How Brown blocked CalPERS extra-pay regulation

When CalPERS approved regulations to carry out Gov. Brown’s pension reform legislation two years ago, critics said they allowed “99 ways to boost pensions” that undermine the cost-cutting plan for new employees.

The critics had a field day going through the list of 99 types of regular extra pay that boost pensions, pointing out what seemed to be absurd bonuses for doing part of the basic job.

A Wall Street Journal editorial mentioned law enforcement incentive pay for staying physically fit, longevity pay for staying on the job more than five years, and pay for maintaining a government-issued license required to perform job duties.

An in-depth story by the Los Angeles Times mentioned bonus pay for “librarians who help the public find books, secretaries who take dictation, groundskeepers who repair sprinklers, and school workers who supervise recess.”

CalPERS said that because the reform listed a half dozen types of pay that can’t be counted toward pensions for new hires, such as overtime and unused sick leave and vacation, the 99 types of previously allowed extra pay not listed continue to count toward pensions.

Critics said CalPERS made a pro-labor interpretation of reform legislation intended to cut pension costs. The Times noted that CalPERS sponsored legislation in 1993 authorizing it to determine what bonuses count toward pensions, then created a list.

“The long-term cost of pensions calculated with bonuses is billions of dollars more than with base pay only,” said the Times. “But the exact price tag remains a mystery. The labor-dominated CalPERS board voted without estimating the potential tab.”

An illustration by Thomas Fuchs accompanying the Times story appears to show a pensioner at leisure on the backs of taxpayers.

Times

Now the California Public Employees Retirement System board may have to revisit the controversial issue sharply criticized by major media. An update on the pension reform given to the board last week said the regulations never took effect.

Although much of the media criticism focused on the 99 types of extra pay, Brown’s Finance department had objected to a CalPERS decision to allow a pension boost from a “temporary upgrade” to a higher-paying position.

“Today CalPERS got it wrong,” Brown said in an August 2014 news release after the CalPERS board approved the regulations, referring to counting “temporary salary supplements” toward pensions.

“This vote undermines the pension reforms enacted just two years ago (AB 340 in 2012),” Brown said. “I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees Pension Reform Act.”

What the governor could do was not clear. A union-backed state constitutional amendment, Proposition 162 in 1992, gives CalPERS and other public pension boards sole control of their funds and administration.

As it turned out, Brown’s Finance department simply did not sign the regulations, a necessary step in the process. So, the regulations expired a year later, never taking effect. CalPERS proposed, the governor disposed.

The Brown administration thinks that allowing a temporary upgrade to a higher-paying position to count toward pensions would enable “spiking,” a boost in pensions from improperly increasing the final pay used to determine pension amounts.

“If someone is put into a higher-paying position at the end of their career, not on merit, that seems to present the potential for pension spiking,” Richard Gillihan, a Brown administration official, told his fellow CalPERS board members in April 2014.

The CalPERS staff reversed its position on temporary upgrade pay, excluding it from “pensionable compensation” in a circular sent to employers in December 2012, then including it in draft regulations.

Staff said the change reflected a reform cleanup bill, SB 13. If items other than base pay can be excluded from “pensionable compensation,” the staff reasoned, then there are items beyond base pay that are pensionable, like normal pay for temporary upgrades.

Whether temporary upgrade pay should count toward pensions split the 13-member CalPERS board: the governor’s three appointees opposed, the six members elected by active and retired employees in support.

In April 2014, a board committee removed temporary upgrade pay from the draft regulations, then it was replaced by the full board. In August 2014, Brown appointees tried and failed to remove temporary upgrade pay before the regulations were approved on a 7-to-5 vote.

Spiking is a recurring problem for pension systems. CalPERS and the California State Teachers Retirement System have anti-spiking units. To reduce spiking, the reform based new-employee pensions on a three-year pay average, a change from one year.

In addition to the pay regulations, the reform update given the board last week said two other unresolved issues will be addressed by “reconvening a team of stakeholders” that includes the Brown administration, employers, and labor unions.

A need to prevent the transfer of “excessive liability” was revealed when a former Glendale police chief, Randy Adams, took a high-paying job in Bell, more than doubling his pension to $510,000 and sticking Glendale and other former employers with the tab.

Transit workers got a two-year pension reform exemption after the federal government threatened to withhold $1.6 billion in transit grants, saying transit bargaining rights are protected. A court appeal and legislation (AB 1640) are pending.

