New pension initiative puts Utah-like cap on cost

One of the two initiatives filed by a pension reform group last week would cap state and local government spending on retirement benefits for most new hires at 11 percent of pay, much like a Utah pension reform five years ago.

A co-author said the cap is “dramatically different” from the other initiative: a simplified version of a requirement that voters approve pensions for new hires, originally filed in June, that was rewritten in an attempt to clearly exempt current workers.

The leaders of the bipartisan coalition, former San Jose Mayor Chuck Reed and former San Diego City Councilman Carl DeMaio, said the original “voter empowerment” initiative was given a biased ballot summary that made voter approval unlikely.

By filing two initiatives, the group hopes to get at least one acceptable ballot summary from Attorney General Kamala Harris, a U.S. Senate candidate said by the reformers to be an ally of public employee unions opposed to their measures.

The reformers need a ballot summary that polls well enough to attract major campaign donors. DeMaio has estimated that $2.5 million to $3.5 million will be needed to gather the voter signatures required (585,407) to place a state constitutional amendment on the November 2016 ballot.

The original initiative requiring voter approval of pensions for new employees, and allowing employers to pay only half of their retirement benefit costs, might for many result in 401(k)-style investment plans, which would not require voter approval.

The new initiative limiting employer retirement payments for new hires to 11 percent of “base compensation” (13 percent for police and firefighters) would allow, for example, bargaining for pensions, 401(k)-style plans, or a combination of the two.

Voter approval would only be needed to lift the employer cap on payments or, as in the original initiative, lift a requirement that government employers pay no more than half the total cost of retirement benefits for new employees.

“It just focuses on the costs in the simplest way possible,” Reed told reporters last week, “because the cost is what is driving our concerns about the future of California and the future of municipal government in California. Services are being cut all over the state as a result of these costs.”

DeMaio

DeMaio

Reed

Reed


One of the half dozen current and former local government officials who signed the initiative filings, Pacific Grove Mayor Bill Kampe, is familiar with a failed attempt to cap pension payments.

Voters in Pacific Grove approved a 10 percent cap on city pension payments to the California Public Employees Retirement System. A superior court judge ruled that Measure R in 2010 violated the “vested rights” of current workers.

DeMaio told reporters last week the coalition looked at the Utah reform, led by former state Sen. Dan Liljenquist in 2010, that capped government retirement costs for new hires at 10 percent of pay.

New Utah employees choose between a 401(k)-style individual investment plan, now widespread in the private sector, and a “hybrid” that combines individual investments with a smaller pension, similar in concept to the plan for federal workers.

DeMaio said the coalition chose a “different approach” that allows state and government to “develop a variety of pension programs” that do not exceed the cap on employer costs, unless lifted by voters.

“In this case we looked at Bureau of Labor Statistics data on retirement costs for employers in the state of California and county by county,” DeMaio said, “and we believe that the cap that we have established is very reasonable.”

Dan Pellissier, a coalition consultant, said the initiative caps have room for the Brown pension reform requiring new hires to pay half the “normal” cost of their pension, which does not include the “unfunded liability” or debt from previous years.

The Utah reform, unlike the coalition cap, provides Social Security, 6.2 percent of pay each from employers and employees. The Utah contribution to a 401(k)-style plan, 10 percent of pay, is well above the average Utah company contribution, 3 percent of pay.

In California, reforms are limited by the “California rule,” a series of state court decisions widely believed to mean the pension offered on the date of hire becomes a “vested right,” protected by contract law, that can only be cut if offset by a new benefit.

The rule prevents the one thing, allowed in private-sector pensions, that the watchdog Little Hoover Commission and others say could quickly lower costs: cutting the pensions current workers earn in the future, while protecting amounts already earned.

Most California reforms, like Gov. Brown’s in 2012, are limited to new hires. That can take decades to yield significant savings as previously vested workers are slowly replaced, doing little meanwhile to reduce massive pension “unfunded liabilities” or debt.

