Will Brown propose paying judges pension debt?

In what has been a futile annual ritual, CalPERS President Rob Feckner sent the governor and Legislature a letter last March urging advance funding of a closed judges pension plan, a change estimated to save $753 million to $2.3 billion in the long run.

Reform legislation two decades ago put new judges in a conventional pension plan with an investment fund to help cover future costs. But judges hired before Nov. 9, 1994, were left in a pay-as-you-go plan closed to new members.

Now for the new plan the state this fiscal year is paying $63.2 million (24.6 percent of pay) for the pensions of 1,407 judges (1,352 active). Judges Retirement System II is 95 percent funded with a debt or “unfunded liability” of $41.2 million.

For the old pay-as-you go plan the state is paying more than three times as much, $217.5 million, for the pensions of 2,251 judges (328 active). And the original Judges Retirement System I is only 1.6 percent funded with a big unfunded liability: $3.4 billion.

Gov. Brown’s finance department was silent on the judges plan last month when announcing that the new state budget proposed this month (Jan. 9) will begin advance funding of another long-ignored debt, state worker retiree health care.

But the governor said the judges plan is on his to-do list last year as he proposed a costly solution, later enacted, for another long-ignored retirement debt, the seriously underfunded California State Teachers Retirement System.

“Now this doesn’t handle it all,” Brown said last May as he proposed a revised state budget. “We still have retiree health. We still have the judge’s retirement system. We have got lots of other stuff here, and we will handle it.”

The administrator of the two judges systems, the California Public Employees Retirement System, and the nonpartisan Legislative Analyst’s Office both urge advance funding of the pay-as-you-go judges plan.

Instead of just covering the cost of pension checks sent to retirees each year, additional money would be paid into an investment fund yielding a return. The “advance funding” or “pre-funding” helps pay for the pensions promised current workers in the future.

It’s cheaper in the long run, saving taxpayer money. CalPERS expects its investment fund, valued at $296 billion last week, to pay about two-thirds of total pension costs.

It cuts debt passed to future generations. Pensions are generally regarded as deferred wages that, from an accounting viewpoint, should be paid while the worker is still on the job.

And it gives pension system members added assurance of getting a pension check, if for some reason lawmakers balk at payments. Feckner said in a previous letter the pay-as-you-go money had run out before the end of the fiscal year, delaying pension checks.

If the state begins advance funding of the closed judges plan, a staff report to the CalPERS board last March showed possible savings of $753 million to $2.3 billion over the life of the plan, depending on how quickly pension debt is “amortized” or paid off.

“Normal cost” covers the pension earned by active workers during the fiscal year. UAL (unfunded accrued liability) is the debt owed for pension amounts earned in the past by members of the plan. EARSL (expected average remaining service life) is the years current judges are expected to remain on the job. "Payout" is the state cost for the pensions.

“Normal cost” covers the pension earned by active workers during the fiscal year. UAL (unfunded accrued liability) is the debt owed for pension amounts earned in the past by members of the plan. EARSL (expected average remaining service life) is the years current judges are expected to remain on the job. “Payout” is the state cost for the pensions.

The biggest possible savings shown, $2.3 billion, would result from following the Governmental Accounting Standards Board rules, which base the annual payment to the pension fund on the average time active workers are expected to remain on the job.

The “estimated average remaining service life” of the 328 active judges in the closed plan last year (188 age 65 or over) is brief, 1.87 years. If the state followed the accounting rules, the payment this year would be not $217.5 million but $1.9 billion.

“Note that this last amount ($1.9 billion) is the Actuarially Required Contributions (ARC) under GASB Statement No. 27 and may be required to be disclosed in the State’s financial statements,” said the CalPERS staff report.

On the other hand, what happens if the state, again foregoing a chance to get long-term savings through advance funding, continues the current policy?

CalPERS expects the pay-as-you-go cost, $217.5 million this year, to continue growing for a few more years, peak at about $225 million in fiscal 2017-18 as more judges retire, and then slowly decline for about 60 years as age takes its toll.

Judges2

Judges in the old and new systems had been contributing the same amount to their pensions, 8 percent of their pay. The old system can be more generous, mainly by allowing earlier retirement with the maximum benefit.

A pension reform pushed by Brown two years ago exempts judges, who tend to take office at a later age and also retire later, from most of the major provisions for new employees, such as lower pensions and a tighter cap on total pension amounts.

But judges hired after the Public Employees Pension Reform Act took effect on Jan. 1, 2013, are not exempt from a provision requiring a 50/50 split between employers and employees of the annual pension “normal cost,” which excludes debt from previous years.

