California public pension reforms

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Note: Visit the California Public Pension page for the full rundown of the three main public pension plans administered by the state of California.

State pension costs in California have increased 2500 percent in the last decade.[1] Pension costs are an ever increasing worry in California. The city of Vallejo has filed for bankruptcy which will have the effect of obviating its pension obligations.50 The City of Orange spent $13 million on pensions in 2009 and expects this number to rise to $23 million in three years. In Los Angeles, one half of the city’s $7 billion budget goes to employee salaries which is one of the factors contributing to a budget shortfall of hundreds of millions of dollars currently and a projection of $1 billion in a few years. This after the city handed out a 23 percent pay increase to city employees in 2007.[2]

New Pension Plans for 2013 New Hires

A new law began on Jan. 1, 2013 that set 62 as the normal retirement age for most state workers hired on or after that date, up from age 55 for most of the current workforce (excluding public safety staff). Employees under either retirement plan can retire earlier with smaller pensions. CalPERS, the massive public pension fund, calculated the changes could cut up to $55 billion in costs over 30 years for all of its state and local employers. State employees account for about one-third of its 1.65 million members.[3]

Legislative Actions

Proposition B

See also: San Francisco Pension Reform, Proposition B (November 2010)

Sustainable City Employees Benefits Reform would have required police, firefighters and other city employees covered by CalPERS to contribute 10% of their pension contribution.[4] These employees currently contribute either 7.5% or 9%, depending on when they were hired. The maximum amount that could come out of an individual worker's paycheck toward his or her pension contribution would be 2.5%.

Other city employees, who currently contribute 7.5%, would contribute 9%. Muni workers, who currently contribute nothing, would have to start paying into the system as other city workers do, under the Adachi proposal. The initiative would also require city employees to pay for 50%, rather than 25%, of their family's health care coverage. The proposition gathered 77,000 signatures and qualified for the November 2010 ballot.

Several city employee labor unions have filed a lawsuit against the proposition. Participants in the suit include: San Francisco Fire Fighters, Local 798, International Federation of Professional & Technical Engineers, Local 21, Service Employees International Union, Local 1021, the San Francisco Municipal Executives’ Association, and the San Francisco Police Officers Association.[5][6]

SB 867 and SBX6 22

Gov. Arnold Schwarzenegger signed into effect SB 867 and SBX6 22 in October 2010. The reforms, which were agreed on during the budget process, will roll back SB 400, end pension spiking, and increase pension transparency.[7]

For the transparency measure, it will require CalPERS to report its numbers in plain language and requires the Treasurer to evaluate and provide an opinion of the report to the legislature.[7]

During recent state budget negotiations, the legislature agreed to increase the age limit for public pensions, spiking prevention by using a rolling formulation of three to five years, and addressed the unrealistic growth predictions previously used.[8]

Gov. Jerry Brown is proposing that the state give CalPERS $1.5 million to identify and study alternatives for a “hybrid” retirement plan, a cost-cutting combination of pensions and 401(k)-style individual investment plans. The item in the governor’s revised state budget plan last week is a reminder that the “12-point pension reform plan” he proposed last March listed a “hybrid option” as one of five points still under development. Brown issued the reform plan after a breakdown in talks with a handful of Republican legislators, who must provide at least four of the votes needed to extend an expiring tax increase.[9]

A legislative analyst rejected Brown's proposal, calling the $1.5 million budget item “uncommonly amorphous and inscrutable.” The analyst said CalPERS, with its hard-won independence and legal duty to give priority to the interests of retirees, must be able to raise employer contribution rates in response to reforms and, if necessary, go to court.[10] Alan Milligan, an actuary for CalPers, said if the government freezes the current pension plan for existing workers and starts a new 401(k)-style plan for new workers, taxpayers would have to pay for the cost of administering two retirement plans simultaneously for the foreseeable future. Administering two plans costs more than one.[11]

Four state Senate Republicans have introduced a long-shot effort aimed at putting a ballot measure before voters that would make sweeping changes to public pensions in California. Senate Constitutional Amendment 13 would alter everything from how much current and future employees pay toward their retirement accounts to retroactive pension increases – which would be banned. Its provisions would apply to all state and local pension systems in California starting July 1, 2012, and would affect workers hired on or after that same date.[12]

California Democrats plan to lead an effort in reforming the state's pension ills in the fall. Some of the ideas include Gov. Jerry Brown's proposals to eliminate purchase of air time, prohibit so-called pension holidays and retroactive pension increases and ban payment of pension benefits to employees who are convicted of a felony related to their job.[13]

