Bid to trim pension fails, $7.7 million settlement

A backdoor attempt by CalPERS to trim an absurdly generous pension backfired, resulting in a $7.7 million payment last year to the heirs of a man who retired as a top state Senate aide more than 40 years ago.

The settlement after a lengthy court battle took a big bite out of the Legislators Retirement System, which has been shrinking since a term-limit initiative, Proposition 140 in 1990, ended pensions for new legislators.

The court settlement last year nearly equaled the annual amount of pensions paid by the plan. During fiscal 2009-10, payments to 266 retirees totaled $7.9 million, an average of $29,535.

But the system’s investment fund still had a market value of $114 million in June of last year. And in a fact sheet that the California Public Employees Retirement System gave a legislative committee this month, the system stands out.

It’s the only one in which the employee contribution is zero.

In the other CalPERS state systems, employees contribute 5 to 11 percent of their pay toward their pensions, usually with a matching contribution from the employer that is two or three times larger than what employees pay.

The employee contribution has been zero in the Legislators Retirement system since 2000, when it became “super funded” with more than enough assets to pay future obligations.

The surplus has fallen due to the court settlement, two years of investment losses and choosing a smaller “margin for adverse deviation” for the declining fund that dropped the earnings forecast to 6 percent, well below the usual CalPERS forecast, 7.75 percent.

“If the plan suffers another significant loss (investment, or unexpected large benefit payment), employee contributions will need to be reinstated,” an annual actuary report said in May. “In addition, contributions from the state would be required.”

Proposition 140 imposed a limit of three terms on the Assembly and two terms on the Senate and constitutional officers such as the governor and members of the Board of Equalization.

The initiative only ended pensions for new members of the Legislature. The eight top constitutional officers, four elected Board of Equalization members and four top legislative aides remain eligible for the Legislators Retirement System.

On a list of active plan members are Gov. Brown, Controller John Chiang, Superintendent of Public Instruction Tom Torlakson, Attorney General Kamala Harris, Secretary of State Debra Bowen and Insurance Commissioner Dave Jones.

Treasurer Bill Lockyer, a former assemblyman and state Senate leader, is an inactive member now in CalPERS. The office of Lt. Gov. Gavin Newsom did not respond to a query about his status.

For constitutional officers, the pension provided by the plan is based on 5 percent of the highest annual pay for each of up to eight years served. The pension for the legislative aides is based on 3 percent of pay, capped at two-thirds of the final salary.

Most state workers are in a plan based on 2 percent of pay for each year served at age 55, increasing to 2.5 percent at age 63 and older. Pensions in the uncapped plan equal 100 percent of final pay after 40 years of service.

The $7.7 million settlement last year grew out of a generous pension increase enacted by the Legislature for its top aides in 1969. The pensions of retirees were linked to the salary of current officeholders.

An increase in the salary of a current legislative aide and cost-of-living adjustments increased the base pension of retirees, which also received a cost-of-living adjustment.

The double cost-of-living adjustment became known in the media as the “super escalator.”

Clarence Alexander became secretary of the Senate in January 1969 and retired in December of that year at age 56 with 22 years of service. Available documents do not show the amount of his original pension.

But his pension soon exceeded the salary of the current Senate secretary, said a decision by Administrative Law Judge Jonathan Lew in 2006 that contains a brief history of the case.

Alexander asked CalPERS in 1976 about waiving part of his pension and was told he could not. Without telling Alexander, CalPERS broke the link with the current secretary’s pay in 1980 and began giving him a single cost-of-living adjustment.

In 1991 an internal CalPERS memo said Alexander’s pension should be increased from $7,559 per month to $17,549 per month, with a retroactive lump sum of $463,658 unadjusted for interest. No action was taken.

Three other legislative aides had pensions with the “super escalator.” One died in the early 1980s. CalPERS tried to reduce the pensions of the other two, ending in an unadjudicated settlement in 1996 that did not include Alexander.

Alexander died in 1998 and his widow, Frances Alexander, began receiving his pension. In 2003 a former CalPERS employee told Alexander’s daughter of the apparent underpayment, and a long legal battle began.

By the time Frances Alexander died in 2005 CalPERS was contending that her pension, $10,785 a month, should have been $5,277 a month and that the overpayment in three previous years totaled $191,274.

After Judge Lew ruled in favor of the Alexander heirs, they argued that Lew’s decision must be adopted because CalPERS violated a legal requirement by failing to order a transcript within 100 days or adopt a decision of its own.

A superior court ruling in favor of the Alexander heirs on the 100-day violation was upheld by an appeals court in September 2009. CalPERS paid the $7.7 million settlement in March 2010.

“The outcome is most troubling — double COLAS in any given year that over time resulted in respondent’s allowance being three and a half times greater than the current incumbent’s salary,” Lew said in his decision.

The judge said double cost-of-living adjustments are “windfall benefits” and are “best seen as the byproduct of a system where benefits and eligibility criteria were under the direct control of the persons expected to receive benefits under it.”

Generous benefits from the Legislators Retirement System sparked a well-publicized controversy in 1974. The Associated Press reported that a 1965 law would give several legislators in their 30s lifetime pensions of $10,000 a year.

