Legislative panel working on ‘hybrid’ pension

SANTA ROSA — A two-house legislative committee is working with Gov. Brown’s Department of Finance on a ‘hybrid’ retirement plan for new state and local government hires, a committee member told a forum here last week.

Assemblyman Michael Allen, D-Santa Rosa, twice referred to a “cash balance” plan while talking about a cost-cutting hybrid, proposed by Brown, that combines a lower pension with a 401(k)-style individual investment plan.

At a hearing in February, the committee was briefed on the cash balance plan of the California State Teachers Retirement System, a pension supplement that guarantees a bond-based rate of return on individual investments.

In a typical 401(k)-style plan there is no protection against major investment losses, widespread during a stock market crash in 2008, or a prolonged period of low earnings like some experts predict for the next decade.

A hybrid plan that combines a lower pension with a cash balance plan instead of a 401(k)-style plan could reduce savings for government employers, who would be responsible for covering the gap if earnings fall below the cash balance guarantee.

But protecting workers from the risk of losses in a typical 401(k)-style plan might make a hybrid more acceptable to public employee unions, who have criticized the governor’s hybrid plan at hearings and in news releases.

“We are working on different models to design a plan that will protect the low-paid workers and also be fair to the higher-paid workers,” Allen told the forum. “It’s complex and we are getting a lot of help from the state Department of Finance on this.”


Brown’s proposal expected the hybrid plan to be developed after the legislation passed. His finance department told a hearing that outside experts would help develop a hybrid plan in about six months, before a Jan. 1, 2013, deadline in the legislation.

The governor’s proposal is a retirement plan that replaces about 75 percent of annual income on the job after a 30-year career, with roughly a third each coming from the smaller pension, the investment plan and federal Social Security.

If the worker is not in Social Security, the pension would be two-thirds of the retirement. A cap on the retirement plan would be based on the Social Security earnings limit, $110,000 this year.

“The whole concept of capping pensions at higher levels is being discussed and probably will be part of the proposal that comes forward,” Allen said.

The assemblyman said the governor’s 12-point pension reform plan is mainly conceptual. Developing legislation for the broad range of California public pension plans is a complicated task, he said, but the committee hopes to issue a proposal in June or July.

“I understand the press believes there has been a long silence on this,” Allen said. “I’ve been advocating for an interim report to let people know what the timelines are, what the expectations are.”

“But we are working on it,” he said. “I do agree when there has been so much controversy and concern on this it would be irresponsible for the Legislature not to respond to the governor’s proposal.”

The six-member committee is scheduled to hold its fourth hearing Friday (April 13) in Chino, this one focusing on county retirement plans. Allen, an attorney, has negotiated labor contracts and served as executive director of SEIU, Local 707.

Asked by an audience member if public pensions are sustainable, Allen said the intent of the governor’s plan is to “inflect a cost curve,” reducing projected government spending on retirement in the future.

“That can be done over a period of time,” he said, “whether done through increased contributions, changing the benefit mix. That’s something we are talking about.”

Allen said the committee also is discussing what some call “intergenerational compacts” and the transfer of debt to future generations through, for example, Social Security or other means. He said the committee wants to strike a balance.

“So what we are trying to do is be fair to the younger generation and also be fair to those who gave their lives in service,” he said.

Allen said the governor’s plan for an equal split of “normal” pension costs between employer and workers is supported by the committee. He said a roughly 50-50 split in recent contracts saves the state an estimated $350 million to $500 million a year.

“The governor talked about implementing it legislatively or unilaterally,” Allen said of an equal split of normal costs. “The conference committee prefers that we do this through collective bargaining.”

The “normal” cost is the amount actuaries say is needed, with investment earnings, to pay for pension obligations accrued in the current year. But many systems have a huge “unfunded liability” mainly due to investment losses in previous years.

Most state workers contribute 8 percent of pay toward their pension, more than half of the 14.4 percent normal cost. But state employers contribute 17 percent of pay toward the pensions of these workers, an amount that includes the unfunded liability.

The governor would extend the retirement age, now 50 for many police and safety workers, to 52 for eligibility and 57 for full retirement after 30 years. For others eligibility, now often 55, would begin at 57 reaching full retirement at 67 after 35 years.

Allen said the committee has agreement on extending the retirement age “at some levels,” but “one size does not fit all.” Manual labor occupations are strenuous, he said, and actuaries say the risk of disability can increase with age.

Some think retiree health care promised state and local government workers is a financial problem nearly equal to pensions. But unlike pensions, little or no money has been invested to help pay for future retiree health care costs.

