Pensions
Brown Pension Reform: Local Workers Pay More

Brown Pension Reform: Local Workers Pay More

Originally posted at www.calpensions.com

Gov. Brown’s 12-point pension reform would not change what most state workers pay toward their pensions. But many local government workers would pay more under an even employer-employee cost split.

Nearly all state workers with the exception of the Highway Patrol, firefighters and judges are already paying half of the “normal” cost of their pensions, which does not include the “unfunded liability” that can cause the employer share to more than double.

But a CalPERS fact sheet prepared for a legislative hearing last week showed that nearly all of the local government employees in the giant system, with the exception of non-teaching school employees, are paying less than half of the normal cost.

A boost in what employees pay for their pensions would allow employers to cut their pension payments by a similar amount. So the governor’s pension plan could provide budget relief for struggling local governments.

“These 12 points are a good framework,” Brown told the legislative committee, “and to the extent they affect the locals that’s good, particularly in the 50-50 contributions, an important measure.”

Marty Morgenstern, Brown’s labor secretary, told the legislators the plan is to phase in the even split of normal pension costs through collective bargaining as labor contracts expire.

Some of the new equal-share policy could be enacted through legislation. About a third of state workers, he said, are managers and supervisors not covered by collective bargaining.

“Setting minimum and maximum annual rate increases until the base line is achieved could be a reasonable way to implement this, we think,” Morgenstern told the legislators.

He said the plan calls for an equal split of normal costs, not the full cost that includes the unfunded liability, because “we don’t want to attach that to the new members coming in.”

Most state workers contribute 8 percent of pay toward their pension, more than half of the 14.4 percent normal cost. But the state employers contribute 17 percent of pay toward the pensions of these workers, an amount that includes the unfunded liability.

The “normal” cost is the amount actuaries say is needed, with investment earnings, to pay for pension obligations accrued in the current year. The “unfunded liability” is the pension debt from previous years, mostly due to investment losses.

The fact sheet said the California Public Employees Retirement System, which covers about half of all non-federal government workers in the state, was about 75 percent funded as of last June 30 with an unfunded liability of $85-90 billion.

Critics say the unfunded liability is probably much larger. They argue that the CalPERS forecast of future investment earnings, an average of 7.75 percent, is too optimistic and not likely to be achieved.

Investment earnings are expected to provide most of the revenue for California public pension funds. The CalPERS investment fund, $225 billion last week, is still well below its peak of $260 billion four years ago.

The fact sheet gave this breakdown of the sources of the typical CalPERS dollar: investment earnings 66 cents (historically as high as 75 cents), employers 21 cents, and employees 13 cents.

Brown reminded the legislators that he proposed never-enacted pension reform in the last budget of his previous term, 1982, and was mayor of Oakland in 1999 when the Legislature enacted a major pension increase for state workers, SB 400.

“I said, ‘Wow, how do you pay for that,’” Brown said. “I was told it’s free, doesn’t cost anything. PERS assures us that the system can fully incorporate it. I was incredulous at the time, and I’m still incredulous. It costs money.”

CalPERS told legislators the cost of the pension increase would be covered by a surplus and investment earnings. But the state CalPERS payment, dropped to $150 million as the stock market boomed in 2000, soared to $2.5 billion five years later.

The best-known provision in SB 400 was a 50 percent pension increase for the Highway Patrol, providing retirement at age 50 with 3 percent of final pay for each year served.

To remain competitive with the trendsetting Highway Patrol, many local police and firefighters have bargained similar pension increases. And personnel costs are a major part of local government budgets.

Brown referred to the state’s role in increasing local pensions and the Legislative Analyst’s estimate (page 40) last month that state CalPERS payments, $3.6 billion this year, will increase to $3.8 billion by fiscal 2016-17.

“PERS contributions over the next three or four years only grow by a couple hundred million,” Brown said in reply to a question from Sen. Joe Simitian, D-Palo Alto, about whether his plan puts “parameters” around local pensions.

“That percentage is smaller relative to our overall general fund than is faced by San Jose, Los Angeles, San Francisco or Oakland,” the governor said. “I think because there has been a resort to state action in local benefits, then it’s reasonable to continue in that tradition to bolster the funds and make them more solvent.

“I don’t think we should limit local creativity, and I think we will learn a great deal by the different votes and measures that are going to be considered at the local level. So there is going to be a lot of battles, and that’s why I say this will go on over the next few years.”

An initiative on the San Diego ballot in June would switch new hires to a 401(k)-style investment plan and place a five-year freeze on the pay of current workers used to calculate pensions.

A plan by San Jose Mayor Chuck Reed to put a pension measure on a March ballot in council action tomorrow may be pushed back to June. A surprising new actuary estimate said police and firefighter pension costs will drop next year not increase.

The actuary, Cheiron, said the city pension contribution this year, $127 million, is expected to be $105 million next year not $160 million as expected earlier, apparently due to layoffs and pay cuts.

Unions criticize key Brown proposals that switch new hires to a “hybrid” plan (aimed at replacing 75 percent of income with a smaller pension, a 401(k)-style plan and Social Security) and that extend the full retirement age for new hires to 67, much like Social Security.

The Legislative Analyst doubts that an equal split of normal costs can be applied to current workers without infringing on their vested rights, which limit most cost-cutting pension changes to new hires.

But there is legislative and union support for parts of the Brown plan that curb abuses, such as “spiking” to boost pension payments. The two-house committee is expected to issue a reform package next year, probably before budget action heats up in June.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 5 Dec 11

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