Capping big pensions: How much is too much?

Regents last week reaffirmed the use of a federal IRS cap on the amount of pay used to calculate UC pensions, an inflation-adjusted $250,000 limit this year that also is proposed in a bill capping the pensions of all new hires in state and local government.

A letter from 36 of UC’s highest-paid executives threatened a lawsuit because UC, allegedly breaking a promise made in 1999, did not lift the cap after federal approval finally came in 2007, the San Francisco Chronicle reported in December 2010.

The demand was criticized by Gov. Brown, faculty leaders and others. The executives issued the threat as UC regents approved a painful plan to begin closing a $21 billion retirement funding gap amid budget cuts, pay freezes and layoffs.

Big pensions were in the spotlight. An inflated-salary scandal had erupted in the city of Bell, the “$100,000 club” list of big pensions on a reform group’s website grew, and huge investment losses fueled debate about whether pensions are “sustainable.”

The UC demand prompted Assemblyman Jerry Hill, D-San Mateo, to introduce legislation requiring all pension funds to use the IRS limit. AB 89 was one of several bills held last year at the request of Brown, who wants sweeping pension reform this year.

Now a two-house legislative committee on pension reform, scheduled on April 13 to hold its fourth hearing, is expected to include a pension cap in its proposed legislation, even though a cap has not been specifically discussed so far.

Powerful unions oppose or are skeptical of Brown’s proposed cost-cutting structural changes: higher employee contributions, delayed retirement and a “hybrid” plan for new hires. But the unions support curbs on salary “spiking” and excessive pensions.

The nonpartisan Legislative Analyst’s Office and others have suggested that the inequity between public and private-sector security, much like rising employer costs, is a threat to the “sustainability” of public pensions.

Public employee unions support moves to bolster private-sector retirement such as Retirement USA. Unions and Democratic legislators back SB 1234 by Sen. Kevin de Leon of Los Angeles requiring businesses to put employees in a “personal” pension plan.

Big pensions can draw attention to the wide gap between retirement security for government workers and the private sector, where an estimated six million California workers have little or nothing in retirement plans beyond federal Social Security.

Leading the 12,199 members of the “$100,000 club” on the reform group’s California Public Employees Retirement System list of retirees receiving pensions of $100,000 a year or more:

Bruce Malkenhorst, Vernon city administrator, $530,268; Joaquin Fuster, UCLA neuroscientist, $314,713, and Donald Gerth, CSU Sacramento president, $295,086.

Topping 5,259 retirees on the California State Teachers Retirement System list: James Enochs, Modesto elementary, $296,555; Fredrick Wentworth, San Joaquin County, $290,485, and Edward Hernandez Jr., Rancho Santiago Community College, $286,396.

The highest of the 1,642 on the University of California Retirement Plan list: George Miller, Lawrence Livermore National Laboratory, $270,075; Thomas Cesario, UC Irvine, and James Holst, UC general counsel, $237,129.

After the Los Angeles Times reported in July 2010 that officials of the small city of Bell were receiving some of the highest municipal salaries in the nation, CalPERS began a system-wide review of high pensions.

The Times reported last August that CalPERS had reviewed 2,250 pensions so far and reduced 329, “mostly because employers incorrectly reported employees’ pay.” No updated information was available from CalPERS this week.

Former Bell city administrator Robert Rizzo, once expected to get a $650,000 pension and a second pension boosting the annual total to more than $1 million, had his CalPERS pension slashed to $50,000, the Times said.

The pension of his assistant, Angela Spaccia, was cut to $43,000 from a projected $250,000. Rizzo and Spaccia have been charged with misappropriation of public funds and related crimes.

In addition, CalPERS, criticized for not sounding an alarm about big Bell pay raises, changed internal guidelines and formed a task force to look at pay disclosure, capping pay used to determine pensions and spreading pension costs among employers.

CalPERS and CalSTRS both say they use the IRS cap on pay used to calculate pension amounts. The pay limit under section 401(a)(17) of the Internal Revenue Code increased from $245,000 to $250,000 this year in an inflation adjustment.

UC Retirement, which went two decades without employer or employee contributions, was 132 percent funded in 1999 when the regents delegated authority to exceed two IRS pension limits, a move deemed “critical” for retention and recruitment.

A regent agenda memo last week said exceeding the 401(a)(17) pay limit depended on federal approval and the president receiving the approval of the chairs of the regents and finance committee.

When federal approval came in 2007, said the memo, the president and the chairs did not did not take the second step needed to launch the program. The pension fund surplus was eroding and the regents were considering restarting contributions.

