it’s been said (and ignored), the 3@50 came about in lieu of salary increases at the bargaining table because the management/state/whoever thought they were getting a free pass. I don’t agree with it, but it exists and should be reformed in the same manner. Actually, it is being reformed in the same manner thankfully. For all the rhetoric, cooler heads seem to be prevailing. I suspect change will come in a form in which both sides will get to puff out their chests and claim victory. Whatever helps them sleep at night.

  3. Rex The Wonder Dog! Says:

    The best solution is to put ALL gov trough feeders back into Social Security-like everyone else. The state may add in a 401K with a 3% MAX match and thta is it-end of the story.

    No more multi million dollar-wealth accumulation- pensions at a age 50.

  4. Rex The Wonder Dog! Says:

    An although it’s been said (and ignored), the 3@50 came about in lieu of salary increases
    TRhat OUTRIGHT whopper of a lie belongs right up ther with the cops and firewhienrs die 4 days after they retire.

    The AVERAGE cop/firewhiner salary in this state has risen 97% in the last decade alone (earning in the top 3-5% in the nation), and that was when 3%@50 was implemented, for a GED no prior work experience necessary job.

    That is 4-5 tiems the rate of inflation and must also be viewed in light of the average CA employee who has seen their salary remain stagnent and for many had their salary go DOWN in the last decade.

    Listen, try to be honest when posting here-these public employee whoppers are easily debunked today.

  5. jskdn Says:

    It was corrupt and immoral to grant pensions to government employees that are so completely out of line with those of the average private citizen that has to pay for them. Who would willingly agree to a system that takes their money away so that government employees would have such a privileged existence? The pensions government employees had BEFORE the corrupt giveaway were already better than what was available to the vast majority of private-sector employees. There was no justification regardless of what the stock market did.

    The corrupt local giveaway in my town didn’t even have the stock market bubble as an excuse. That had already popped when they gave away the store. But that didn’t stop them. The local politicians ignored my objections, which were easily drowned out by the greedy government employee unions. Most people didn’t even understand what was going on as the worse-than-useless news media ignored the fundamental questions. That means this supposed “contract” didn’t have the people who would have pay for it in taxes and diminished services as a knowledgeable party. Where was the average private citizen told that they were being put on the hook for government employee privilege even as their own economic risks were being increased?

    Furthermore just changing benefits for employment going forward ignores that many of the pension benefits that the government employee elites think is theirs weren’t as the result of pension agreements in effect during the employment that those benefits are based upon. Rather increased benefits were given for employment that happened in the past. So the arguments against changing contracts are being applied only one way, in the favor of corrupt government employee privilege.

    For those of us who believe government should not be creating privilege for anyone, let alone its employees, we seem have little voice. We need universal pension rules that apply to everyone in society. Government employees and everyone else should receive defined contributions adequate to ensure a decent pension. Those contributions need to be pooled together so that investment risk is shared and overhead management costs are kept to a minimum. People’s retirements would be a function the averaged time-value return of their contributions over their lifetimes as a share of the of the whole pool of investments. In other words, we would be in this together. We might not know exactly what we would get when we retire but whatever that return is would reflect what our fellow citizens would receive too. People could be free to invest on their own beyond that if they choose but I suspect that most people would be happy to not have to think about such things. People’s lives are being consumed by complexity, choices and obligations to navigate a never ending ocean of consumer decisions. I’d rather walk on the beach.

  6. Tough Love Says:

    The comment by jskdn (above) is right on the money. The ROOT CAUSE of the financial problem is EXCESSIVE PENSIONS. Read on:

    So let’s cut to the chase …….

    Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

    More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
    2% per year of service w/o COLA – 29%
    2% per year of service with COLA – 39%
    3% per year of service w/o COLA – 44%
    3% per year of service with COLA – 58%

    Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

    This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

    TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

    Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

    Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

    It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

  7. FLAK88 Says:

    If the State formula had not been changed in 1999, this issue would not be occurring (right?). Well, almost every bargaining unit agreed to Schwarzenegger’s proposal to roll it back to 1999 for all new hires. That’s what was proposed and that’s what was agreed to. (I think ALL units should conform, but at this point it’s more of a housekeeping task than anything that impacts larger groups of employees.) Also, State employees accepted a higher premium payment for their pensions and also a lower salary schedule. Did I mention the concurrent 15% reduction, due to furloughs ? Given the circumstances, larger concessions could have been proposed and possibly an even larger pension premium could have been achieved. That’s not the fault of the unions, is it ? In addition, two holidays were taken away without any bargaining what so ever; an end run that still smacks of illegality. Now, the GOP scapegoaters want an even more concession from employees not even hired yet; to have their pensions voted away in a political deal precipitated by duped alarmists and opportunism. Wall Street hates defined benefit plans and loves the numerous fees charged by 401Ks. This is just another opportunity for the GOP Puppets to further serve their Corporate Masters. Finally, much of what I read in the comments relates to why civil service benefits should be lowered to simulate what private workers get. It would be more logical and productive for private workers to ask themselves ‘why don’t I get something better ?’ and then act on it. In other words, if it looks THAT good to you, stop your whining and form your own union !