One of them was former Assembly Speaker Bob Moretti, D-Van Nuys, who was defeated in the Democratic gubernatorial primary that year by Jerry Brown. A freshman Republican, Robert McLennan of Downey, unsuccessfully pushed legislation to change the pensions.

After the Legislature adjourned in September, Gov. Ronald Reagan called them back in special session. The early pensions were repealed with only one dissenting vote from the 118 legislators.

But the angry legislators also voted to slash Reagan’s pension by $15,000 a year to $19,640, the Associated Press reported.

When the 61-year-old McLennan retired two years later, he was criticized for receiving a $3,000 a year pension after serving less than four years in the Legislature. He announced that he would donate the pension to his church.

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 12 Dec 11

6 Responses to “Bid to trim pension fails, $7.7 million settlement”

  1. Ted Steele, Dean of Students Says:

    “It’s the only one in which the employee contribution is zero.

    In the other CalPERS state systems, employees contribute 5 to 11 percent of their pay toward their pensions, usually with a matching contribution from the employer that is two or three times larger than what employees pay.”

    Of course employees should pay in as they do in most cases! This rare situation was a mess. Of course this highlights the sturdy nature of employee rights and of course vesting etc.

  2. Rex The Wonder Dog! Says:

    For constitutional officers, the pension provided by the plan is based on 5 percent of the highest annual pay for each of up to eight years served

    Scam central……never ends……I am throwing a party when Teddy Steals $10K per year pension is cut in half🙂

  3. Rex The Wonder Dog! Says:

    Ted Steele, Dean of Students Says:
    December 12, 2011 at 2:23 pm
    “It’s the only one in which the employee contribution is zero.
    Of course employees should pay in as they do in most cases! This rare situation was a mess. Of course this highlights the sturdy nature of employee rights and of course vesting etc.

    LOL…ZERO employee contributions, and dork Teddy says most do, baloney. Most pay NOTHING. 75% of gov employees in CA are local, and 75% of local gov employees pay nothing or only a fraction of their half.

  4. Tom Saggau Says:

    Ed,
    You wrote:
    “The initiative only ended pensions for new members of the Legislature. The eight top constitutional officers, four elected Board of Equalization members and four top legislative aides remain eligible for the Legislators Retirement System.”

    In fact, Prop. 140 ended pensions for current legislators. This provision of the initiative was overturned for current legislators and allowed for future legislators. It was a unanimous Supreme Court decision as per this particular provision of Prop. 140.

    The legislators had a contractual right to their pension benefits that could not be taken away, even by a vote of the people. Please see:

    Legislature of the State of California, Petitioners versus March Fong Eu, as Secretary of State, etc, et al., Respondents; Californians for a citizen government, intervener. No. S019660 Supremee Court of California October 10, 1991

    The court ruled unanimously as follows:
    Summary
    The California Legislature, certain individual legislators, and various citizens, voters, and taxpayers petitioned the state Supreme Court for a writ of mandate to prevent enforcement of Proposition 140, which imposed term limits on legislative members and state constitutional officers, and limited the Legislature’s budget and its members’ retirement benefits.

    The Supreme Court granted the petition to the extent it sought to compel respondents to refrain from enforcing that portion of the proposition limiting pension benefits, as applied to incumbent legislators; in all other respects, the court denied the petition.

    The summary goes on to say as it pertains to pension benefits…However, the court held, insofar as the measure provides that no pension or retirement benefit, other than Social Security, may accrue as a result of service in the Legislature (Cal. Const., art IV, 4.5), it is invalid under federal law as an impairment of contract, but only as applied to incumbent legislators.

  5. Rex The Wonder Dog! Says:

    Tom, your case referencing the legislators is exactly what the prviosu case law states, that the pensiosn can be changed if the fund is threatened. I have posted this fact numerous times, if the muni is in FINANCIAL TROUBLE like SJ is, then the pension CAN BE CHANGED!

    The employee does not obtain, prior to retirement, any absolute right to fixed or specific benefits, but only to a “substantial or reasonable pension.” (Wallace v. City of Fresno (1954) 42 Cal.2d 180, 183 [265 P.2d 884].) Moreover, the employee’s eligibility for benefits can, of course, be defeated “upon the occurrence of a condition subsequent.” (Kern, supra, at p. 853.) 864*864 (3) However, there is a strict limitation on the conditions which may modify the pension system in effect during employment. We have described the applicable principles as follows: ( “An employee’s vested contractual pension rights may be modified prior to retirement for the purpose of keeping a pension system flexible to permit adjustments in accord with changing conditions and at the same time maintain the integrity of the system. ( [Citations.] Such modifications must be reasonable, and it is for the courts to determine upon the facts of each case what constitutes a permissible change. To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.
    http://scholar.google.com/scholar_case?case=17080363232227008395&hl=en&as_sdt=2&as_vis=1&oi=scholarr

  6. Denis Bishton Says:

    As a former STATE employee, now retired, I wish that I had a super escalator clause. What a boondoggle ! I worked longer,and I think, harder, because mine was manual labor, and that was after a 4 year education in my trade. In the 11 years, since I, retired, I haven’t received what this guy got in one year. Plus I always paid into my pension and social security. Btw , I didn’t get a cola every year. Those at the top of the heap, always make it hard for those at the bottom to continue to get a fair shake, my having plush ‘EXTRA’ benifits.

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