Pension reform: third of state workers pay more

Without the usual bargaining with unions, a new pension reform raises the amount roughly a third of state workers pay toward their pensions, an increase of 1 to 3 percent of pay over the next two years.

The small bite from worker paychecks, authorized by a broad reform approved by the Legislature and awaiting Gov. Brown’s signature, is for state workers not already paying half the “normal” cost of their pensions, a new standard set by the bill.

There has been little public mention of the increase imposed on current workers and apparently no protests from unions, which tend to view any reduction in pension benefits after the date of hire as a violation of “vested” rights protected by contract law.

Most of the cost-cutting structural changes in AB 340 are for new hires with no vested rights: lower pension formulas that roll back higher pensions granted a decade ago in the SB 400 era, extended retirement ages and a cap on pay that sets pension amounts.

In contrast to the treatment of state workers, the bill uses the bargaining process to increase the pension contributions of current workers in the 1,573 local governments that, like the state, are in the giant California Public Employees Retirement System.

Employers are given five years to bargain employee contributions that are 50 percent of the “normal” cost. Then in 2018 an equal cost share may be imposed (it’s not mandatory) through a bargaining impasse including mediation and fact finding.

Why does the bill, prepared in private by the Brown administration and Democratic legislators and quickly passed with little explanation, respect the bargaining process for local government employees but not for state workers?

Several union officials and their representatives declined to comment. The president of a statewide organization representing public safety employee said the answer may be in the state laws authorizing bargaining.

Local government public employee unions operate under the Meyers-Milias Brown Act of 1968. State employee unions operate under a different law enacted a decade later, the Dills Act of 1977.

“In some conversations it was mentioned that this (an employee contribution increase without bargaining) may be doable for state employees,” said Ron Cottingham, president of the Peace Officers Research Association of California.

CalPERS chart shows state worker contribution increases

Former Gov. Arnold Schwarzenegger had to use a record state budget deadlock, lasting 100 days after the fiscal year began on July 1, 2010, to get the largest state worker union to agree to an employee contribution increase and lower pensions for new hires.

Several smaller state worker unions refused to settle with the Republican governor, waiting until Brown, a Democrat, took office last year. The increased employee contributions helped cut $400 million from the annual state CalPERS contribution.

The nonpartisan Legislative Analyst’s Office said much of the long-term savings from the employee contribution will be offset by pay raises at the end of the new labor contracts.

In this way, the agreements negotiated during bargaining loosely follow the widely held view that a series of court rulings mean that public pensions can’t be cut without providing another benefit of equal value.

If higher contributions for current workers and lower pensions for new hires can be imposed on state workers without bargaining, why did Schwarzenegger (see his new $250,000 pickup truck) resort to a painful and costly budget deadlock?

The Republican governor arguably would have had difficulty getting the Democratic-controlled Legislature to impose a pension cut on their public employee union allies without an agreement.

Brown was in a different political situation. He and others argue that pension reform is needed to aid passage of the governor’s tax initiative on the November ballot, Proposition 30, which has union support.

Voters presumably are more likely to approve a tax increase if they have some assurance that the state is trying to control spending and that new tax revenue will not be eaten up by soaring pension costs.

It’s not publicly known to what extent, if any, unions were involved in the private negotiations between the Brown administration and Democratic legislators that produced AB 340. But union interests were not totally ignored:

1) The contribution increases imposed on current state workers are relatively small and create equity with the roughly two-thirds of state workers who already pay half the “normal” cost of their pensions.

2) Employees are not asked to help employers pay for the large “unfunded liability,” the shortfall from previous years mainly due to investment earnings that fall short of the target, now 7.5 percent for CalPERS.

The “normal” cost is the actuarial estimate of the annual employer-employee contribution needed to pay for pensions earned during the year, along with investment earnings expected to cover about two-thirds of the total cost for CalPERS.

For example, last year the “normal” cost for state miscellaneous workers was 14.4 percent of pay. The worker contribution was 8 percent of pay. Employers contributed more than twice that amount, 18.2 percent, due to the large “unfunded liability.”

If some local government officials are at sword’s point with unions, the bill protects employees from an attempt to impose contributions to help pay for the “unfunded liability.”

The contribution that may be imposed through the impasse procedure is capped at 8 percent of pay for most employees, 11 percent for “safety” workers and 12 percent for police and firefighters. The local caps reflect current state worker “normal” costs.

3) The bill provides two small pension boosts, loosely following the legal view that pension benefits cannot be reduced without providing an offsetting benefit — at least in spirit if not the math of gains and losses.

Local government safety employees (police, firefighters and others), who currently qualify for an “industrial disability” payment providing 50 percent of salary, could receive a reduced pension paying more before reaching minimum retirement age.

A CalPERS analysis said the “improved industrial disability retirement (IDR) for safety members” is expected to reduce the savings from AB 340 by about $500 million to $1 billion over the next 30 years.

The bill eliminates the Alternate Retirement Program that since 2004 has put new state miscellaneous and industrial workers into a 401(k)-style plan during their first two years on the job.

The state saved by not making the employer contribution. Ending the program, which was intended to offset the cost of a never-issued $949 million pension bond, also is expected to reduce the reform bill’s savings by $500 million to $1 billion over 30 years.

The total AB 340 savings for the CalPERS state, local government and non-teaching school plans over the next 30 years is estimated to be $43 billion to $56 billion, which is $12 billion to $15 billion when adjusted for inflation.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 10 Sep 12

10 Responses to “Pension reform: third of state workers pay more”

  1. Captain Says:

    “Without the usual bargaining with unions, a new pension reform raises the amount roughly a third of state workers pay toward their pensions, an increase of 1 to 3 percent of pay over the next two years.”