The reform that took effect for new employees in CalPERS and county systems hired after Jan. 1, 2013, is expected to save CalPERS employers $29 billion to $38 billion over the next 30 years.

Brown could not get legislation for parts of his reform plan: adding two governor appointees to the CalPERS board and switching new employees to a “hybrid” plan combining a smaller pension and a 401(k)-style individual investment plan.

But the reform gives new hires a lower pension formula, caps the pay used to calculate pensions, requires employees to pay half the “normal” pension cost (excluding debt from previous years), and bars employer payment of the employee share of costs.

The reform only applies to new hires because a series of state court decisions, often called the “California rule,” are widely believed to prevent cuts in the pension offered at hire unless offset by a new benefit of comparable value.

In a surprise to some, the update said 29 percent of active CalPERS members, about 200,000 workers, are already covered by the reform, apparently due to filling positions vacated during the recession and other factors.

State savings are 1.2 percent of pay for miscellaneous workers and 5.1 percent of pay for peace officers, non-teaching school employee savings 1.7 percent of pay, and savings for other local government workers vary with their pension formulas.

“PEPRA is beginning to bend the cost curve and will continue to do so for many years,” Alan Milligan, CalPERS chief actuary, told the board last week.

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 20 Jun 16

22 Responses to “How Brown blocked CalPERS extra-pay regulation”

  1. larrylittlefield Says:

    Here’s the thing with these pension deals. You’ve got an older and wiser Governor Moonbeam who doesn’t have to pander and calls them as he see’s them.

    But sooner or later, you’ll have a Governor willing to do a secret 3 am deal in exchange for support for re-election or higher office.

    And because it involves pensions, the results of that deal become irrevocable, regardless of cost, consequences, or any sense of fairness or social justice. Can never be revised, even if undisclosed or fraudulently disclosed.

    That is what is wrong about all this. That is what allows, perhaps even induces, the unions to act without any sense of equity or empathy. If the 1999 deal could be reversed, it might not have happened, or might not have been so bad in any event.

  2. S Moderation Douglas Says:

    “That is what allows, perhaps even induces, the unions to act without any sense of equity or empathy.”

    Two words: Bulls hit.

    Unions are people too. They have been very cooperative in negotiations, taking pay freezes and in some cases pay reductions in response to recent revenue problems. They have not reduced formulas for legacy employees, but have increased pension contributions, some have doubled.

    Contrary to what I have seen published, state employees do not receive COLAs. Many of us would have been much better off if, instead of SB400, the legislature in 1999 had mandated COLAs tied to CPI. My take home pay would have been higher for the last six years, AND my pension would be at least five percent higher than it is now.

  3. rockyrambone Says:

    These are our states heroes. The police officers and firefighters who put their lives out there everyday. These are the nurses and doctors who save lives. These are the teachers who educate our children. These are the engineers who help build our roads and bridges, and the programmers who help build and maintain our states technology infrastructure.

    When we make decisions that do harm to our states heroes, we are doing harm to ourselves. Let’s not be penny wise but pound foolish here! These folks deserve to be well paid in work and retirement.

  4. SeeSaw Says:

    No kidding–how many secret 3:00 a.m. deals of this nature can you document? You spout a lot of hogwash–that is for sure.

  5. mrecky Says:

    So, political types, who can we find for our next Governor who most closely resembles Jerry?

    The amusing thing is that for miscellaneous state employees, at least, pension has been on base pay, period, for a long time. Even under the 1-year formula, which theoretically might have allowed some spiking by late-career promotions. I don’t understand counting all those bonuses as part of pensionable pay; somebody would have needed to be creative to make that work. The only “bonus” I got was 1/4 of my accumulated sick leave (I was not a heavy user) as service credit – whoopee?