Only 11 other states have the “California rule.” But reformers seldom push an initiative directly challenging the rule, apparently fearing a lack of support among voters and, even if approved, a costly and uncertain court battle.

A labor polling firm found two years ago that “California voters reject the idea of reducing or eliminating retirement benefits for current public employees,” calling it a “visceral negative response,” the Sacramento Bee reported.

Reed filed a lawsuit to change the Harris summary of his previous pension initiative. But last year a judge found the summary was not “false and misleading,” ruling instead that the initiative was indeed an attempt to overturn the “California rule.”

The opening phrases of the Harris summary of Reed’s initiative last year and the coalition initiative filed last June are identical: “Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees . . .”

A statewide poll issued by the Public Policy Institute of California last month found that 72 percent of likely voters say public pension costs are a problem and 70 percent say voters should make decisions about retirement benefits.

As in previous PPIC polls, 70 percent favor giving new government employees a 401(k)-style plan rather than a pension. The change has strong bipartisan support: Republicans 74 percent, independents 69 percent, and Democrats 65 percent.

So, why aren’t the reformers proposing a direct switch to 401(k) plans for new hires?

Reed said not everyone in the broad coalition wants to eliminate public pensions. And like DeMaio, he said the coalition wants to let local governments and voters make the decisions.

“Since most of us are from local government, we don’t like the state telling us what to do,” Reed said.

A coalition of public employee unions, Californians for Retirement Security, issued a statement after the two initiatives were filed last week.

“It’s clear that the proponents of eliminating retirement security for teachers, firefighters, schoool employees and other public servants are more interested in playing politics and rewarding Wall Street than providing the retirement security all Californians deserve,” said Dave Low, the chairman.

“Their new proposals would ultimately do what their previous failed attempts would have done: create billions of dollars in costs for the state’s pension systems, jeopardize the ability to attract and retain teachers, police officers and other public employees and jeopardize a secure retirement for hard-working middle class families.”

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 11 Oct 15

27 Responses to “New pension initiative puts Utah-like cap on cost”

  1. John Moore Says:

    Pacific Grove mayor Bill Kampe fought the ordinance adopting a 10% cap. He has been a dedicated opponent of pension/salary reform. His support of the Reed-DeMaio initiative is truly duplicitous.

  2. S Moderation Douglas Says:

    “The Utah contribution to a 401(k)-style plan, 10 percent of pay, is well above the average Utah company contribution, 3 percent of pay.”

    Nyuck nyuck nyuck.

    It’s not like Utah companies GIVE their employees 3 percent of pay. If the market rate is $1,030 dollars a week, it matters very little to the employer if he offers $1,030 a week, or offers $1,000 a week, plus a 3 percent match. (Except he knows upfront that about half his employees will not participate because they can’t afford the 6 percent match required.)

    Likewise, the state does not GIVE their employees 10 percent. It is well known that public employees typically earn 7 to 12 percent less in cash pay than equivalent private sector workers, on average. The big difference is that the public sector contribution is not voluntary. All employees receive the match, and all employees automatically contribute. So a $3,200 a month CalTRANS worker has about $300 deducted from his pay monthly. Whether you like it or not.

    And if he is a “full career” worker, he will have a reasonable secure pension of about $2,400-$2,600 a month.

  3. S Moderation Douglas Says:

    Years ago, when I first began to see articles about the $100,000 pension club, with lists of names and pension amounts, I e-mailed the contact listed on the web site.

    To be fair, (and balanced) I asked why they they didn’t publish all the full career retirees UNDER $30,000. It would probably be a longer list.

    I was surprised that I actually got a response. I didn’t archive it, or can’t find it, but it was short and sweet. I recall the phrase “That would not fit our agenda.”

  4. SeeSaw Says:

    @SMD: Transparent CA publishes everything. The catch is that you must know the name of the employee, as it is on the rolls. Isn’t this just a ducky thing that you can find out what all your former co-workers get compared to you.

