Gov. 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.
The Republicans are said to be seeking pension reform along with a state spending limit and business-friendly regulatory changes. A news release in March said Brown intends to “introduce these pension reforms with or without Republican support.”
At a news conference last week, the governor said he is willing to put a spending limit on the ballot as part of a budget deal. He was asked if he also would put a pension reform on the ballot.
“We are going to propose pension reform,” Brown said. “That’s more contentious, and I’m told there is going to be a lot of pension reform on next year’s ballot, anyway. So, one way or the other, I think we are going to get whatever pension reform we need.”
Polls show voter support for cost-cutting pension reforms. Among the proposals for local pension ballot measures are switching new hires to 401(k)-style plans in San Diego and cutting pensions earned by current workers in the future in San Jose.
Several statewide pension reform initiatives have been proposed in recent years. But they lacked the funding needed to gather enough voter signatures to place the measures on the ballot.
Now former Assemblyman Roger Niello, R-Fair Oaks, has filed an initiative that would extend retirement ages, cap pension amounts and require employees to pay more toward their pensions.
Dan Pellissier, president of California Pension Reform, is working on an initiative aimed at the ballot next year. He has talked about several possibilities, including a cap on employer contributions and a switch to a 401(k)-style plan.
The watchdog Little Hoover Commission, warning that pension costs could “crush” government, suggested a court test of whether pensions not yet earned by vested current workers can be cut, which likely would result from the San Jose plan.
The commission report in February also recommended a federal-like hybrid plan, calling it “a breakthrough model for pension reform that is gaining renewed attention as states struggle to address rapidly increasing pension costs.”
The three-part federal plan adopted in 1985 for new hires combines a lower pension, a 401(k)-style plan with a federal match and Social Security. As of 2009, the hybrid was said to be fully funded, while the old pension plan was 39 percent funded.
In Orange County, unions agreed to a plan authorized by legislation last year that gives new and current workers the option of choosing a hybrid plan. But the plan is on hold awaiting federal approve of pre-tax employee contributions to the 401(k) plan.
A Utah hybrid plan, opposed by unions but approved by voters in an initiative drive last year led by a Republican state senator, Daniel Liljenquist, is getting some national attention.
All full-time state and local government workers in Utah hired after July 1 will be able to choose between a hybrid and a 401(k)-style plan. The state contributes 10 percent of pay (12 percent for police and firefighters) to the plan the worker chooses.
In a new wrinkle, if the cost of the pension part of the Utah hybrid goes above 10 percent, because of investment losses or other problems, the employee has to cover the increased cost.
But if the actuarially required contribution to the pension part is less than 10 percent (it’s set to begin at about 7.5 percent) the excess goes into the 401(k) part of the employee’s hybrid plan.
Liljenquist expects most employees planning a long career on the job to choose the hybrid plan. He thinks many short-term employees will choose the 401(k)-style plan, which is portable and can be transferred to another job.
Most private-sector employers offering a retirement plan have switched to 401(k) plans. For the employer, a 401(k) has the advantage of an annual “defined contribution” with no long-term debt.
A pension is a lifetime monthly payment or “defined benefit,” which can result in massive debt if investment earnings or contributions fall short. Brown said last week the state has a $181 billion “unfunded liability” for pensions and retiree health care.
Critics say the 401(k), originally a pension supplement, can be a bad deal for employees due to poor investment decisions, high management fees and little time to recover losses if the stock market plunges shortly before retirement.
Perhaps most importantly, the risk borne by the employer in a pension plan is shifted to the employee in a 401(k) plan. Advocates say a hybrid plan can protect employers against crushing debt and employees against an impoverished retirement.
“The debate between a defined-benefit and a defined-contribution system, however, does not need to be an either-or choice,” said the Little Hoover Commission report.
A hybrid plan was one of two cost-cutting pension options recommended in February by the nonpartisan Legislative Analyst. The other “cost-sharing” option would increase employee and employer contributions when pensions are under-funded.
Last week, the Legislative Analyst “strongly” urged rejection of thegovernor’s proposal to have the California Public Employees Retirement System conduct a hybrid study, 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.
In addition, said the analyst, a Wall Street Journal story on May 19 said CalPERS officials “now see the fund playing a leadership role in the national debate over whether to overhaul public pensions and replace them with 401(k)-style plans popular in the private sector, a change CalPERS opposes.”
The CalPERS chief actuary, Alan Milligan, wrote in an article published in Capitol Weekly on April 28 that an analysis, “The Impact of Closing the Defined Benefit Plan at CalPERS,” found that phasing out pensions may not yield the expected savings.
For example, the pension system would have management costs for at least 60 years, the life expectancy of young members, and investments would be more conservative to provide liquidity, requiring higher employer contributions.
About a third of CalPERS members are not in Social Security. Putting them in Social Security, as under the federal hybrid plan, would require government employers to pay an additional federal tax amounting to 6.2 percent of worker pay.
“The topic of pensions and retirement benefits is complex,” Milligan concluded. “If done wrong, pension changes could result in higher costs to taxpayers while providing lower benefits to employees.
“If done right, pension changes could result in a system that better meets the needs of both taxpayers and employees. Policymakers should conduct a thorough analysis before embarking on any changes.”
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 24 May 11