Pension Reform: Brown Picks Up Where He Left Off

In his last year as governor, Jerry Brown’s budget proposal said it was possible for state workers to retire at age 62 and receive more than 100 percent of their final salary from CalPERS and federal Social Security.

He proposed lower pensions for new hires, arguing that 70 percent of final salary is a “common standard” for maintaining a standard of living in retirement that is similar to the one when working.

The lower pension would result in lower annual contributions to CalPERS, savings that could be passed on to both the state and the workers. The change would have to be negotiated with labor unions and enacted through legislation.

Last week, Brown, now the Democratic candidate for governor running against Republican Meg Whitman, made a brief reference to his “record” as he outlined an eight-point pension reform plan on his campaign website.

“As governor in 1982, I signed into law SB 1326 that called for a Two-Tiered Retirement System to reduce overall pension costs,” Brown said on the website. “Pension spiking (manipulating final pay to boost pensions) was not permitted.”

A Brown campaign spokesman, Sterling Clifford, said the budget bill that year, SB 1326, contained language calling for a two-tier pension system, but the change was never enacted.

The governor’s Department of Personnel Administration director, Marty Morgenstern, recalled that 1982 was a difficult budget year. The state faced a deficit during an economic recession.

“Gov. Brown’s idea was to have DPA and CalPERS work out a second tier pension that would save money for both the state and the employees, while still maintaining a defined benefit pension plan that would maintain the employees’ standard of living in retirement,” said Morgenstern.

Unlike Whitman, Brown is not advocating that new state hires, with the exception of police and firefighters, be switched from pensions to 401(k)-style individual investment plans, now common in the private sector.

But he continues to advocate negotiating a “two-tier” system giving most new state workers a lower pension formula requiring them to work longer to earn full retirement.

“For example, when I was governor a miscellaneous employee could retire at 2 percent (of final pay) per year (served) at age 60,” Brown said on the website. “In recent years, this was changed to 2 percent at age 55. For new employees, these ages must be brought back to the more appropriate levels in place when I was governor.”

He is referring to a major pension increase sponsored by the California Public Employees Retirement System, SB 400 in 1999, which Gov. Arnold Schwarzenegger and others say is “unsustainable” and crowding out funding for other programs.

Like Scharzenegger, who has tentative agreements with a half dozen unions to cut pensions, Brown would increase worker pension payments to 10 percent of their pay, up from 5 to 8 percent. The state contributes 20 percent of pay for miscellaneous workers.

Under the “2 at 55” formula a state worker with 40 years of service can retire with a CalPERS pension equal to 100 percent of pay. There is no cap, so it’s possible for a worker with more than 40 years to retire with a pension greater than final pay.

State miscellaneous workers receive Social Security in addition to their pensions. The Highway Patrol, state firefighters and others in the “safety” classification do not receive Social Security, but have more generous pensions than miscellaneous workers.

The state’s annual payment for Social Security, 6.2 percent of pay, was $639 million in fiscal 2008-09, the latest data available. Workers also contribute 6.2 percent of their pay to Social Security.

With Social Security, state retirement costs total about $7 billion this fiscal year: CalPERS $3.8 billion, California State Teachers Retirement System $1.2 billion, and retiree health $1.4 billion.

Non-teaching school employees, the largest group in CalPERS (38 percent of the 1.6 million active and retired members), receive Social Security. A long-standing issue is that teachers in CalSTRS do not receive Social Security.

Worse from the viewpoint of teachers in CalSTRS, Social Security benefits they earn in other jobs can be reduced or even lost under federal laws aimed at “double-dipping” in two public pensions.

Attempts to repeal the “pension offset” and “windfall” laws lack support in Congress. The change has been estimated to cost $61 billion to $80 billion over 10 years. And only about 15 states have public employees without Social Security.

Brown’s new eight-point pension reform plan does not mention combined pension and Social Security retirement pay. But the concept was a key part of a pension initiative a group unsuccessfully tried to place on the November ballot this year.

The initiative would have pushed back full retirement ages for all new workers by nearly a decade or more. For workers not in “safety” police and fire jobs, full retirement would have been the same as Social Security, 65 to 67 depending on birth date.

The formula would have been 1.65 percent of final pay for each year served in non-safety jobs not covered by Social Security. In non-safety jobs covered by Social Security, the formula was 1.25 percent.

The president of the group sponsoring the initiative, Marcia Fritz of the California Foundation for Fiscal Responsibility, thinks Brown’s eight-point pension reform plan is a big step in the right direction.

“I like it,” Fritz said. “My board doesn’t agree with me.”

She said the group founded by former Assemblyman Keith Richman, R-Northridge, who died last night after battling brain cancer, was intended to be nonpartisan.

The vice president of the group, Jack Dean, editor of Pensiontsunami.com, said in a recent television interview he thinks an initiative is needed for lasting reform, because change negotiated with labor can be undone later.

Fritz said she has been talking to a labor representative about a “hybrid” plan. Salary up to a certain level, for example $50,000 a year, could be covered by a pension. Then any part of a salary above $50,000 would be covered by a 401(k)-style plan.

“I’ve been saying, ‘If you guys don’t get on this, you could lose control,'” she said.

Fritz said Whitman, riding a wave of mistrust of government, may have an edge in the race for governor. She said the wealthy Whitman could easily finance a drive to place a pension on the ballot.

“Unions have got to know that happens if she gets in,” said Fritz.

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