Details of a major federal-style overhaul of state and local public pension funds proposed by Gov. Brown last week are expected to emerge from a study, which could take about a year.
The goal is to replace 75 percent of pay with a “hybrid” retirement plan that combines a lower pension, a 401(k)-style investment plan and Social Security (if the worker is already in the federal plan), each part providing a third of retirement income.
Administration officials said the study would determine key parts of the plan needed to hit the 75 percent replacement target: employer-employee contributions, the formula for the lower pension and how the retirement age would be extended.
The governor’s proposal for new state and local government hires is similar to a cost-cutting reform that since 1987 has given new federal employees a hybrid retirement plan combining a pension, a 401(k)-style investment plan and Social Security.
“Twenty-five years ago, the federal government developed a breakthrough model for pension reform that is gaining renewed attention as states struggle to address rapidly increasing pension costs,” a Little Hoover Commission report said in February.
As of 2009 the three-part federal retirement was 100 percent funded actuarially, said the Hoover report, while the traditional pension plan for federal employees hired before 1987 was 39 percent funded.
The hybrid helps the employer by lowering costs and shifting the risk to employees if 401(k)-style investments fall short. In a pension, employers not employees make up the losses if there is a shortfall in investments expected to provide two-thirds of revenue.
“The devil is in the details,” said Dave Low, chairman of a labor coalition, Californians for Retirement Security. “We absolutely hate the mandatory hybrid thing.”
Low said many unions have agreed to increase employee pension contributions and give new hires lower pensions. He said asking union members who also have been hit by pay cuts and freezes to accept a weaker retirement plan would be difficult.
The proposal to make hybrid plans mandatory for new state and local government hires is the big change in a 12-point pension reform issued by Brown last week, fleshing out some things listed as “under development” in a 12-point plan issued in March.
Labor is likely to support several of the points, some already moving through the Legislature, that correct well-publicized pension abuses but only provide marginal cost savings for employers.
In pension “spiking,” for example, cashing out unused sick leave, vacation and other things boost the final pay in pension calculations. As notably happened with two Contra Costa fire chiefs, spiked pensions can be well above salary earned on the job.
Brown’s plan and pending legislation will be heard by a two-house legislative committee, which last week in Carson held the first of three planned hearings. The committee is expected to issue a reform package next year.
“This will be chewed on over in the Legislature — I certainly welcome that,” Brown said at a news conference last week when asked if his 12-point proposal was “all or nothing” or some parts could be left out by the Legislature.
Democrats, the traditional allies of labor, have big majorities in both houses. But several Republicans would be needed for the two-thirds vote required to place parts of the governor’s plan on the November ballot next year.
Current workers. Critics contend that soaring pension costs are eating up money that should be spent on basic government services, particularly in local government where personnel can be 80 percent or more of the general fund budget.
The Little Hoover Commission and others say that California’s public pension systems, like private-sector pension funds, need to be able to control costs by cutting pension amounts current workers will earn in the future.
Many believe the courts have ruled that pensions promised a worker on the date of hire cannot be cut, but there is a dispute. Brown said he thinks “some cities will experiment in this area,” causing the courts to clarify the issue in a few years.
He apparently was referring to an initiative on the June ballot in San Diego capping pay counted toward pensions, a proposal in San Jose to cap city pension contributions and perhaps competing ballot measures on Nov. 8 in San Francisco.
“I’m not sure there might not be greater latitude in terms of changing pension benefits, but I know we can do what I proposed,” Brown said. “If there is any more, that will evolve over time.”
The governor’s plan for current workers calls for equal sharing between employees and employer of the “normal” cost, what actuaries say is needed to pay for pensions earned during a typical year.
But that does not include the debt or “unfunded liability” that soared after the stock market crash and a weak economy dropped investment earnings well below the typical pension fund forecast, 7.75 percent, which critics say is too optimistic.
A Brown administration official told the Carson hearing that state workers currently pay a roughly equal share of the normal cost of their pensions. No figures were immediately available from the California Public Employees Retirement System.
But if state workers paid an equal share of the total cost including the unfunded liability, their payments would increase significantly.
For example, most state workers agreed last year to contribute 8 percent of their pay toward their CalPERS contributions under new contracts, up from 5 percent. The state contribution for these “miscellaneous” workers this year is 18 percent of pay.
The governor’s normal cost-sharing plan would have the biggest impact on local government, particularly for police and firefighters. Some cities currently pay all of the employee’s required pension contribution, up to 8 percent of pay.
In addition, some of these “employer paid member contributions” are counted as salary that increases the employee’s pension under formulas based on final pay, years of service and age.
Working longer. The governor’s plan would require new hires to work longer to receive full pension benefits, until age 67 as in Social Security. But how this would be structured depends on the study of what is needed to reach the hybrid pay replacement goal.