    I supervised part-time workers; I have two former employees who are now retired–their “huge” pensions are $223/mo. and $235/mo., respectively. They are really “burning it up” with those huge pensions. How will the taxpayers ever manage!

  5. Tough Love Says:

    Quoting ….S Moderation Douglas … ” It is well known that public employees typically earn 7 to 12 percent less in cash pay than equivalent private sector workers, on average.”

    Given that you are a retired CA Public Sector worker with a CA pension, and an extreme opponent of meaningful pension reform, you LEFT OUT that in California, on a Total Compensation” basis (which includes cash pay plus pensions plus benefits) CA’s PUBLIC Sector workers have a 23%-of-pay advantage over their Private Sector counterparts.

    Taxpayers: Think about how much better YOUR retirement would be if YOU had an ADDITIONAL 23% of pay (each and every year) to save and invest for YOUR retirement ……. and extra $1 Million, maybe $2 Million? Well right now, YOU are being forced to OVER-COMPENSATE your Public Sector workers by 23%.

    It is WAY past time to DEMAND an end to this THEFT of Private Sector Taxpayer wealth.

  6. SeeSaw Says:

    Nobody is stealing anything from the private sector in CA, TL. Those private sector residents paid taxes for services available/received. What you are calling for is, in effect, the end of a middle-class lifestyle for over a million California residents who are employed in or retired from the public sector. They have families in the private sector who will also be affected negatively if you got your way.

  7. S Moderation Douglas Says:

    Tough Love,

    Howzabout …..give me your e – mail address and I’ll copy all my drafts to you for editing before I post?

    I never LEFT OUT nuthin’. The quote in the article implied that the state (Utah, not California) was somehow more “generous” because they contribute 10 percent ….. “well above the average Utah company contribution, 3 percent of pay.”

    The point being that in neither case is the contribution a “gift”. In both cases it is deferred compensation. But the state (like most other states) defers a higher percentage than does private industry. In this particular case, there is no “23%-of-pay advantage.” In Utah, Biggs cites a 15 percent public sector wage disadvantage, for a total compensation advantage of 5 percent for state employees ( 7 percent inclusive of job security.)

    That is, of course, ………if…….. you buy in 100% to Biggs calculations and …….if……. you want to rely on data three to six years old.

  8. Jill Bohn Says:

    Source for your numbers, Tough Love. What they are trying to do is sweep all pensions into one formula. Teachers cannot collect Social Security or spousal benefits. CalPERS can. Some pensions provide medical into retirement; some don’t. You can compare apples to oranges to bananas.

  9. spension Says:

    83% of respondents agreed with the mathematical statement: 1/2 + 1/3 = 1/5.

    Letting polls determine mathematics is idiotic. 401(k)’s are notorious for huge fees and rotten grabs of contributors’s assets… read about Shankar Iyer and Penn Specialty Chemical. 401(k)’s allow investment managers to charge trips for their girlfriends and boyfriends to the Kentucky Derby as `fees’.

    California pension payouts (like 3% @50) got way out of hand, though. The smart move is to keep DB pensions, which have lower fees and also eliminate longevity risk, but have much lower payout rates. Plenty of state systems in the Country do that.

  10. Tough Love Says:

    Well Spension,……… Those 3%@50 CA pensions ..”that got way out of hand” …… ARE STILL in place for all Safety workers hired before the recent changes …… continuing to SCREW that Taxpayers for the next 25-30 years (by CONTINUING to accrue clearly excessive, unnecessary, unjust, unfair, and unaffordable pensions) until they all retire.

    Hopefully, Private Sector Taxpayers will grow sufficiently disgusted with this THEFT of their wealth to renege on these absurd “promises”, made by elected officials BOUGHT with Public Sector Unions campaign contributions and election support.