A Republican proposal in the California Senate would hike how much all current and future state and local government workers pay toward their pensions. Senate Constitutional Amendment 13 would mandate, among other things, that California state and local government workers pay 5 percent more of their salaries toward their retirements if their pension fund's assets equal less than 90 percent of promised payments. If approved, the measure would immediately increase pension contributions paid by state and local workers in the 3,000 agencies whose retirement plans are administered by the California Public Employees' Retirement System. Although the fund's assets are valued at about $240 billion, that's enough money to cover only about 70 percent of its long-term obligations. Most experts consider an 80 percent funding status to be the bare minimum required for a public pension fund's health.[14][15]

A pension reform study suggests that switching California state government pensions to a hybrid system that provides a modest monthly check plus a 401(k)-type savings plan could save taxpayers about $250 million right away and generate billions of dollars in savings in future years. Savings would be much higher, roughly $2 billion, if state workers were required to pay up to half of the cost of their early retirement health insurance premiums, said the report released Friday by the California Foundation for Fiscal Responsibility in the Sacramento suburb of Citrus Heights. Immediate savings at the local government level would be $3 billion to $4 billion a year, the report said.[16] CalPERS criticized the California Foundation for Fiscal Responsibility's research as flawed, saying the study "is based on artificial models and doesn't use real data." The pension fund also said the study "falls short on specifics and lacks comparative data"[17]

Some pension reform bills before the California legislature are being watered down.[18]

Ballot Initiatives

In 2012 California voters may get the chance to vote on two potential November ballot initiatives that aim to cut government pension costs. One of the measures backed by California Pension Reform would put newly hired state and local government workers into "defined contribution" plans similar to a 401(k) account. The group's other measure would put those future employees into "hybrid" plans that blend smaller guaranteed pensions with defined-contribution savings accounts for retirement.[19]

CPR will need 807,615 registered California voters to put their names on a petition for the ballot initiative. The law sets a 150-day deadline to turn in signatures, which would be June 8, 2012.[20]

Gov. Brown's 12-Point Pension Reform Plan

In December 2011 Brown unveiled a pension reform plan he said would save taxpayers about $900 million annually. The plan includes:[21]

  • Moving new employees to a hybrid system that combines pensions with a 401K style plan. Many employees will have to contribute at least half of their pension costs
  • Increase the retirement age from 55 to 67 years old
  • Prohibit pension spiking
  • Equal sharing of pension costs between employee and employer
  • Calculate benefits based on regular pay to stop spiking for new employees
  • Limit post-retirement employment
  • Felons forfeit pension benefits
  • Prohibit retroactive pension increases
  • Prohibit pension holidays
  • Prohibit purchase of service credit
  • Increase independence of the pension boards

CalPERS representatives released a report criticizing Brown's proposal, saying the plans won't significantly cut the state's pension costs and could cost some employers more than their current defined benefit plans.[22] The CalPERS analysis found that the hybrid plan that was analyzed will lower retirement benefits for new employees and shift the risk from employers to employees. It also may not significantly reduce costs for the State, but will result in savings for school employees and local public agency employers.[23]

Pension Bill of Rights

Assemblyman Roger Dickinson of Sacramento introduced a bill to give tens of thousands of state employees even more job protections and insulation from the economy. The bill would:[24]

  • Gives unionized state employees priority over outside contractors and excluded state workers to fill permanent, overtime and on-call positions.
  • Sets a one-year statute of limitations for employers to take an adverse action against a state employee. (The current law allows disciplinary actions up to three years after the discovery of fraud, embezzlement or records falsification.)
  • Establishes a peer review committee to provide workplace operations input.
  • Guarantees that the state won't impose "unreasonable quotas" on employees.
  • Bans extra work created by vacancies, furloughs of layoffs without "fair compensation."
  • Gives priority to workplace safety and health grievances.
  • Strengthens whistleblower protections.
  • Requires employers exercise "preventive and corrective" actions before administering harsher employee discipline.
  • Settles grievances in favor of the employee if the employer misses contractual deadlines for response.
  • Defines protections and performance and merit evaluation processes for professionally licensed employees.
  • Guarantees independent legal representation for professionally licensed workers named as codefendants in litigation against their employers.

