(UPDATE: Gov. Brown vetoed AB 1878 with this message: “Given the state’s huge unfunded pension liabilities, I don’t believe it is prudent to add the additional costs that this bill would require.)
Annual rates paid by employers to CalPERS and CalSTRS are going up, pension funding levels haven’t recovered from a big drop during the recession, and Gov. Brown’s pension reform put a lid on pension increases.
But there is still pressure for one type of retirement benefit increase: a lump-sum payment from pension funds received by survivors for funeral expenses when members die, often in addition to monthly payments for the spouse and dependents.
It’s usually called, ironically enough, the “death benefit.”
Last week, the CalPERS board took a neutral unless amended position on what has become perennial legislation to increase the death benefit from $2,000 to a minimum of $5,000 for its largest group of members, non-teaching school employees.
Last month, the CalSTRS board, after an initial look in September, once again put on hold a long-delayed increase in a $6,163 retiree death benefit for teachers. Since the board last increased the payment in 2002, inflation has increased 38 percent.
Part of the argument for the CalPERS non-teaching increase, in addition to the rising cost of funerals, is equity with other public pension members, which critics say has been used in the past to “ratchet up” retirement benefits.
Ivan Carillo of the California Federation of Teachers, the sponsor of the legislation (AB 1878), told the CalPERS board last week that since the death benefit was increased to $2,000 in 2000, the cost of the average funeral is up 40 percent to $10,000.
He said there have been too many “heartbreaking stories” of the lowest-paid school staff, the non-teaching “classified” employees, seeking money for funerals from friends, churches, and high-interest loans, some even losing their houses to cover costs.
The importance to the non-teaching school employees of an increase in the death benefit is the reason the legislation has been repeatedly introduced, he said, a half dozen times since 2009.
“They see it as an equity issue,” said Carillo. “As was also noted, CalSTRS members receive a death benefit of $6,163. So, their colleagues on their own school sites lives appear to be valued more than classified members.”
Equity was the reason given by CalPERS for sponsoring a major retroactive pension increase, SB 400 in 1999, best known for a Highway Patrol formula that became the local police-firefighter standard that some critics say is “unsustainable.”
But the legislation also gave other state and non-teaching school employees a major pension increase. In 1991 new state workers were given a pension well below the pensions of previous hires and most local government employees.
In a 17-page brochure about SB 400 titled “Addressing Benefit Equity,” CalPERS said the low pensions for new state workers made it difficult to attract talented employees in a tight job market, particularly for jobs requiring specialized skills.
“Employees are working side by side, and earning benefits at a smaller rate than colleagues performing the same jobs,” the CalPERS brochure said of state workers hired before and after the 1991 pension cut for new hires.
Equity also was part of the staff recommendation adopted by the CalPERS board last week on the school bill: neutral if amended to include state workers, who currently have a similar $2,000 death benefit, and an appropriate funding source is identified.
The bill is supported by the California Teachers Association and other leading labor groups. Listed as opposition are the Los Angeles County Office of Education and Gov. Brown’s Finance department.
“As a reminder, most benefits for current members are typically negotiated through collective bargaining contracts,” Katie Hagen, representing Brown’s Human Resources director, told her fellow CalPERS board members.
School employers currently are allowed to amend their CalPERS contracts to provide death benefits of $3,000, $4,000 or $5,000. When pension reformers propose legislation or initiatives, they are often told by union officials that benefit changes should be negotiated.
A statewide increase of the death benefit for school employees would create a $398 million liability, estimated a CalPERS analysis of AB 1878. The first annual payment would be $32.7 million and the final payment 20 years later $57.3 million.
In addition to a pension, school employees in the California Public Employees Retirement System receive federal Social Security, which provides a lump-sum death benefit of $255. Members of the California Teachers Retirement System do not receive Social Security.
Equity is the reason for a big difference between the current CalSTRS death benefit for retirees, $6,163, and the death benefit for active members, $24,652, both last increased in 2002 when the system was fully funded.
Rick Reed, CalSTRS chief actuary, told the board last month that when the pension plan was changed in the past to ensure equality between males and females, the large death benefit for active members was an “offset” to balance the outcome.
If the death benefit were increased to reflect a 38 percent increase in the cost of living since 2001, CalSTRS actuaries estimate, the retiree benefit would be $8,499, the active benefit $33,996, and the actuarial obligation increase would be $267 million.
The annual valuation issued last month showed that CalSTRS, as of June 30 last year, only had 68.5 percent of the projected assets needed to pay for pensions promised in the future.
That’s higher than predicted at this point when legislation two years ago began phasing in a long-delayed rate hike. School payments to CalSTRS will more than double, going from 8.25 percent of pay to 19.1 percent of pay by 2020.
But a staff report last month warned that the CalSTRS investment fund expected to pay two-thirds of future pensions had “losses experienced so far this fiscal year” that could result in lower funding than originally projected.
Last September, a CalSTRS committee rejected a policy that would have resumed inflation increases in the death benefit, but only in years when investment earnings were high enough to keep the plan on the path to full funding, despite the added cost.
At a full CalSTRS board meeting last month, Harry Keiley, one of three members elected by educators on the 12-member board, said he agrees with staying on the full-funding track but wants consideration of a death benefit increase at an “appropriate” time.
“Perhaps we look at this item separately as a stand-alone item at some future date as the funding status improves,” Keiley said. Several board members asked for information about death benefits in other pension systems, another look at equity.
The CalSTRS staff gave the board a survey last September of death benefits provided by 22 retirement systems throughout the nation, including one in Canada. CalSTRS is among the more generous.
Most of the retirement systems offer some form of continuing income to the survivors of retirees. Fewer provide income to the survivors of active workers. CalSTRS does both.
“In addition, only slightly more than half of the plans investigated provide a one-time lump-sum death benefit, other than the return of contributions and interest in the member’s account, to survivors of members who die while in active service and less than half provide a similar benefit to members who die after retiring,” said the staff report.
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 23 May 16