  11. SeeSaw Says:

    @Jill Bohn – CalPERS members are eligible to collect their SS benefits from their work record in or out of the public sector, but most pay a penalty under the GWB provision. Spouses who are CalPERS members are subject to the GPO–I am eligible but I receive zero in Spousal Benefits. I pay $1565/mo. out-of-pocket to my former municipal employer to cover my share of ABC medical insurance which is only secondary to Medicare and my spouse’s full premium. That is some afte- retirement medical coverage isn’t it?

  12. SeeSaw Says:

    Spension any lowering of existing benefits must be agreed on at the table and by statute with the legislature. Believe it or not there are certain labor groups who are willing to talk. Messing with constitutional amendments is too risky–too hard to undo if necessary.

  13. SeeSaw Says:

    No they aren’t all still in place TL. My former employer lowered the 3% at 50 to 3% at 55 for new fire hires in 2006. It then lowered the 3% at 60 formula for miscellaneous employees back to the old 2% at 60 prior to PEPRA. Then PEPRA came along and lowered things still more for new hires. And my employer laid off several full time employees and replaced them with part-timers who are not being covered by CalPERS–an action I deplore. My former employer has also looked into the possibility of new legislation which would allow bargaining for further changes. So you can’t say that nothing is being done. You are, after all, in New Jersey–how can you keep your finger on everything from up there?

  14. Tough Love Says:

    SeeSaw,

    So, even if we assume some Town’s back-off from the 3%@50 started in 2006, That STILL means that for Safety workers hired in 2005 and earlier, those workers will CONTINUE to accrue pension credits that EVERYONE now knows are grossly excessive, unnecessary, unfair (to Taxpayers) and unaffordable for perhaps 20 MORE years …….. accruals would NEVER be allowed to continue in the Private Sector.

    A Taxpayer rip-off INDEED.

  15. SeeSaw Says:

    That is true–but those workers in my former municipality are not going to retire at the age of 50. They have volunteered to accept the 3% at 55 if legislation could be passed to allow such. They would not suffer financially since they are not going to retire at 50, but the employer would save money–how much I don’t know. In my personal life I look at the amount of my personal tax liabilities. Mine are doable. Who is ever willing to discuss that aspect of the situation–they just want to see the trillion dollar figures so that they can hyperventilate.

  16. spension Says:

    As we’ve all been through before… the only legal way to lower pensions for vested employees who were promised 3%@50 or whatever is sovereign default, which has happened 10 or 20 times in US history. But the outcome of sovereign default is unpredictable, and would give a haircut not only to pensioners but to wealthy interests like bondholders. And so sovereign default is neglected by, well, just about everyone. But it might be the best for the taxpayer. Iceland went through it just fine a few years ago.

    So instead wealthy interests who want their bond coupons focus on 401(k)s which indeed the private sector has converted to. But the story of the private sector conversion is filled with fraud… read `The Pension Heist’ by Pulitzer winning journalist Ellen Schultz.

    DB’s with reasonable payouts are the most economical, and they work in an awful lot of the Country. Just not in Illinois, Rhode Island, some places in Alabama, etc. Governments are free to fail in the us, and vote in as fact 1/2 + 1/3 = 1/5.

  17. Tough Love Says:

    SeeSaw,

    CA’s Police rarely retire before 30 years (unless seriously sick/disabled or hired at a much older-than-typical age) because the pension formula makes it so lucrative to stay for the full 30 years. And since VERY few Officers are hired in the very early 20’s, VERY few have 30 years before age 53 or 54 (at the earliest).

    Hence a pension change from 3%@50 to 3%@55 is almost financially meaningless ….. complete poppycock and a successful attempt to MAKE-BELIEVE that they are agreeing to pension reform but rarely costing them anything.

    While a change to 3%@60 is more* meaningful, it is ONLY such if those who elect an early retirement (i.e., BEFORE age 60) receive a full actuarially-equivalent reduction of (AT LEAST) 5% PER YEAR of age that they retire before age 60. While I do not know what per-year-of-age reduction % CA uses, past history certainly suggests that the % reduction is far LESS that the true “value” of being able to begin collecting one’s pension at the earlier age.