The Chronicle said the 36 executives who signed the letter earned between $174,000 and $756,000 in 2009. Lifting the cap for all eligible employees could boost pension liability an estimated $5.5million a year, plus $51 million retroactive to 2007.

The regent action last week rescinded the conditional 1999 action and affirmed the pay limit cap, preventing more benefits from accruing if the cap is lifted. The UC executives have not yet filed a lawsuit.

With their other action in 1999, the regents approved a plan begun the following January that enables pensions to exceed the IRS section 415(m) limit on pension amounts, which increased from $195,000 to $200,000 this year.

The part of the pension above the $200,000 limit comes from a separate taxable trust fund. CalPERS and CalSTRS also are among the many public pensions that use “qualified” replacement plans to exceed the IRS limit on pension amounts.

In the CalPERS replacement benefit plan, employers make a taxable payment for the amount above $200,000. Then the employer payment to CalPERS is reduced by an equal amount.

Now there are at least four pension cap proposals in the Legislature — a wide range of possibilities for the two-house committee to consider, among other things, if it decides to propose a limit on pensions.

A bill, AB 1633, capping public pensions at $100,000, or $80,000 if the retiree receives Social Security, was introduced in February by Assemblyman Donald Wagner, R-Irvine. A few weeks later Hill reintroduced his bill, AB 1639, with the IRS $250,000 pay cap.

In March Assemblyman Luis Alejo, D-Salinas, introduced AB 2115 imposing a $173,987 cap on public pensions. A Salinas public hospital official will receive a retirement payment of nearly $4 million in addition to a $150,000 annual pension, the Los Angeles Times reported last year.

Brown’s 12-point pension plan, introduced by Republicans as SCA 18 and ACR 22, would give new hires a “hybrid” plan combining a smaller pension with a 401(k)-style investment plan.

The target for the cap on combined benefits in the governor’s hybrid plan is based on the Social Security earnings limit, $110,000 this year, and 120 percent of that amount if the retiree does not receive Social Security.

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 5 Apr 12

17 Responses to “Capping big pensions: How much is too much?”

  1. Ted Steele, Director of Operations Says:

    I say Cap em at 150k…..future pension caps of course are all that’s allowed by law.

  2. Yukon Ron Says:

    Public employee compensation and benefits should be no better, and no worse, than what is available to other employees in the community.

  3. Tough Love Says:

    I agree with Yukon …. which means the cut to Public Sector Plans should be 50-75% from the current excessive levels.

  4. SeeSaw Says:

    Oh Yukon, you mean minimum wage–that’s all that is available to workers in the respective private sector communities right now–the private sector better get going and provide some good paying jobs, because the public sector has already been cutting, with layoffs and furloughs and they sure aren’t going to be doing salary survey comparison with the private sector. The two are apples and oranges and you can complain all you want–you will not mix them.

    TL you are mixed up. Ninety-eight percent of workers and retirees in the public sector do not have excessive salaries and pensions–and Managers in the public sector don’t have salaries and benefits anywhere near those of CEO’s in the private sector. You might be able to enact your desired, draconian cuts in NJ, but you won’t be able to do that in CA.

  5. SeeSaw Says:

    Pensions are already capped in CalPERS, Ted. The problem for taxpayers in any individual entity is that the respective, elite managers, CM’s in particular, are able to negotiate additional retirement benefits, with their respective governing bodies. My own small municipality must cough up $100,000+/yr. to add to the retired CM’s, already capped, CalPERS benefit.

  6. Ted Steele, Director of Operations Says:

    Seesaw— Yes I agree— I know the average worker gets a more modest pension. I like that about Calpers. I was thinking of the elite high level managers when I said 150k cap. I also know there are VERY few of these folks. The average worker as you say makes far less!— Thanks– Ted

  7. gery katona Says:

    Yukon, you are right on. Your statement about comparable compensation and benefits is all about fairness and nobody can argue with that. Up or down doesn’t matter, just fairness for all.

  8. SeeSaw Says:

    Doctors, dentists, engineers, scientists and many other similar professionla earn a lot more in the private sector than they would in the public sector. Now, what are we going to do about that? Back to apples and oranges again. Let those who want to work in the apple groups prepare for that and vice versa–fairness for all.

  9. Captain Says:

    Quite the little lovefest going on here. Cap pensions at 60% base pay and limit the dollar amont to 75K. There are other ways to compensate people without sticking taxpayers with the burden of covering CalPERS losses based on their inflated return assumption. Just another hidden cost to go along with dozens of other hidden costs that comprise the California Public Employee Union looting of state, county, and city taxpayer dollars.