Most state workers are in a “2 at 55” plan (new hires “2 at 60”) providing 2 percent of final pay for each year served at age 55. But workers can retire at age 50 with 1.1 percent for each year served, gradually increasing to 2.5 percent at 63 or older.
After 40 years of service, the plan provides a pension at age 63 equal to 100 percent of salary, which can increase if the employee continues to work because there is no cap. Most state workers receive Social Security in addition to their pensions.
In the last year of his previous term as governor, Brown’s proposed budget in 1982 called for lower pensions because state workers could retire at 62 with more than 100 percent of their final salary from CalPERS and Social Security.
California is one of about 15 states where some government employees are not in Social Security. Among them are teachers in CalSTRS and some estimate more than 60 percent of local government employees, a cities’ representative told the Carson hearing.
CalSTRS. One point in the governor’s March plan missing in the new plan issued last week: a funding solution for the California State Teachers Retirement System.
Without a contribution increase, CalSTRS is expected to run out of money in about 30 years. But unlike most California public pensions systems, CalSTRS lacks the power to set contribution rates, needing legislation instead.
An agreement on a funding solution would probably require phasing in more money from the state, as well as school districts and teachers. As huge state budget gaps continue and schools struggle, the Brown plan avoids adding new costs for government employers.
The governor, perhaps wryly, held out hope that an improving economy will shrink the pension debt or unfunded liability by boosting pension fund investment earnings, which are expected to provide about two-thirds of pension revenue.
“We have to deal with it,” Brown said of CalSTRS funding. “But unfunded liability changes over time, and hopefully the Obama (jobs) plan is going to make everything go away.”
Retiree health. The state’s biggest retiree debt or “unfunded liability” is $60 billion owed over the next 30 years for retiree health promised current state workers. Last May, the unfunded liability for CalPERS was $49 billion and for CalSTRS $56 billion.
But unlike pensions, little or no money has been invested to pay for future retiree health care costs. It’s pay-as-you-go costing the state general fund $1.5 billion this year, up 60 percent in the last five years and expected to nearly double in the next 10 years.
By comparison the other state worker retirement costs this fiscal year are $3.5 billion to CalPERS ($2 billion from the deficit-ridden general fund and the rest from special funds such as transportation), Social Security $632 million ($297 million general fund) and Medicare $218 million (102 million general fund).
The state payment to CalSTRS is $1.3 billion, all from the general fund. Add them up and general fund state worker retiree costs this year are about $5 billion, more than 5 percent of the deeply troubled $89 billion general fund.
In better economic times, the governor might propose setting aside money to invest and begin “prefunding” retiree health care promised current workers. His proposal trims retiree health care for new hires.
New state employees would have to work 15 years, instead of 10 years, to be eligible for partial state payment of retiree health care premiums and 25 years, instead of 20 years, to get full state payment for the average retiree health care premium.
The governor’s proposal to require working longer for full pensions could shorten the length of time before retirees become eligible for Medicare, producing savings by reducing the time the state pays their premiums.
Labor proposal. Public employee unions are not a united front as former Gov. Arnold Schwarzenegger learned last year. Some unions volunteered to raise employee pension contributions and give new hires lower pensions.
Others had to be prodded by a record 100-day state budget deadlock. And some held out until the Republican Schwarzenegger administration was replaced by the new Democratic Brown administration.
Historically, there has been some competition among unions to represent bargaining units, producing a few changes. And labor leaders always have to worry about getting too far in front of their members.
In a joint news release last week, the president of the largest state worker union, Yvonne Walker of SEIU Local 1000, and the executive officer of the trendsetting California Highway Patrol union, Jon Hamm, did not blast the governor’s plan.
“Gov. Brown’s proposal starts the conversation on retirement security that will help shape the future for the millions of people reaching retirement age,” Walker and Hamm said.
The two union officials said they supported curbing pension abuses, but could not jeopardize the modest pensions of public employees. They pointed to a recent UC Berkeley study showing nearly half of all Californians may retire in poverty.
Then they made a proposal that would give the two-house committee even more to chew on: Look at ways to improve retirement security for private-sector workers, instead of only focusing on cutting benefits for public employee benefits.
“Vehicles like CalPERS that offer expertise in making sound investments and achieving returns higher than market averages should be available to public and private sector employers and their employees,” said Walker.
Initiative pressure. Brown also had some advice for legislators last week. He urged them to “rise above the pressures” and place key parts of his plan on the November ballot next year if they want a favorable response from the electorate.
“November could have some very profound measures on the ballot, profoundly impactful,” he said. “So I would say that the Legislature is well-advised to take this very seriously, get it on the ballot in November when other things may be on that they are quite interested in.”
The governor didn’t say whether he was referring to a tax proposal he is expected to make, a “paycheck protection” initiative aimed at curbing public employee union political campaign funds or a rumored pension reform initiative.
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 1 Nov 11