Now these new judges are contributing 15.25 percent of pay for their pensions, nearly twice the 8 percent of pay contributed by other judges, who earn the same retirement benefits as the new judges.

Last month a half dozen judges elected by voters in 2012, but who did not take office until 2013, filed a lawsuit to avoid paying the higher contribution rate. Brown vetoed a bill last year, AB 837, that would have allowed the judges to pay the lower rate.

“This measure creates an exemption to the California Public Employees Pension Reform Act of 2013. I am unwilling to begin chipping away at these reforms,” the governor said in his veto message.

The reform bill that put new judges hired after Nov. 8, 1994, into an actuarially sound pension plan was recommended by a Select Committee on Judicial Retirement appointed by former Chief Justice Malcolm Lucas.

Former Gov. Pete Wilson vetoed a bill in 1992 that would have put judges into a less expensive pension plan. Judicial groups said the bill did not properly balance cost cutting with the need for a high-quality judiciary.

The select committee, appointed after the Wilson veto, found in a survey of 600 California attorneys that among 18 factors for becoming a judge pensions ranked third, after public service and intellectual stimulation.

“With all the pushes and pulls we faced — attracting experienced lawyers, saving the state money, keeping judges on the bench — we believe this plan is the best possible compromise,” the select committee chairman, former Legislative Analyst Alan Post, said in a news release in 1993.

The select committee recommended that the lawmakers adopt a “strategy for the liquidation of the unfunded liability” in the old judges plan. Reaching full funding by a deadline of 2002 was estimated to cost an additional $100 million a year.

But instead of paying down the debt in the old judges plan, the bill creating the new pension plan (SB 65 in 1993) repealed the 2002 deadline for reaching full funding in the old plan. Avoiding the short-term cost seems a likely reason for the repeal.

No explanation was given as an Assembly floor analysis listed among the bill provisions: “Repeal the statutory requirement that the actuarial unfunded liability of existing tier of benefits, known as the Judges Retirement System (JRS), be eliminated by the year 2002.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 5 Jan 15

15 Responses to “Will Brown propose paying judges pension debt?”

  1. John Moore Says:

    The legislature created the pension mess. It should be responsible for all unfunded deficits and pension bond debt of every govt. defined benefit plan operating under its authority. As taxpayers, we pay for state, county, city and district debt. Move it all to the state level so that the legislature must deal with the mess it created. Pension reform that only operates prospectively is illusory and will not allow govt. entities to heal financially. It simply causes more delay.

  2. spension Says:

    As far as I know, all US military pension payments are pay-as-you go. Would be great to see how much money the US taxpayer would save if US military pensions were pre-funded.

  3. Stuart Mill Says:

    How is prefunding different from funding one’s own retirement? Isn’t that we should do with our own planning? Perhaps, I am mistaken.

  4. SeeSaw Says:

    In my mind it is no different than having a savings kitty or rainy day fund. There is really no way to prefund medical premiums. It is not fair to make public employees the bad guys in this situation–they just did their jobs–they did not make the insurance companies triple the premiums in 8 years which is the case with my ABC premium which is secondary to Medicare and has gone from $400 to $1000/mo in that amount of time. The increases come out of my pocket–not my employer’s. There is a cap on what my employer will pay. One solution for the State would be to negotiate caps in the CB process.

  5. spension Says:

    There is huge `longevity risk’ when one person saves for their own retirement. There is about a 1% chance that a 65 year-old person will survive to >100 years old, and maybe a 10% chance that they will survive to >90 years. When a great many people pool their retirement savings together, the law of large numbers makes the payouts quite predictable… longevity risk is eliminated. If every single person has to save for their own retirement, and if everyone is knowledgeable, there must be a substantial increase in the amount of money saved to cover the risk of longevity.

    This is one of the principal arguments against exclusive reliance on individual defined contribution plans. Originally the US retirement income system was supposed to have 3 roughly equal components: a modest DB pension, DC savings, and Social Security. Gradually the various political poles have emphasized one of these more than the others.

  6. Bring Back the WPA Says:

    I thought TL and Captain would be chiming in here by now with complaints about the inherent conflict of interest of judges making rulings on public pensions when they themselves will be drawing pension checks.

  7. Berryessa Chillin' Says:

    BBtWPA: Of course it is a conflict of interest. It is as obvious as the sky is blue on this sunny California day.

    Not being a legal beagle, I have no idea how the conflict of interest could be avoided.

  8. Tough Love Says:

    The idea that per-funding an obligation due in the future actually “saves” money is silly (and wrong) … ask anyone with a understanding of financial economics.