    * The 3%@60 COLA-increased pension remains grossly excessive, STILL granting Police Officers pensions that ROUTINELY have a value at retirement 4 TIMES that of the typical Private Sector pension for the Private Sector worker who retires at the SAME age. with the SAME pay, and the SAME years of service.

    Even a 2%@60 COLA-increases pension would be worth 2 to 3 times that of the comparably situated Private Sector worker.

    It’s WAY past time to end this decades-long financial “mugging” of Private Sector taxpayers and freeze ALL of these DB pension Plans for the future service of all CURRENT workers.

  18. SeeSaw Says:

    Sovereign Default–perish the thought–CA is better than that. The legislature can pass new statutes if it feels the need.

    Its time for TL to stop comparing apples and oranges unless he wants to die still talking about it.

  19. S Moderation Douglas Says:

    Oh, Tough Love. There be hope for you yet.

    “Hence a pension change from 3%@50 to 3%@55 is almost financially meaningless ….. complete poppycock and a successful attempt to MAKE-BELIEVE that they are agreeing to pension reform but rarely costing them anything.”

    I have been saying this for years. Or the obverse. There are several safety formulas available, but for the California Highway Patrol, and many other agencies, the pre 1999 formula was 2% @ 50 (which graduated up to 2.7% @ 55.) For those who began their careers in mid twenties and retired at 55 with 30 years, the pension was 81%. SB400 was not a “50% increase”, except for those who actually retired AT 50. And very few of those had 30 years service.

    The new PEPRA formula, 2.7% @ 57, (also a graduated formula, beginning with 2% @ 50) is slightly less generous even than the pre 1999 formula.

    LOFL

  20. S Moderation Douglas Says:

    Reducing the accrual rate for future service of current workers seems to be the holy grail of pension reform, or an irrational obsession. Spension is wrong; sovereign default is not the only way to reduce pensions. Santa Clara County Superior Court Judge Patricia Lucas gave us the way. Pension formulas cannot be cut, but the city CAN cut employees’ salaries to offset its increasing pension costs.

    Instead of reducing 90% of $100,000 ($90,000 pension) to 60% of $100,000; one could simply reduce the salary to $66,666. Voilà ! we reduced the pension to $60,000 without violating any existing law or constitutional rights. (Two birds, one stone. Reduce pay AND pensions.) Of course there’s a flaw in that plan, although legal, it is a major reduction in compensation, like reducing future accruals would be.

    I’m sure that wouldn’t break your heart, but not everyone agrees with your opinion of the allegedly excessive pay and benefits. Particularly the state and local governments responsible for attracting and retaining a qualified and effective safety force.

  21. SeeSaw Says:

    @SMD – When I was on the 2% at 60 formula we were upgraded to the 2% at 55. The price was steep and we had to make some kind of concession that I can no longer remember; we thought we had really gotten something. When I looked later on at the CalPERS charts I saw that those two formulas are identical if the employee serves until the age at which the chart tops out. The only advantage in the upgraded formula was for the employee who was actually going to retire at the age of 55 and before age 60.

    In my former municipality where a group of firefighers was offering to accept the formula of 3% at 55 in place of their current formulas of 3% at 50, was due to the fact that none of them intend to retire at the age of 50. Such a change would be of financial benefit to the employer, and they would not personally be impacted financially since they were not going to retire prior to age 55 anyway. Such exchange cannot be conducted without new legislation to allow these groups and the employer to go back to the bargaining table. It will probably not be accomplished. TL scoffed at the idea, because the scheme would be painless for the participants. Every new idea or change in a policy does not always have to result in pain and sacrifice in order to be a success.