    The notion that BLOATED pensions are required to attract and retain qualified employees is beyond insulting. Comparing city mangers to private sector CEO’s demonstrates a lack of awareness. Claiming City Managers are the problem when they are only one for every 200 city employees making six figure pensions is insulting.

    But, given the usual cast of union/calpers defenders, it’s what I expect.

  10. SeeSaw Says:

    I come from a small city Captain and there are certainly not 200 employees there, making six figure pensions. Fact is the only ones that are were elite manager/ dept. heads. I was pointing out that there is a CalPERS cap and the elite managers are able to draw pensions beyond that cap, because they can negotiate such for themselves. That said, I have no animosity toward any of these people, my former CM included.–just stating the facts as they are.. My little City does not have 200 city employees making six figure pensions–but they have one former CM,that they must pay for out of their own budget–that is quite different that what happens with other former employees. They don’t have to pay another penny for me, until my own account which is paired with the CalPERS investment earnings, is used up–I’ve been retired for four years, so in about five years they will have to start paying something for me again–it will be pennies compared with what is needed to pay for the elite manager that must be funded to the tune of $100,000+ every year. We’re trying to see where the taxpayer money is going, are we not? The bulk of the pensions for regular retirees is coming from the investment earnings–not your pocket and mine. Your drivel is what i expect, from you, on each similar subject, too. You can compare public and private sector workers and their respective salaries, but I can’t compare public managers with private sector CEO’s? Go figure–you are pathetic! How’s that!

  11. SeeSaw Says:

    Public unions do not get paid with taxpayer dollars, Captain, and all of these people making six figure pensions, that you are wailing about, were managers who were not in unions. Talk about lack of awareness! Wow! That’s Captain–thinks he knows everything, and doesn’t know anything!

  12. Ted Steele, Director of Operations Says:

    Seesaw– once again you are correct– thanks for putting the truth about pensions out here yet again.

  13. Proud Ca. State employee Says:

    I started working for the County in 1987 at just 41 years old. I barely survived on the money I was making. I moonlighted on two different jobs, and did auto repairs also. The economy was good and people didn’t want these low paying jobs. I wanted the benefits as I had children.
    In 1995 I went to work for the state as a Heavy Fire equipment operator. I was two months short of being 49 years old. I’m still working and will be 66 in July. I’ve earned and still earn every bit of benefits which I was promised. I do plan on retiring next year. I won’t have full medical and not near the max pension I would have if I would have started younger. And people want to take this away. Sorry you made bad choices, but I sacrificed for mine.

  14. SeeSaw Says:

    Good for you PCSE. I first went to work for a municipality as a part-time secretary in 1967, making $1.85 hr. I didn’t even know what CalPERS and a pension were. Your story and mine are more common than those fairy tales about 200 retirees, in one entity, getting six figures.

  15. spension Says:

    These UC folks who want huge pensions are not in any way unionized. Most of them, actually, work in the investment portion of UC, investing the pension fund and the endowment; some are other high level managers.

    In this case, they look at equivalent private sector jobs where the golden parachutes are quite rich.

    Now personally, given the fact that UC’s pension fund is underfunded, I wonder why the investment managers think they deserve so much: they messed up and ran the pension fund poorly.

    But they assert that if you let them go, you’ll just have to hire in new people at even higher salary+benefits.

    This is one way the incredibly rich pension benefits of private sector benefits leak into the public sector… then public sector folks, including the unions, get the idea that they deserve similar benefits.

    So personally, I’d greatly tax *all* post employment cash benefits over $75K/year, whether private or public.

  16. Ted Steele Says:

    proud ca employee— HFEO is a dangerous job!!! Stay safe amigo!

  17. Ca Taxpayer Says:

    SeeSaw and all other CA employees, So you must be okay with the notion that Calif pension be capped to, say, $75K per annum and no more than 60% of retiring salaries. The local and state govt push up employees near retirement at the top such as to award them with maximum retirement benefits. The claim that public employees earn less than private sector is no longer true. For example, private school teachers make only $35K in bayarea schools while public school teachers avg about $66K. Then, we must give the public school teachers their retirement for next approx 30 yrs. Private school teachers get no pkg when let go and will get SS in retirement. At private companies, most engineers work often work 50-60 hrs per week, so comparing their salaries to engrs working 40 hrs and getting overtime for extra work in govt is comparing apple to oranges.
    CA pension system is a drag on our state and state is always looking ways to penalize must be brought to an end. Otherwise, our end will be no different, but I don’t think you’d care if CA bond investors got shafted. So, let me go ahead and check with broker that I’m not invested in ANY Calif bonds.

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