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 https://calpensions.com/ Posted 14 Mar 11