  22. Tough Love Says:

    Quoting SeeSaw …..”Such a change would be of financial benefit to the employer, and they would not personally be impacted financially since they were not going to retire prior to age 55 anyway. ”

    THOSE firefighters may not have intended to retire before age 55, but if none did, there would be ZERO savings. And with few retiring before age 55, the financial saving to Taxpayers was indeed meaningless…….. an affront to the beleaguered taxpayers.

  23. SeeSaw Says:

    The savings, if such a scheme had been possible, would have been in lowering the employer’s contributions for that particular labor group if it were agreed in the bargaining process that the formula could be downgraded.l. And, there were volunteers for that type of change. Of course, I doubt that the taxpayers in that particular district would see a lowering of their, respective, tax bills, but the employer would benefit. It would be the same if you got your way TL, and saw every public retiree’s pension cut. You personally would never see a tax decrease. Nobody ever gets everything they want.

  24. spension Says:

    S Moderation Douglas… and how does that reduce the vested pension base, which would still be the highest 3 years or 1 year of salary (sometimes including unpaid leave etc) ? Seems like you only shave future raises, and so you contain the base, but yearly credit still accrues, and will be applied to the $100,000 base at retirement, not the $66,000.

  25. S Moderation Douglas Says:

    Spension,

    It was just an example. I don’t think anyone reasonably thinks we could reduce safety, or any other salaries by 33%.

    It is very evident that Tough Love, among many others, believe safety workers make too much money. Both in income and in pensions and benefits.

    He has stated, more than once, as I recall, that the only way to make MATERIAL (kinda like “material”, only on steroids) reform is to either freeze all present pension accruals and institute a Defined Contribution scheme going forward (preferable); or to drastically reduce pension accruals going forward for all current employees by at least 50%. (Larger reductions for safety worker, whose pension value at retirement is like 4.62 times something. I can’t remember. It was a LONG screed.)

    That’s why I said it was the holy grail, or brass ring, of pension reform. Moderation says there is more than one way to skin a cat. Reducing future accrual, in California, at least, is a sure fire ticket to protracted court cases. And, it will NOT reduce prior unfunded liabilities. It will just stop them from increasing. Freezing salaries going forward, though, is perfectly legal. Over the very near future, it will reduce immediate salary and pension costs. That savings could be applied to the unfunded liability, and, Bob’s your uncle, in a few short years, we’ll all be walkin’ in high cotton.

    So said Moderation, with tongue firmly implanted in cheek. The basic assumption is that public workers are overpaid, which has an element of truth, or half truth. Some say the only cure is to get rid of Defined Benefits. I disagree.

    And the unions have cancer, or something!!! “See my looong comment above.”

  26. Tough Love Says:

    Quoting S Moderation Douglas …. “Reducing future accrual, in California, at least, is a sure fire ticket to protracted court cases. And, it will NOT reduce prior unfunded liabilities.”

    Correct, but by not finding a way to very materially reduce FUTURE Service pension accruals for all CURRENT workers, we provide the fuel for the DEEP financial hole we are NOW in to grow even larger by continuing to grant pension credits far greater than necessary, just, fair, or affordable.
    ————————————
    DB pensions are based on the salary in the last (or last few) years. Politicians cannot be trusted. Salary cuts today can (and based on history and WILL) be reversed tomorrow. And in the meantime, the Unions/workers will be laughing about how (in the interim years) they hoodwinked the taxpayers with lower employee pension contributions.

  27. C. T. Weber Says:

    When hired, public employees signed on for lower wages than private sector employees for like work, certain benfits and a defered compensation package. That is what they agreed to and what they paid for each month as money was withdrawn from their check. The two percent that the state pays towards these defined benefits are returned many times over as a result of public employees spending money in their neighborhoods. Many private sector employees had defined benefit packages and they were taken away by their bosses. Defined contribution supplemental retirement plans that were set up to close the cost of living gap was sold to workers as a get rich retirement plan. Voters should not attempt to change the constitution to eliminate these defined benefits. Instead they should work together to enable all workers, public or private, to have defined benefit packages.

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