    And the INCREASED cost to taxpayers for that 1/3rd of employees that are effected by the so-called pension reform and will be contributing an additional 1-3 percent is: an additional 3-5 percent of payroll.

  2. Captain Says:

    “The total AB 340 savings for the CalPERS state, local government and non-teaching school plans over the next 30 years is estimated to be $43 billion to $56 billion, which is $12 billion to $15 billion when adjusted for inflation.”

    CalPers earned 1% in FY2011-12, on assets of 239.6 billion (assuming they’re being honest & assuming they’ve already adjusted the numbers to “NET” numbers – after expenses). That means they didn’t earn 6.75% of their Assumed Rate of Return which is 7.75%. 239.6B * .0675 = an additional 16.17 Billion in unfunded pension liability. We are in even worse shape with the so-called pension reform then we were just 1 year ago. It is even worse because some people will assume the problem is being addressed when it really isn’t.

    We’ve added over 16 Billion in taxpayer backed debt obligations while the present value of CalPERS claimed 43-56 billion in savings is really only 15 Billion at best – and that probably assumes the go-forward 7.5% discount rate/return assumption which probably over states the real savings.

    And this is what the Governor is selling as pension reform to help justify additional taxes of between 6.8 – 9 billion per year over the next 7 years. Pension Reform is promising “at best” 15 billion in savings (and they are assuming cities will actually adopt the changes beginning in 2018) while asking taxpayers to tax themselves between 47.6 Billion to 63 Billion.

    Just wait until CalSTRS gets their rate increase which will triple the taxpayer cost. We are in for a rude awakening when that happens.

    Again, the current version of pension reform in conjunction with the massive tax increases is, at best, one CRAPPY deal.

  3. gery_katona Says:

    This “reform” is inadequate for the taxpayers to approve Proposition 30. Yes on Propostion 32 is more in line with the needs of the state.

  4. jskdn Says:

    It would be interesting to see the value of the supposed future savings of this law discounted, not by the rate of inflation, but by the same discount rate used by the pension systems to calculate their funding adequacy and by which their funding shortfalls grow, at that compounded rate. Using the same metric, how do the savings compare with current funding deficits for already existing pension promises?

  5. brianS Says:

    @Captain: regardless of the merits of your other comments, excessive focus on a single year of return is not very helpful.

    You can see the annual rates of return on Calpers’ investment on p.5 of this document:

    Click to access August-2012.pdf

    Calpers reports that their annual rates of return since 1990 have been negative six times, 0-7.5 pct twice, 7.5-10 pct zero times, 10-15 pct seven times, and over 15 pct seven times. In other words, they have earned twice or more than their targeted returns about as often as they have seen negative or below-target returns.

    Calendar year 2008 was a killer, as Calpers had a -27.8 pct return. That heavily colors everything in the last four years. But unless you think there has been a fundamental, long-term change in markets from the 1990-2011 distribution, it is pretty reasonable to expect that Calpers can and will return to its long-run pattern of achieving its targets (on average).

  6. Tough Love Says:

    Quoting ..”The small bite from worker paychecks, authorized by a broad reform approved by the Legislature and awaiting Gov. Brown’s signature, is for state workers not already paying half the “normal” cost of their pensions, a new standard set by the bill.”

    Oh please………… under Plan accounting most financial economists feel is “appropriate”, the normal cost of Misc worker pensions is just about a level annual 30% of pay, and 50% for safety workers.

    A 50% share of normal costs should be half of THESE percentages (15% and 25% for safety workers), not the 8% (12% for safety workers) caps put into the law. …. by our self-serving gutless politicians caving in to the Unions for the million-Th time.

  7. Tough Love Says:

    Brian, Interesting how you picked 1990 as the start year …. self interest maybe ?

    Now do the same with say 1960 (or even 1970) … the average earnings rate will be a LOT lower.

  8. brianS Says:

    @Tough Love:

    I do not work for Calpers. I do not understand why you are questioning my motives without bothering to check even the facts I have linked to.

    If you would bother to look at the link I provided, you would see that I gave information on the entire data set provided by Calpers in their table.

    Calpers only received authority to invest in other-than-bonds in 1953 (when its predecessor, SERS, was permitted to invest in real estate; in 1967, it was permitted to invest in stocks; in 1984, it was released from its prior limit of 25 pct of the portfolio in stocks).

    according to this 1991 LA Times article (,

    “* In the 1980s, the average annual return on a 60/40 stocks/bonds mix was a stunning 15.82%. That was the best return on that portfolio in any of the six decades shown. In fact, no other decade was close; runner-up was the ’50s, at 11.98%.

    “* Outside of the ’80s, the 60/40 portfolio returned less than 8% a year for most of this century. Even with the “solar flares” of the 1950s and 1980s, the portfolio’s annualized return for the full 60 years was just 8.06%, according to investment tracker Dimensional Fund Advisors Inc. in Santa Monica.

    This data, together with the Calpers data for 1990-2011 I mentioned above, strongly suggests that a target in the 7-8 pct range for average annual rates of return on the portfolio is quite reasonable.

  9. Tough Love Says:

    brianS, While I do not claim to be an economist, many who are, think the returns of the past few decades will not be repeated for a long tome, must of that run-up being debt-driven (which can no longer be sustained).

    But, as we all know (as long as the taxpayers pay up …. which I hope that they will NOT do), calPERS sees no downside to the high asset return (and therefor liability discounting) assumption. After all, it heads the workers win (via greater benefits) and tails the taxpayers lose(when return shortfalls occur and unfunded liabilities develop).

    The case is pretty clearr when (as we have seen), CalPERS drops the earnings rate from 7.5% to 3.8% for any city that wants to opt out of calPERS.

  10. SeeSaw Says:

    Forget about Prop.32 Gery–If it passes it will be struck down in the Courts–like what just happened in Wisconsin today.

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