Originally posted February 4, 2011 at CalPensions.com. 

More stories are at http://calpensions.com/

As Republican legislators work on pension reform, a good place to start might be Gov. Brown’s eight-point campaign proposal, which contains most of the pension reforms adopted in other states in recent years.

Brown proposed four of the five key reforms that a Pew Center on the States study issued last year, “The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform,” said seem “largely politically feasible.”

The four reforms in both the Pew report and the Brown proposal: lowering benefits and increasing retirement age, increasing employee contributions, keeping up with funding requirements, and improved governance and investment oversight.

The missing option, “share risk with employees,” includes a 401(k)-style individual investment plan instead of a pension, a “hybrid” combining smaller pensions and a 401(k), and basing annual pension inflation increases on investment performance.

Some reform advocates in California recently have proposed ways to cut costs by reducing the pensions earned by current workers, a change virtually certain to draw a legal challenge. Pension cuts so far have been limited to new hires.

A series of court decisions are said to mean that once a worker is “vested” in a pension, it’s protected by contract law and cannot be cut without providing a benefit of equal value. But some attorneys disagree.

One of the initiatives proposed by a pension reform group led by Marcia Fritz would declare a fiscal emergency and lower the pensions earned by current workers in the future, without cutting pension amounts already earned.

A proposal to cut soaring costs in the troubled San Diego pension system by Councilman Carl DeMaio would cap the amount of pay used to determine pension amounts, similar to the way Social Security operates.

This week, Brown was interrupted by applause during his State of the State address when he said, “We must also face the long-term challenge of ensuring that our public pensions are fair to both taxpayers and workers alike.”

Departing from his prepared text, Brown said, “So that’s ambiguous. Either side can read into it whatever they wanted to,” getting a laugh from the legislators. “In a sense, we want to welcome all possibilities and don’t close off too many.”

Brown’s proposal to close a $24 billion budget deficit is an attempt to hit an extraordinarily difficult trifecta: 1) Democratic approval of deep cuts in health, welfare and other programs, some rejected when proposed by former Gov. Schwarzenegger.

2) A handful of votes from Republicans who signed anti-new tax pledges to put a $11 billion-a-year temporary tax extension on the June ballot. 3) Approval by voters who rejected the tax extension in May 2009 when it was two years, not five as proposed now.

The tax extension contained a spending limit demanded by the six Republicans who voted for the taxes. Presumably, an incentive of some kind might attract a few Republicans needed for the two-thirds legislative vote to place the tax extension on the June ballot.

Responding to Brown’s address, Assembly Republican Leader Connie Conway of Tulare emphasized pension reform. Senate Republican Leader Bob Dutton of Rancho Cucamonga mentioned job-creating regulatory reform, but not pensions.

Sen. Mimi Walters, R-Laguna Hills, told the Contra Costa Times she is preparing a package of pension reform bills, including a 401(k) plan, that must be addressed before taking up taxes.

The Republican caucuses in both houses are expected to meet next week to discuss their policy agenda for the year.

The Senate Republican caucus has not taken a position on Walters’ pension reform proposal, said Jann Taber, a Dutton spokeswoman. Assembly Republicans plan to make a pension reform proposal, said a Conway spokeswoman, Sabrina Lockhart.

The Schwarzenegger administration negotiated pension reform in new contracts last year with five unions representing about 58 percent of the 223,000-member state workforce, including the giant SEIU Local 1000 after a record 100-day budget deadlock.

Employee pension contributions increased to 8 to 10 percent of pay, up from 5 to 8 percent depending on the union, while the state contributes 17 to 28 percent of pay. Pensions for new hires were lowered to the level used before a major increase, SB 400 in 1999.

The immediate state savings from the increased employee contributions enabled the California Public Employees Retirement System to cut $200 million from the state pension payment this fiscal year, dropping to about $3.7 billion.

Now the Brown administration must negotiate contracts with six holdout unions representing the remaining 57,000 non-management workers. More than half are in the California Correctional Peace Officers Association, a major Brown campaign contributor.

Brown’s newly appointed director of the Department of Personnel Administration, which negotiates labor contracts, is Ronald Yank, a retired labor attorney who has represented state prison guard and firefighter bargaining units in the past.

A basic position of the labor unions that have been willing to chip in with pension cuts during hard times is that the changes must be bargained, not imposed through legislation.

The Brown plan said that many public pensions, which have been getting 65 to 75 percent of their funds from investment earnings, adopted “pension programs that could not be sustained” when a soaring stock market turned out to be a temporary windfall.

“These problems grew out of policies established by legislation, regulation and collective bargaining and will need to be reformed through the same process,” said the plan.

In addition to higher employee contributions and lower pensions for new hires, the Brown plan calls for:

-Considering longer vesting periods and more employee contributions for retiree health care, now costing the state $1.4 billon a year. No money has been set aside for promises made to current workers, expected to cost $50 billion over the next 30 years.

-An end to boosting or “spiking” pensions by manipulating final pay. Schwarzenegger vetoed a bill to curb spiking in county systems sparked by windfalls for two Contra Costa County fire chiefs, saying AB 1987 didn’t go far enough.

-An end to employer contribution “holidays” when investment earnings soar. CalPERS dropped the annual state pension payment from $1.2 billion to $150 million during a stock market boom a decade ago.

-An end to retroactive pension increases for retirees. Retirees in CalPERS and the California State Teachers Retirement System received pension increases of 1 to 6 percent, depending on length of retirement, when the market boomed a decade ago.

-Monitoring by the state finance director of earning forecasts and investments. CalPERS, faulted for optimistic earning forecasts that mask debt, decided to include a range of forecasts in future reports, reinforced later by Schwarzenegger legislation.

As the plan notes, Brown is not new to pension reform. In 1982 the last budget in his previous term proposed lower pensions for new hires, saying a worker could retire at age 62 with more than 100 percent of their salary from CalPERS and Social Security.

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 4 Feb 11