  8. Tough Love Says:

    Quoting FLAK88 …”Finally, much of what I read in the comments relates to why civil service benefits should be lowered to simulate what private workers get.”

    No, the comments DON’T say that.

    They say Public Sector Pensions need to be lowered (significantly, and for CURRENT workers) so that when combined with cash pay, TOTAL COMPENSATION (for comparable) Public and Private sector jobs is similar.

    It’s clear you are a Civil Servant riding this gravy. Twisting facts is a familiar tactic from your Greedy breed.

  9. SkippingDog Says:

    New week, but the same tired arguments and slanted statistics from the same posters as always.

    I do agree with IT Pro that it’s increasingly clear that cooler heads will prevail and work this out through the normal give and take of our political processes. That will undoubtedly gall the naysayers here even more, but it’s really what you should have reasonably expected all along.

  10. Just the Facts Says:

    What gravy train? Let’s talk real numbers. Public pensions account for only 3% of general fund expenditures. About half of CalPERS retirees receive annual pensions of $18,000 or less. 78 percent receive $36,000 or less. Only 1.7 percent of CalPERS retirees receive annual pensions of $102,000 or more. So let’s lose the hyperbole!

  11. FACT check Says:

    Dog Food Rexie: Make sure my fat pension payment is on time.

    Love, one of your cop/firewhiner friends.

  12. jskdn Says:

    I’ve read the median 401k match by employers is around 3%. Combined with Social Security it’s worth asking if that would lead to an adequate pension income. But once again, government employees should be held to whatever standards affect the rest of us. In that vein, government employees need to be in Social Security and on the hook for the redistributionist nature of that program, something supported by their Democrat agents. Combined with defined contributions that would make government employment and private employment both more easily comparable and interchangeable. Whatever government employees get from taxpayers should reflect what those taxpayers get from their employers. No second-class citizens and no government employee privilege leading to indentured taxpayers. That ideal was once the hallmark of liberalism. Now liberals simply represent a corrupt political movement that provides favors to chosen constituencies.

    I’ll say it again. I’m for defined contributions for pensions but not individual 401k accounts. The huge inefficiencies, transaction costs and widely varying risks of return are unacceptable. Put me in an efficiently managed, diverse investment pool with a few million other people willing to share risk and accept a common return.

  13. roger Says:

    Cops & firewhiners ARE the reason we are in this mess! $100K is the norm for this group & they keep wanting more at the expense of everyone!!!

  14. Tough Love Says:

    Quoting Just The Facts …”About half of CalPERS retirees receive annual pensions of $18,000 or less. 78 percent receive $36,000 or less.”

    ALL %s are WAY low (and misleading, as you expect when the quote comes from a Gravy-train-riding Civil Servant) because:

    (a) Includes part-timers
    (b) includes Short career workers, and
    (c) includes those who retired perhaps decades ago at much lower salaries

    What WOULD BE relevant would be the starting pensions from 30-year career full-time 2010 retirees. Likely would be $60-$80K annual (COLA-adjusted) pensions … and much higher for safety workers.

    But they won’t show you THAT, because it doesn’t support their agenda of making believe they are working class peasants when they’re really the new “royalty” …. on the TAXPAYERS’ dime !

  15. spension Says:

    I am a trough-feeder too… but I’m not unionized and my employer (UC) dangled the pension to both recruit me and to retain me. Oddly enough, the private University sector pays quite a bit more salary for professors than the public sector does… not at all like the claims that public positions pay way more. But the public pensions equalize the total compensation. UC has hired Arthur Anderson etc through the years to evaluate that, to quite professors who know their salaries are low.

    At UC, the Regents forgot to make any pension fund payments between 1991 and 2009. Amazing in a way… for 2.5% at 60, not a dime contributed.. 18 years of 0%, not 39% as suggested above.

    One way I think of the current deficits… they are telling the taxpayer to buy while stock prices are low.

    On the other hand I’m not a fan of pensions over, say, 2X the California Median salary. I didn’t think much about it when they were retaining/recruiting me. But to get paid to sit around by working people is a privilege to begin with, and when people get >$100K pensions from taxes I don’t like it either.

    And frankly, a 401(k) (really 457 or 403(b)) would have been *better* for me than the defined benefit of UC. Because the money for the past 20 years would have been really deposited!! The long Regents’ holiday would not have happened, and I’d be more financially secure!