State Controller John Chiang estimates the state has a $62 billion unfunded liability for retiree health care promised current workers over the next 30 years. The state will pay $1.7 billion for retiree health care this year, up 60 percent in the last five years.

The governor would delay state worker eligibility for retiree health from 10 years of service to 15 years for partial coverage and from 20 to 25 years for full coverage. His plan urges local government to take similar steps.

The committee is working with the governor on retiree health care, Allen said, but believes changes should be done through collective bargaining. He said the governor’s plans to curb salary “spiking” to boost pensions have “unanimous” committee support.

A forum panel member, Cynthia Murray of the North Bay Leadership Council, said the governor wants business backing for a tax increase on the November ballot. She said he will not get support if the new revenue is going to be eaten up by pension debt.

“What we are very adamant about is we will not even consider supporting any kind of tax increase unless pension reform has occurred,” she said.

Allen said he suspects there may be a second round of legislation after the initial committee proposal if cities and counties, due to the complexity of dealing with a wide range of retirement systems, do not get all of the flexibility they want.

“So I expect there will be more dialog,” he said. “I would also point out that at a certain point, and Cynthia alluded to it, I think the governor and the Legislature want to show that we are trying to move forward on reform.”

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 9 Apr 12

14 Responses to “Legislative panel working on ‘hybrid’ pension”

  1. Michael Genest Says:

    Not very encouraging. I could get behind a hybrid with a cash balance plan, as long as the cash balance was backed up by the members, not the government. How would that work? First, members on the hook like that would insist on a conservative projection of rate of return, although not necessarily a conservative investment strategy. Second, in the event of shortfalls there would have to be some balance of sharing between active workers and retirees.

  2. Paul Says:

    Hey Michael,

    I don’t really think the legislature cares what you could get behind. You and your group already took a swing with your ballot measures, which flopped before the ballot. Your group’s continued misrepresentations of the financial issues regarding the retirement system takes you out of consideration for input.

  3. Michael Genest Says:

    OK, Paul-no-last-name. So let them ignore it. Then we’ll see what happens to the tax increase. I don’t think that’s what the Governor wants. Perhaps they care what he could get behind.

    And, it’s outrageous to assert that we’ve misrepresented anything. Were you intending that remark for our Attorney General?

  4. ace Says:

    Mr. Genest is correct that there needs to be balance, but you lose that if the employee ears teh risk AND a cap on returns ($110k) plus is stuck in a system intended to provide only a portion of past income (75 percent or less).

    Let’s not forget also the impact this can have on salaries, which will further burden the state if the overall compensation package becomes unsufficient to attract professionals into long-term employment with the state.

  5. Ted Steele, Director of Operations Says:

    Michael– Seriously– no offense but your group HAS been caught in pretty clear fibbing on this issue. You should just probably just move on to some other important community issue and let this go for awhile. Everyone still remembers at this point!

    On another note– this new plan sounds petty good for the new hires! Might even save a few bucks by golly!

  6. Michael Genest Says:

    In politics, the assumption is that one is guilty as charged if one does not respond to attacks. On the other hand, I do have other work to do and this could go on forever. So, hopefully, one last note in my own defense. The spurious charge that my “group” has been caught fibbing requires it.

    I have read press releases by CalPERS attacking a report we did. Those attacks were lame at best. For example, they claimed we “manufactured” examples to make our points, when in the report presented over 30 different “hypothetical” but quite realistic examples of career scenarios, not all of which, by the way showed the same conclusion.

    I’ve also read attacks on the work done by Professor Nation at Stanford and by David Crane. While I think both have contributed important insights on this subject, with which I mostly agree, our “group” did not collaborate with either of them or co-author any of the work.

    Finally, I read the very biased title and summary to our initiative. It never said we “fibbed”, but it certainly presented a different view of our initiative than we had. I responded to that view and the LAO’s in this article: http://www.sacbee.com/2012/01/14/4186884/lao-fails-to-give-groups-pension.html .

    Enough. I’m in business to provide analysis. It may not always support a particular view. In fact, it does not always support the view of my client. But, it is always sound and it never “fibs”.

  7. Tough Love Says:

    Quoting …”The governor would delay state worker eligibility for retiree health from 10 years of service to 15 years for partial coverage and from 20 to 25 years for full coverage. His plan urges local government to take similar steps.

