Until a pension reform six years ago, CalPERS and CalSTRS members could boost their pensions by buying credit for up to five years of service without doing the work, thus the name “air time.”
But former Gov. Brown’s broad cost-cutting reform did not end a similar program often called the “golden handshake.” In this one the employer, not the employee, buys up to two years of air time for employees as an incentive for retirement, if it’s shown to cut costs.
Adding to pension debt for doing no work arguably is not a good look, particularly when CalPERS is only 70 percent funded, CalSTRS just 64 percent funded, and the bite both take from government budgets is at an all-time high and growing.
Beyond the optics, a criticism of air time is the money paid for the added years may not cover the cost. The air time price is based on the current pension fund investment earnings forecast, now 7 percent a year for both systems, which critics say is too optimistic.
A higher lifetime pension is a strong incentive. A state firefighter union filed a lawsuit to overturn Brown’s ban on air time. The state Supreme Court upheld the ban in March, ruling air time wasn’t a vested right protected by contract law.
Could cash or another debt-free incentive for early retirement be as effective as air time, if reducing or avoiding layoffs during a staff reduction is a goal? The question is not asked in the CalPERS and CalSTRS golden handshake programs.
An example of how a golden handshake program can increase pension debt is Folsom, a city on the American River at Folsom Lake that grew from 11,003 residents in 1980 to an estimated 79,022 last year with an average household income of $102,692 (Wikipedia).
After the recession a decade ago, Folsom offered golden handshakes six times to cut costs and help balance the budget. Between Feb.17, 2009, and Dec. 31, 2016, about 139 employees retired with a golden handshake, a Folsom spokeswoman said last week.
Now the California Public Employees Retirement System actuarial valuation for Folsom shows the golden handshake is about 13.7 percent of the city’s estimated payment this fiscal year for pension debt or “unfunded liability” — $1.6 million of the $11.7 million total.
In addition to the Folsom payment to CalPERS for debt from previous years, a separate “normal cost” payment is intended to cover the pension earned by employees this fiscal year — $8.2 million ($5.2 million from the city, $3 million from employees).
When pension fund investments don’t earn at least the forecast amount, now 7 percent, or there are other changes such as golden handshakes, a new layer of debt or unfunded liability is created that must be paid off over 20 years, down from 30 years for investment gains or losses under a new reform.
As recently as 2007 CalPERS was 100 percent funded. The average employer only had to pay the normal cost. Then investment losses and other factors caused employer debt payments to soar (employees don’t pay down debt) and total debt to reach $139 billion.
In 2013 CalPERS cut the time for paying off golden handshake debt from 20 years to five years. A spokeswoman said the “decision supported the strategic goal to improve long-term health of the pension plan.”
CalPERS does not issue a report of the number of golden handshakes and the amounts, unlike a state law requirement for CalSTRS. A data set shows more than 200 employers offered golden handshakes a total of more than 1,700 times, some back in the 1980s.
To issue a golden handshake, CalPERS employers are expected to show cost savings and must certify the added service credit avoids “mandatory transfers, demotions and layoffs” and at least one resulting position vacancy is intended to be permanent.
As Folsom began golden handshakes in 2009, a city resolution authorizing a second round said the first offer from February 17 to May 31 was accepted by 28 employees, “creating over $2.2 million dollars in savings towards the budget deficit.”
Unlike its outlook for some cities, CalPERS projects Folsom employer rates will be fairly stable during the next five years. Miscellaneous employee rates go from 41.2 percent of payroll this year to 40.9 percent in 2024-25, safety rates from 55.1 percent to 59.4 percent.
CalSTRS rarely refers to its “retirement incentive” as a golden handshake. What makes the California State Teachers Retirement System program different from the CalPERS version is much tighter regulation and monitoring under the state education code.
School districts and other employers must demonstrate that adding two years of service to pensions will result in cost savings. Employers choose the method and time period, but it must be approved by the county education office or the state superintendent of public instruction.
Then the state controller’s office does a cost analysis of the golden handshake result and issues an annual report. As the reports note, the analysis is based on audited basic financial statements submitted by the employers that are not verified by the controller.
The latest controller’s report, for fiscal 2017-18, shows the lowest number of employers offering golden handshakes, 13, since the reports began nearly two decades ago in fiscal 2001-02.
Golden handshakes were offered by 19 employers in the first report and 17 in the second, spike in the third year to 84 employers in 2003-04 and 80 in 2004-5, followed by a steady if uneven decline to 15 in 2016-17 and 13 in the latest report.
What happened in 2003? Legislation (AB 1207) made the CalSTRS golden handshake permanent, while also temporarily adding two years of age credit to the two years of service credit before expiring on Dec. 31, 2004.
A typical 60-year-old earning $70,000 could get a $590 monthly pension increase from the “two plus two”, said Keenan & Associates, an insurance consultant and brokerage firm. The same employee would only get a boost of $233 a month from two years of service credit.
A more recent official calculation in a CalSTRS retirement incentive directive issued in 2016 said two years of additional service credit for a 60-year-old with 30 years of service and earning $60,000 increases the pension by $220 per month.
The employer’s cost for the two years of service credit would be about $35,400, said the directive. The employer can pay CalSTRS in one lump sum or over eight years, which includes monthly compounded interest based on the earnings forecast, now 7 percent.
Golden handshakes cut costs when the retiree is replaced by an employee with lower pay and benefits or the position is left vacant. The cost of the handshake can exceed savings in the first years. (See chart below)
The 2017-18 controller’s report, for example, said it takes 2.007 years to recover the total one-time cost of the 13 golden handshake programs, $5,975,318, which exceeds the annual savings of $2,976,661.
Golden handshakes have competition from the private sector. An articleby Sheila Vickers of School Services of California on the website of Public Agency Retirement Services suggests an alternative to the CalSTRS program.
“This (CalSTRS) program is generally more costly and less flexible than a program that can be crafted by the local agency itself or through a private provider,” said Vickers.
Locally developed plans can be offered to “any and all” employee groups, Vickers said, and include a tiered incentive to opt out of school district-paid medical coverage and allowing retirees to choose variable-length annuities.
During the San Bernardino bankruptcy, a staff report in August 2012 outlined the CalPERS golden handshake as a way to cut costs and mentioned the Public Agency Retirement Services golden handshake, used by the city in the past for police retirements.
“The PARS early retirement program goes far beyond the limitations of the PERS option and it is far more flexible,” said the San Bernardino 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 8 Sep 2019