  6. john m. moore Says:

    It is important to note that the California rule only applies if the agency employee’s had been granted a “vested(irrevocable)” pension right, like the charter in Kern.
    PEPRA will reduce deficits compared with the deficits that would occur but for PEPRA, but the deficits will continue to compound at a vigorous rate because there is no lid on salaries and the assumed investment rate is so high.
    Portraying Brown as a pension reformer is like putting socks and perfume on a pig. He and Regan set up the collective bargaining system that has destroyed the quality of life in California

  7. Overtaxed RN Says:

    “states heroes”. What a crock of BS. They are being paid for the job they voluntarily applied for. There are vastly more doctors and nurses who work outside the public trough that end up with a higher cost of living due to higher taxes. Engineers? The condition of any major road in this state speaks to the job they are doing. So very tired of the hero worship in the public sector. This is not indentured slavery. Public employees get paid well, retire earlier than most and have a guaranteed income for life. That’s a deal not found anywhere else. If there is economic injustice, it’s in the private employees being forced to find a compensation package for a bunch of government drones.

  8. SeeSaw Says:

    Mr. Moore, there is a cap on the amount of income than can be pensionable–one good thing in PEPRA. You cannot expect to get all the reform you want at once. The collective bargaining system is proper and good for employees. You just don’t like CB because you come from the Management side–pretty normal response, but wrong nevertheless. You make it sound like Reagan and Brown colluded on CB. That is quite a stretch, since the two signed CB laws ten years apart. Most CB haters won’t even admit that it was a Republican Governor who first brought CB to the public sector. And to say that CB has destroyed quality of life is CA is absolutely ludicrous! CB enhanced the quality of life for several million workers and their families and in the long term, those who provide products and services that those workers have been able to purchase.

  9. john m. moore Says:

    See-Saw’ I am pro collective bargaining in the private sector because there is real bargaining. In public CB everyone at the table favors higher salaries pensions and benefits. The legislative bodies are at the trough with the rest. Do the math, the system is a bubble. PEPRA may extend the bubble a little bit, but the investment market will bust and bust again, a factor not considered in the investment rate. I wish I was wrong, I have children and grand children who are deprived of reasonable educational, medical and housing because of the resources paid govt. staff and unions. Here in Pacific Grove, we have half of the govt. employees compared to 2001 at three times the expense. The quality of govt. is crap at best.

  10. S Moderation Douglas Says:

    For one example, in the late nineties, Federal regulations began requiring a commercial license for vehicles over a minimum weight, or vehicles having air brakes. CalTRANS Maintenance, which uses a large variety of heavier vehicles and equipment, made a minimum class B license required for all employees, and negotiated a five percent salary increase.

    Other departments with fewer heavy vehicles made a class B license optional and paid five percent more only for those licensed. It’s a management decision, and saves paying for licenses not needed or used.

    In either case, the five percent was considered “regular, recurring pay”, and yes, the five percent is pensionable pay for both the mandatory and voluntary licensees.

    Many of these “extras” may seem illogical because their description is oversimplified. One of the long standing complaints about civil service is that there is no incentive to put forth extra effort because all workers are paid the same, despite differences in ability or performance. Now we learn that there may be pay incentives to being bilingual, or learning specialized skills and obtaining licences and credentials beyond the minimum requirements of the job.

    As Martha Stewart says, that’s a good thing.

  11. S Moderation Douglas Says:

    Overtaxed RN says:
    “Public employees get paid well, retire earlier than most and have a guaranteed income for life.”

    “Common knowledge”:
    “There’s a guy on my street who retired at 48 with $100,000 a year …for life… and if he dies first, his wife will continue to draw that pension for the rest of her life.”

    Congratulations!!! One of the top two percent of employees lives on your street. If his wife continues with the same pension, it’s because his base calculated pension has been actuarially reduced based on their relative ages. With the obvious exception of safety employees, public sector workers retire at about the same age as the private sector, according to a 2014 Gallup poll.

    Four major studies since 2012 have concurred that California state workers earn, on average, twelve percent less than equivalent private sector workers. Three of those studies say that, even with the value of pensions and healthcare factors in, public workers earn slightly less than the private sector.

  12. SeeSaw Says:

    He has to be a disabled pensioner because the minimum age for normal CalPERS retirement is 50. Age 48 with 100K+ for life– that must have been a public safety job resulting in a major disability–do you want to trade places with him?

  13. S Moderation Douglas Says:

    No, SeeSaw, he’s not disabled. He is apocryphal. He’s not totally fictional, he’s just “made up” of a mixture of all the negative stereotypes rolled into one imaginary “typical” worker. Some of the facts are actually individually correct, but taken out of context.