    In the context of 99+% of Private Sector workers getting exactly ZERO retiree healthcare from THEIR employers, there is considerable justification for the SAME taxpayer-subsidized retiree healthcare beneftits of ZERO for Public Sector workers, but in the context of putting “something” on the table …. how about a MAXIMUM 50% subsidy of a modest (not Cadillac) retiree healthcare plan (and secondfary to Medicare once eligible) for those with 35 years of FULL-TIME service, with a proportionally smaller subsidy for those with less service?

  8. SeeSaw Says:

    My former municipality already requires 25 years service for coverage, that is capped–it has been that way for years. Mine is secondary to Medicare, and if you think the price on the secondary coverage goes down when the retiree is eligible for Medicare, you are sadly mistaken. My secondary coverage premiums are higher than they are for the fully covered, active employees. My former, employer-paid subsidy is currently 62% of the full secondary premium–I put out 32% of my gross pension for medical insurance premiums for my spouse and myself.

    I personally am opposed to the hybrid plan. There are many ways to reform pensions without making outcasts of new employees. I have written to my own state senator and asked her not to support the hybrid plan. If she wants my vote the next time around, she better pay attention.

  9. Tough Love Says:

    The math does’t seem to work. Please help me understand….

    You said you are under Medicare, and have volunteered that your pension is about $50K annually, so that means for converage secondary to medicare (i.e., a “Medicap policy) you are paying 32% of $50,000 = $16,000, amd I’m assumig that is for both you and your husband (who I’m aslo assuming is primary under Medicare).

    Unless I misunderstood what you said, you also said your former employer is paying
    62% of your full secondary coverage premium. hat would mean that the full cost (for coverage secondary to medicare for you and your spouce) is $16,000/(1-0.62)=$42,105.

    That seems so incredibly high as to be impossible. What am I doing wrong?

  10. Tough Love Says:

    Seesaw, You said …”There are many ways to reform pensions without making outcasts of new employees.”

    Then please suggest a few that:
    (1) will fully fund employee pensions over their working careers , not over a longer period (and hence passing THEIR costs onto future taxpayersafter they have retired),
    (2) will not take funds needed for public services like libraries, parks, police & fire,
    (3) do not cost taxpayers more for your pensions than their own employers pay towards their pensions (this seems fair because Public Sector cash pay is no less than Private sector cash pay in comparable jobs …. unless your position is that Civil Servants are deserving of greater total compensation than their Private sector counterparts)

  11. SeeSaw Says:

    The ABC premium for insurance which is secondary to Medicare, for a 65+-age retiree at my former municipal employer is $850 mo. My employer pays a capped $532/mo toward that premium, which will continue to rise, and I still will only get $532. I pay the difference, plus the full $850 premium for my spouse–then we each pay our own Medicare, part B premiums. In all, the total out of pocket is, in round figures, $16,800–a little over 32% of my gross pension amount.

    I never sat around and compared what I earned with what those in the private sector earned. I am married to a private sector retiree, and I know full well about the differences in the two sectors. I just worked and followed the rules of the sector where I was working. It has nothing to do with what one is or is not deserving. I am a taxpayer myself, and any costs that are being passed on to taxpayers, are shared by me as well. In the meantime, I am out purchasing the products and services of the private sector. Your argument over who is derserving and who is not deserving and who gets more than someone else gets, is worn thin, and serves no purpose whatsover, in ways to reform public pension costs.

  12. SeeSaw Says:

    My employer pays $532 mo. of my $850/mo. ABC premium–nothing for my spouse. That is 62% of my premium that is currently paid by my former employer. I don’t know what is so mathematically challenging in my statement. The cost of secondary insurance, for those over age 65, is not cheaper than the primary insurance provided by the same company–it is more.

  13. Captain Says:

    Isn’t the smiley faced Michael Allen the same freshman assemblyman that sponsored the “Bankruptcy Bill” that was endorsed by every union in the state. Yes he was.

    He is the same fool that represents parts of Solano County which includes Vallejo. The original version of the Bill is much different than the final product. What Michael Allen originally proposed and endorsed was legislation that excluded public employee union compensation from inclusion in bankruptcy. Considering that 70-90 of city cost is directly tied to public employee compensation he attempted to GUT the entire purpose of bankruptcy on behalf of his union donors.

    IMO, Michael Allen represents every thing that is wrong with California politics. For that reason I have ZERO faith in anything this clown has to offer in the way of pension reform.

  14. Ted Steele, Director of Operations Says:

    Michael— wow…that’s your defense? Really? Oh my. Look– you got caught. Face i and move on– save what little cred you have left!

    Fibbing—- ?? Why not just stick with the facts?

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