A key part of Gov. Brown’s 12-point pension plan, the only change quickly yielding sizable savings for struggling government employers, could have a serious legal problem.
Requiring current workers to pay an equal share of normal pension costs, a 50-50 split with employers, may not be allowed under court rulings many believe limit pension changes to new hires, which can take decades to yield savings.

The nonpartisan Legislative Analyst’s Office argued in a new report last week that employers cannot impose cost-saving pension cuts on current workers, unless that power is legally preserved on the date of hire or bargained later.

“Since increasing current employees’ contributions is one of the only ways to substantially decrease employer pension costs in the short run, the legal and practical challenges that we describe mean that the governor’s plan may fail in its goal to deliver noticeable short-term cost savings for many public employers,” said the report prepared by Jason Sisney, deputy legislative analyst.

The analyst suggested one of the “practical” challenges is that even if unions agree to reduce pension benefits, they generally feel “duty bound” to push for comparable offsetting benefits while trying to represent the best interests of their members.

“For example, many of the recent state employee agreements that increased employee contributions to their pensions included future pay increases roughly equivalent to the increase in the employee pension contributions,” the analyst said.

The new labor contracts increased the employee pension contribution for state workers to 8 to 11 percent of pay depending on the bargaining unit, up from 5 to 8 percent.
The increased contribution from workers allowed the state to lower its annual payment to the California Public Employees Retirement System by about $200 million last fiscal year and $400 million this year.

The savings slowed the growth in state worker pension costs, but were not enough for a reduction. The state payment to CalPERS this fiscal year is $3.5 billion, an increase of $200 million or more from last year.

Most of the new contracts also give new hires a lower pension. But this change, if it remains in future contracts, seems unlikely to yield much state savings until there is a significant turnover in the workforce, which may take years or decades.

The original 12-point plan proposed by the governor last March did not mention cost sharing. But the proposal for equal sharing of normal pension costs is the first point in the more complete plan issued last month.

“We do address existing employees by increasing their contribution rate,” Brown said at a news conference last month when asked if the plan applied only to new hires.

“One thing we know for sure, under constitutional law the employer can require higher contributions and that is the most immediate and the biggest change that will make our pension plans more solvent,” the governor said. “Other changes run into constitutional questions of whether they are permissible or not.”

The analyst respectfully disagreed with the governor and included a two-page summary of constitutional case law “that may protect many current and past public employees.”

The governor’s plan specifically mentions equal sharing between employer and employee of the pension “normal” cost, the contributions actuaries say are needed (with assumed investment earnings) to pay for pensions accrued in the current year.

The analyst said it’s unclear if there also would be equal sharing of the “unfunded liability,” the debt or shortfall in assets needed to pay for pensions promised current workers and retirees if the system is not fully funded.

CalPERS has been 60 to 70 percent funded in recent years. The CalPERS investment portfolio peaked at $260 billion in the fall of 2007, dropped to $160 billion in March 2009 and was $226 billion last week.

The analyst said for most state workers (miscellaneous Tier 1) the current normal cost is 14.4 percent of pay and the unfunded liability 10.4 percent of pay. The employee contribution is 8 percent.

So employees are paying more than half the normal cost, but only about a third of the total cost of 24.8 percent of pay. The other two-thirds is being paid by the taxpayer-supported state budget.

For the more generous pensions provided correctional officers and firefighters, said the analyst, the normal cost is 25.4 percent of pay, the unfunded liability 11.3 percent and the employee contribution 11 percent.

Retiree costs this year are about 5.5 percent of the $89 billion state general fund. But in local government, where personnel is a larger part of total spending, retirement costs are blamed in San Jose, San Diego and other areas for service cuts and layoffs.

Local government employees often have been making little or no contribution to their pensions. In some cases, the employer’s payment of the employee’s contribution is counted as part of the salary on which the pension is based.

A key principle in a pension reform plan issued last June by the League of California Cities is that “public pension costs should be shared by employees and employers (taxpayers).”
The League’s plan seems to agree with the Legislative Analyst’s view of requiring current workers to pay more for their pensions. One of 15 recommendations for state action is that employees be required to pay the CalPERS employee contribution.

“Courts have held that current and former local government employees have rights to the pensions promised them at hiring,” said the League plan. “As such, the following recommendations most likely would not pertain to former employees or the prospective benefits of current employees.”

The Little Hoover Commission and others have suggested that the courts should revisit the issue of whether pensions current workers earn for future service can be cut, while protecting benefits already earned through time on the job.

Voter approval of a pension initiative on the June ballot in San Diego is likely to trigger a court challenge. In addition to putting most new city hires in a 401(k)-style plan, the pay on which the pensions of current workers is based would be frozen for five years.

A pension reform group filed two versions of a statewide initiative last month that would require current workers to “pay more for their same benefits and for a share of unfunded liabilities.”

A suit filed last year by the city of San Diego reflects the Legislative Analyst’s view that current worker pension benefits can be cut if the employer preserved that right on the date of hire.

The city’s suit to force employees to share pension costs is based on a provision in the San Diego charter: “The city shall contribute annually an amount substantially equal to that required of the employees for normal retirement allowances, as certified by the actuary…”

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 14 Nov 11