    There is only one argument against the 401(k) type system… everyone must individually plan to live to 100 or so. When you pool all the resources, you can count on the law of averages, which has the average person dying at 85 or so. The short-lived compensate the long-lived. One of the few things in the system that rewards conscientious healthy people. Health insurance rewards smokers, bad diet, etc, with payouts for healthcare.

    But we’ve had so much bad decision making… at UC, going for expensive private equity deals with Blum etc… in the big pension funds, that I actually prefer the 403(b)… when I figured this out 11 years ago I saved a *lot* in my 403(b). I basically live like a pauper with old cars and clothes… but that is an old professors habit, we can look poor and nobody really cares.

  16. pepsi guy Says:

    OK. Let me make this simple. I have read nearly every post I can find on what people (private sector and public sector employees) are saying. I agree and disagree with most posts… but there is also different retirement systems and percentages at what age for public employees… depending upon everything from union negotiations to non-represented. I am NOT represented. I will put it right out for EVERYONE to see.
    STATS: (and they aren’t jerry-rigged numbers or benefits) My current “defined benefit plan” is 2% at 55.5, with NO medical benefit given after retirement, thus most people will stay and have stayed beyond the 55.5 as medical insurance is needed.
    I am currently paid approximately $90,000 salary ($7,500 a month) in my position. If I were NOW 55.5, which I am not, and able to retire (i.e. chose to do so… which I can’t because I will need medical insurance until 67 until I am on Medicare) I would (based on the salary above), receive $41,400 annually ($3,450 a month). No additional retirement would come from my public employment… no medical insurance, no medical insurance subsidy… nothing. So that is it. Don’t tell me that’s an excessive amount of money, or a golden retirement. It’s not. I contribute to my retirement at 8% of pay, pay into the social security system (just like private sector employees do) and I choose to place $1,500 per month into deferred compensation to lower my current tax bracket, and create what I will call my “real” retirement money. Especially if you wingnuts change my “defined benefit plan” to something else, like a 401(k). When I was hired, the “defined benefit plan” set out what I would make in retirement. It’s one of the reasons I chose to work in government. Security in knowing then, what I would make in retirement. We “gave” back some benefits, and lost cola’s for 3 years, to change the old retirement system of 1.5% at 55, WITH medical. Now I have 2% at 55.5 WITHOUT medical. Also, my counterpart in the private sector is paid approximately $120,000 – $150,000 in CA dependent upon location (SF and LA make more, as it costs more to live in those places). That does NOT include their 401k, bonuses (which can range from $5,000 in a economic bad year (05-present), to $50,000 in a good year (96-04). So my counterpart in the private sector would make approx. $35,000 – $85,000 more each year than a public employee in my job classification. God forbid the government (says the taxpayer… which I am also a taxpayer don’t forget) pay bonuses, or provide another incentive base. You all can have it in the private sector, but as a taxpayer you would be outraged if I received something like that in the private sector.
    SO! In the end, I make LESS over my career yearly (in the range of 1 million to 1.5 million), and I will make LESS in retirement. He contributes to a 401k and social security, no deferred comp. I contribute equally to social security and 8% to my retirement monthly, and CHOOSE to contribute $1,500 a month to deferred compensation, which is a similar financial vehicle like a 401(k) going up and down ($$$) with the market, just as his 401(k) does. His employer matches up to 8%, if he does the same. Anything over 8% has no match.
    So please don’t tell me I am living high on the hog with a publicly paid retirement. I pay 8% of my pay into that retirement system, and earn NOTHING on MY money. Its controlled by the Government (now do you see the problem???). So please, while my numbers are representative of me (and other public employees up and down based upon their pay scale) we DO not make a boat load of $$$ of money at your expense. We make a “secure” retirement (defined benefit plan) from when we are hired. The government screws up their investments (our money), screws up their investments (taxpayers money), and wala! you see the problem.
    If you want to be mad at someone, be made at your government, not the worker. We didn’t screw up, so we shouldn’t get screwed, by your statement of changing our retirement system to a 401(k) style plan, when we were hired under a “defined benefit plan.” Hey, if new employees want to come work in governement with your proposal, God bless em. I wouldn’t recommend anyone work in government now… “defined benefit plan” or 401(k) plan. We and you, as taxpayers, get screwed by OUR government. I didn’t play “fuzzy” math or different math than is right.
    Please realize we have a right to be secure in our retirement years, as you do… whatever your retirement vehicle is. Ours was “defined” for us, and we went and worked in government. Its a choice, and frankly speaking, at less pay and retirement. The only benefit I have that is more than the private sector, is I can contribute to my deferred compensation, which the government does NOT match one bloody cent, and its my risk in the stock market… my choices (from a list mind you), of investments the government chooses. So please get off your high horse, and realize we all contribute equally to society, we just work in different environments… me public, you private. Good luck to you all in retirement.

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