CARSON — A League of California Cities representative yesterday urged a legislative committee to repeal two decade-old bills allowing local governments to negotiate higher pensions, saying the benefits are “too rich” and “unsustainable.”
The legislation backed by CalPERS created a range of more generous formulas said to have ratcheted up pensions during labor negotiations as employers “chased the richest contract” to remain competitive.
“We think it’s important to repeal SB 400 and AB 616 because we think they have generated pensions that are unsustainable and very difficult to explain to the larger public that we serve,” Rod Gould, Santa Monica city manager, told the committee yesterday.
He said the cities would like to see CalPERS and other large retirement systems “offering additional formula choices that maybe aren’t quite as lucrative as those that are currently available but provide more choices to be bargained locally.”
The two-house committee held the first of three hearings on pension reform planned before the Legislature reconvenes in January. A plan is expected to emerge from bills pending in the Legislature and a long-awaited proposal from Gov. Brown today.
The Sacramento Bee and Los Angeles Times reported yesterday, based on a briefing given labor leaders, that the governor’s proposal gives new hires a “hybrid” that combines a less generous pension and a 401(k)-style investment plan.
The governor’s proposal reportedly is similar to a 12-point plan he issued in March: extend full retirement ages for new hires to 67, curb boosting or “spiking” pensions, and end the purchase of service credits or “air time” to increase pensions.
Voter approval would be required for a proposal to reshape the labor-friendly boards of the California Public Employees Retirement System and California State Teachers Retirement System by adding financial experts.
Public pension costs have soared and become a political issue since massive investment losses in a recession and stock market crash. To cut costs, many unions are agreeing to raise worker pension contributions and give new hires lower pensions.
(Current workers are widely believed to have “vested rights” to the pensions promised at their date of hire that are protected by court decisions. So pension rollbacks are limited to new hires, usually taking decades to produce significant government savings.)
For employers in CalPERS, what’s being rolled back for new hires are the major pension increases in the two bills enacted a decade ago.
A key provision in SB 400 in 1999 gave the Highway Patrol a negotiated 50 percent pension increase. The formula was changed from 2 percent of final pay for each year served at age 50 to “3 at 50.”
SB 400 was a sweeping pension increase for most state workers, even retirees. But the legislation also created a “3 at 50” formula for local law enforcement, triggering widespread bargaining for the new benchmark.
“What the state does does matter,” John Mirisch, a Beverly Hills councilman, reminded the committee. “There is a tremendous trickle-down effect to cities as we see in the aftermath of SB 400.”
CalPERS sponsored SB 400 and has been criticized for telling the Legislature the measure would not increase state costs. Although not a sponsor of AB 616 in 2001, CalPERS offered local governments an incentive for boosting pensions to the new formulas.
CalPERS said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier for the employer to pay for the more generous pensions.
Legislative analyses said AB 616 could boost pensions by a third. Part of the argument for the bill was that while SB 400 gave police (and firefighters added later) a potential 50 percent pension increase, miscellaneous workers received nothing.
Before signing AB 616, former Gov. Gray Davis vetoed a similar bill the previous year saying: “I am not aware of a business or policy need to provide a new, higher level of retirement benefits for non-safety public employees.”
Local government employers in CalPERS and the 20 county systems operating under a 1937 act had formulas of “2 at 55” and “2 at 60.” AB 616 added “2.5 at 55,” “2.7 at 55” and “3 at 60.”
At the committee hearing, Sen. Joe Simitian, D-Palo Alto, questioned Gould about why local government, which usually advocates local control, is advocating state control through lower pension formulas to resist bargaining pressure.
If the benefits are too rich, asked Simitian, why can’t local government officials negotiate fair, sustainable pensions?
“You may decide that’s where you want to be,” replied Gould. “What I’m telling you, based on conversations with our colleagues and other elected officials throughout the state, there is a feeling that in some cities the lure is just too great, and we think these benefits are just too rich and unsustainable.
“We think it would be helpful, and send a message to the taxpayers of California that those options are taken off the table.”
Gould mentioned a number of other points in a pension reform policy adopted by the League of Cities last summer. One he did not mention is a “detailed legal review” of whether pensions promised current workers can be reduced.
The Little Hoover Commission and others suggest that the courts look at whether the pensions of current workers can be cut for years worked in the future, while protecting pensions earned for service in the past.
One of the committee members, Sen. Mimi Walters, R-Laguna Niguel, introduced legislation earlier this year that would switch new hires from pensions to a 401(k)-style individual investment plan.
Walters said yesterday she is seeking a clearer picture of total pension liability. Unions say pension opponents exaggerate the “unfunded liability” to scare the public into supporting a switch to 401(k)-style plans now common in the private sector.
“Many of my questions will be focused on finding that number,” said Walters, “and as we meet in the coming weeks or months, we can find solutions that provide the greatest protection to our state workers and taxpayers.”
The co-chairman of the committee, Assemblyman Warren Furutani, D-Gardena, whose district includes Carson, had said earlier this year that he wanted a pension-reform package. He warned that there might be an initiative if the Legislature did not act.
But as in recent years, pension initiatives have not attracted funding. Republicans and other potential backers are putting their money into a referendum on new state Senate districts and a “paycheck protection” initiative on using public employee union dues for political campaigns.
As he opened the new hearings on pension reform, Furutani said, “Hopefully, this all converges around a plan that is bipartisan” and that serves both the workers and the public.
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 27 Oct 11