    Of course pre-funding so that those (the Citizens) who benefit from services rendered over a specific time span (say the 25 year career of the typical Public Sector worker) have to PAY FOR those specific services (even if the payouts … such are pension checks …. occur well beyond that 25 year period) is appropriate.

  9. Captain Says:

    Now these new judges are contributing 15.25 percent of pay for their pensions, nearly twice the 8 percent of pay contributed by other judges, who earn the same retirement benefits as the new judges.

    Note: (small business owners pay 15.3 percent of wages toward social security for the privelage of of receiving about 32K in social security benefits plus medicare)

    Last month a half dozen judges elected by voters in 2012, but who did not take office until 2013, filed a lawsuit to avoid paying the higher contribution rate. Brown vetoed a bill last year, AB 837, that would have allowed the judges to pay the lower rate.

    “This measure creates an exemption to the California Public Employees Pension Reform Act of 2013. I am unwilling to begin chipping away at these reforms,” the governor said in his veto message.

    – While I appreciate the Governors conviction/VETO regarding the Judges pension system it’s difficult to understand why he chose to ignore the 99 exceptions to the state, local & county CalPERS plans that the CalPERS Board of Administration just gutted. I’m not understanding how Governor Brown can take a firm stance on this issue while ignoring the much bigger problem CaLPERS presents. How does his 12 point pension plan shrink to about 8 points, then get gutted 99 different ways, with hardly a peep?

    Is it just a numbers thing (Last month a half dozen judges (6) elected by voters in 2012, but who did not take office until 2013, filed a lawsuit)? Or is it a political clout thing ? Or maybe just a dollar amount thing?

    Why did Jerry Brown take a stand on this issue while he did nothing to prevent every other public employee union from gutting his pension reform effort – 99 different ways? It makes no sense. If it doesn’t make sense there’s more to the story.

    Maybe the Governor figured he can “stand tough” on an issue concerning six judges, while ignoring the pension issue concerning over 1.5 million current employees & retirees. :~(

  10. SeeSaw Says:

    rI am one of the 1.6 million CalPERS members, Captain. And, I did not have one of 99 ways to increase my pension–it is the same with most of us. You are making a mountain out of a molehill here. Why don’t you cite at least one of the 99 ways and talk about it–I will join you in the discussion, and we can determine whether or not it should be a pensionable amount. Brown is not ignoring anything–in fact he disagreed with the ruling that CalPERS made regarding temporary pay for working in a higher classification–the State Legislature gave CalPERS the responsibility to make that rulling–one way or another.

  11. SeeSaw Says:

    Further, Captain….From what I see at first glance, the judges might have a case. If they were elected prior to 2013, but did not step on the bench until PEPRA went into effect, they are in a different situation than other new hires in 2013. A decision could go either way, because there is no right or wrong answer–it will all be up to interpretation of one judge, and then if the plaintiffs are not happy, they will appeal to a panel of judges–it will probably take a few years.

  12. Bring Back the WPA Says:

    Concur with SeeSaw here that the 99 pay items does not “gut” Brown’s pension reform to any substantial degree. It’s very simple: some agencies pay “a la carte.” Shift differential is an obvious example. If somebody works nights, then their pensionable pay should be base pay plus the shift bonus. That’s the job they did and were paid for it.

    Brown’s pension reform will greatly reduce costs in the future. The pension cap (currently at $118,500), raising the retirement ages, and increased employee contributions will get CalPERS much closer to 100% funded. All it needs is time.

  13. Tough Love Says:

    Yes Bring Back the WPA,…..

    Time, LOTS and LOTS of time, because ALL of those employed prior to PEPRA (even if just for 1 day) will continue to get the even MORE Grossly Excessive pensions associated with the prior pension formulas and provisions … which for many, will be for the next 20, 30, even 40 years.

    And during all of that TIME, the financial “mugging” of the Taxpayers to pay for these grossly excessive pensions will continue.

    Keep that in mind when the Taxpayers FINALLY get sufficiently fed up, and throw all of you (WITH your pension & benefits) under the bus … notwithstanding CA’s Constitutional, Case Law, Statutory, and Regulatory “guarantees”.

  14. SeeSaw Says:

    TL, there were many agencies who did not adopt the enhanced pension formulas enacted by SB400 and the one for miscellaneous workers in 2001. The State never did adopt it for State employees. Many agencies adopted their own reforms prior to PEPRA. All this goes to show that the collective bargaining process works. So just sit down with your cheese and whine and keep quiet.

  15. marcia Says:

    Why are they funding under GASB 27? it was replaced by GASB 68 in June, 2012

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