Lawmakers' Pensions

In California, which has the nation’s highest-paid legislators, voters approved Proposition 140 in 1990, which abolished pensions and also created term limits.[25] It was reported that before Attorney General Jerry Brown earned $115,000 annually on his pension before entering the work force.[26] If Brown retires from his current position next year he'll earn $78,450 from two public pension systems, the Legislators' Retirement System and California Public Employees' Retirement System (CalPERS).[27]

Stanford Study of State Pension Liabilities

According to a December 2011 report from the Stanford Institute for Economic Policy Research, California's unfunded liabilities of the pension funds have increased by 15 to 20 percent. The combined unfunded liability for the three funds is $290.6 billion, presuming that the funds earn a 6.2 percent return from investments. That figure represents an unfunded amount per California household of nearly $24,000, according to the report.[28] Using a low-risk, or risk-free, discount rate, the combined unfunded liability for these three systems reaches $497.9 billion, or 17 percent more than that calculated in 2010.[29]

The report says CalPERS must earn a 9 percent return annually for the next 16 years to achieve 80 percent funding levels.[30]

If California lawmakers do not address pension reform, the report's author says state spending on pensions is likely to increase from $4.8 billion in 2011-2012 to $14.6 billion in a few years. That increased spending on pensions is virtually certain to continue to crowd out non-pension spending, including education and social services.[31] The report says solutions to the pension crisis include revenue increases and reforms to public employee pension systems. Revenue increases are unlikely to be approved absent pension reforms. Required pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.[32]

Capping Pensions

Orange County Assemblyman Donald Wagner, R-Irvine, introduced legislation to cap public retirements at $100,000 a year. Wagner’s proposal, Assembly Bill 1633, would apply only to new hires and would allow for inflation adjustments. But at least initially, the bill would prevent newly-retired public employees from making more than $100,000 in retirement.[33]

References

  1. [1]
  2. [2]
  3. Sacramento Bee, The State Worker: Pension benefits set to get less generous for California's new hires, Dec. 7, 2012
  4. "Local ballot measure campaigns reach the finish line," July 6, 2010
  5. Cal Watchdog, Unions sue to stop pension reform, Aug. 12, 2010
  6. Cal Watchdog, NEW: Help From The Left On Pensions, Sept. 10, 2010
  7. 7.0 7.1 Cal Watchdog, Governor Schwarzenegger Signs Historic Pension Reform into Law, Oct. 21, 2010
  8. Cal Watch, NEW: Proposed pension reform in budget, Oct. 4, 2010
  9. Cal Pensions, Brown seeks ‘hybrid’ pension/401(k) reform plan, May 23, 2011
  10. Cal Pensions, Brown seeks ‘hybrid’ pension/401(k) reform plan, May 23, 2011
  11. Capitol Weekly, Opinion: Hidden cost of pension reform: Freezing benefits is complex issue, April 28,2011
  12. Fresno Bee, The Buzz: Senate Republicans introduce long-shot attempt at pension overhaul, July 5, 2011
  13. Sacramento Bee, Steinberg talks about Democrats' plans to pursue pension fixes, July 6, 2011
  14. Sacramento Bee, California pension proposal seeks to hike employee contributions, July 12, 2011
  15. Sacramento Bee, Senate OKs pension measure aimed at curbing county abuses, July 11, 2011
  16. LA Times, Study predicts California pension savings with hybrid plan, Aug. 12, 2011
  17. Calif. Health Line, Calif. Could Cut Pension Spending With Hybrid System, Report Finds, Aug. 15, 2011
  18. Capitol Weekly, Pension reform: Easier said than done, Aug. 29, 2011
  19. Sacramento Bee, The State Worker: Pension reform debate is about to heat up, Jan. 5, 2012
  20. Sacramento Bee, The State Worker: Pension reform debate is about to heat up, Jan. 5, 2012
  21. Press Democrat, Gov. Jerry Brown's 12-point pension reform plan, Oct. 27, 2011
  22. Sacramento Bee, CalPERS: Jerry Brown's hybrid pension plan won't significantly cut state's costs, Feb. 15, 2012
  23. CalPERS, CalPERS Releases Cost Analysis on Creation of Hybrid Pension Plan, Feb. 14, 2012
  24. Sacramento Bee, California lawmaker writes 'Public Employees Bill of Rights', Feb. 13, 2012
  25. Stateline.org "Pension overhaul treats lawmakers, other state workers differently" July 29, 2010
  26. Cal Watch, The OC Watchdog, Aug. 13, 2010
  27. San Francisco Chronicle, Jerry Brown releases his pension information, Aug. 17, 2010
  28. Stanford University, Stanford researchers find that pension funds for California state workers are still in peril - action needed now, Dec. 14, 2011
  29. SIEPR Stanford University, Pension Math: How California's Retirement Spending is Squeezing the State Budget, Dec. 13, 2011
  30. SIEPR Stanford University, Pension Math: How California's Retirement Spending is Squeezing the State Budget, Dec. 13, 2011
  31. SIEPR Stanford University, Pension Math: How California's Retirement Spending is Squeezing the State Budget, Dec. 13, 2011
  32. SIEPR Stanford University, Pension Math: How California's Retirement Spending is Squeezing the State Budget, Dec. 13, 2011
  33. Orange County Register, O.C. lawmaker wants to cap pensions at $100K, Feb. 14, 2012