    And some of the “facts” are totally absurd, but it don’t matter. Once they hit the World Wide Web, they take on a life of their own. They are immortal.

    por ejemplo

    “The average California Highway Patrol officer who retires after 20 years of work receives $98,000 per year, available at age 50, and paid for the life of the retiree and that retiree’s spouse.”

    This from Will Swaim ( vice president of communications at the California Policy Center)

    Myths about government pensions, Santa Maria Times
    May 23, 2016

  14. S Moderation Douglas Says:

    So what’s wrong with this picture?

    The California Policy Center calculations …actually… say:

    “Those who worked 20-25 years are shown in the lightest bar on the left side of the block; their average pension is $55,861 per year.”

    “In the dark shaded bar on the right are those who retired after 30 years or more of service; their average pension is $99,908 per year.”*

    Oh Will ! Perhaps communication is not your forte.

    A real man would issue a correction and apology.

    Enough said.
    ———————-

    *”Evaluating Public Safety Pensions in California”

    California Policy Center, April 25, 2014

  15. spension Says:

    “Brown could not get legislation for parts of his reform plan: adding two governor appointees to the CalPERS board and switching new employees to a “hybrid” plan combining a smaller pension and a 401(k)-style individual investment plan.”

    See http://www.nytimes.com/2016/06/21/opinion/pension-holders-need-a-new-retirement-plan-not-stock-tips.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-right-region&region=opinion-c-col-right-region&WT.nav=opinion-c-col-right-region&_r=0

  16. S Moderation Douglas Says:

    By TERESA GHILARDUCCI

    Not yet convinced that failure is baked into the voluntary, self-directed, commercially run retirement plans system? Consider what would have to happen for it to work for you. First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7 percent of every dollar you earn. (Didn’t start doing that when you were 25 and you are 55 now? Just save 30 percent of every dollar.) Fourth, earn at least 3 percent above inflation on your investments, every year. (Easy. Just find the best funds for the lowest price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced, buy a house or send a kid to college. Sixth, time your retirement account withdrawals so the last cent is spent the day you die.

  17. SeeSaw Says:

    Spension, Brown’s proposed pension reform legislation was thoroughly vetted and studied, for ten months, by pension experts who were appointed by the Legislation Committee. Those experts determined that the hybrid plan could not be guaranteed to pay out a decent standard of living for retirees. There was no need to add more members to the Board. It is a fallacy that CalPERS is union dominated. PEPRA 2013 was a good start on pension reform. There is now a cap on pensionable income. Retroactivity of formula upgrades and airtime were both abolished. Brown is a very pragmatic governor who understands that he would not get everything on his list.

  18. SeeSaw Says:

    The illustration by Fuchs is outrageous! Most public employees are hard-working and strive to serve the public. All have loved ones and friends in the private sector. No pensioner is “rocking” around on the backs of other taxpayers. The public employees are themselves taxpayers, by the way.

  19. john m. moore Says:

    See Saw: We understand why Ca. govt. retirees try to justify this deplorable system. The fallacy in the Policy Institue figures is that it does not add to each retiree’s annuity, the monthly cost of that annuitant’s share of the unfunded pension deficits including, pension bonds

  20. SeeSaw Says:

    Of course not Mr. Moore–that is because the annuitant’s share will come in the same form as that of non-annuitants–taxes.

  21. S Moderation Douglas Says:

    “In public CB everyone at the table favors higher salaries pensions and benefits. The legislative bodies are at the trough with the rest.”

    Déjà pooh. Constant repetition of a specious statement doesn’t make it any more valid.

    The Ralph C. Dills Act was passed in 1978. In 1979, we learned that “CB” stands for “collective begging”.

    Public employee unions are not nearly as powerful as you claim.

    I don’t know to which Policy Institute you are referring, but the fallacy of adding unfunded liability to the cost of each retiree’s annuity is that it does not consider the reason for the unfunded liability.

    It is true that one of the disadvantages of a DB system is transparency. Going to a DC system would obviously simplify the calculation of true employee cost, but it would also reduce the benefit for the employee by MORE than it might reduce costs.

    Lose/lose.

  22. SeeSaw Says:

    Every year there is a specific amount of money that an individual entity has to apply to its budget for salaries and benefits. If there is no CB in said entity, the amount is no different than it would be if CB were part of the process. But the apportionment of the available funds would be different–rank and file would most likely get less without CB. Management would just notify the workers what they would get in the way of salaries and benefits, and the rest would go to management.

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