Originally posted at www.calpensions.com

A backdoor attempt by CalPERS to trim an absurdly generous pension backfired, resulting in a $7.7 million payment last year to the heirs of a man who retired as a top state Senate aide more than 40 years ago.

The settlement after a lengthy court battle took a big bite out of the Legislators Retirement System, which has been shrinking since a term-limit initiative, Proposition 140 in 1990, ended pensions for new legislators.

The court settlement last year nearly equaled the annual amount of pensions paid by the plan. During fiscal 2009-10, payments to 266 retirees totaled $7.9 million, an average of $29,535.

But the system’s investment fund still had a market value of $114 million in June of last year. And in a fact sheet that the California Public Employees Retirement System gave a legislative committee this month, the system stands out.

It’s the only one in which the employee contribution is zero.

In the other CalPERS state systems, employees contribute 5 to 11 percent of their pay toward their pensions, usually with a matching contribution from the employer that is two or three times larger than what employees pay.

The employee contribution has been zero in the Legislators Retirement system since 2000, when it became “super funded” with more than enough assets to pay future obligations.

The surplus has fallen due to the court settlement, two years of investment losses and choosing a smaller “margin for adverse deviation” for the declining fund that dropped the earnings forecast to 6 percent, well below the usual CalPERS forecast, 7.75 percent.

“If the plan suffers another significant loss (investment, or unexpected large benefit payment), employee contributions will need to be reinstated,” an annual actuary report said in May. “In addition, contributions from the state would be required.”

Proposition 140 imposed a limit of three terms on the Assembly and two terms on the Senate and constitutional officers such as the governor and members of the Board of Equalization.

The initiative only ended pensions for new members of the Legislature. The eight top constitutional officers, four elected Board of Equalization members and four top legislative aides remain eligible for the Legislators Retirement System.

On a list of active plan members are Gov. Brown, Controller John Chiang, Superintendent of Public Instruction Tom Torlakson, Attorney General Kamala Harris, Secretary of State Debra Bowen and Insurance Commissioner Dave Jones.

Treasurer Bill Lockyer, a former assemblyman and state Senate leader, is an inactive member now in CalPERS. The office of Lt. Gov. Gavin Newsom did not respond to a query about his status.

For constitutional officers, the pension provided by the plan is based on 5 percent of the highest annual pay for each of up to eight years served. The pension for the legislative aides is based on 3 percent of pay, capped at two-thirds of the final salary.

Most state workers are in a plan based on 2 percent of pay for each year served at age 55, increasing to 2.5 percent at age 63 and older. Pensions in the uncapped plan equal 100 percent of final pay after 40 years of service.

The $7.7 million settlement last year grew out of a generous pension increase enacted by the Legislature for its top aides in 1969. The pensions of retirees were linked to the salary of current officeholders.

An increase in the salary of a current legislative aide and cost-of-living adjustments increased the base pension of retirees, which also received a cost-of-living adjustment.

The double cost-of-living adjustment became known in the media as the “super escalator.”

Clarence Alexander became secretary of the Senate in January 1969 and retired in December of that year at age 56 with 22 years of service. Available documents do not show the amount of his original pension.

But his pension soon exceeded the salary of the current Senate secretary, said a decision by Administrative Law Judge Jonathan Lew in 2006 that contains a brief history of the case.

Alexander asked CalPERS in 1976 about waiving part of his pension and was told he could not. Without telling Alexander, CalPERS broke the link with the current secretary’s pay in 1980 and began giving him a single cost-of-living adjustment.

In 1991 an internal CalPERS memo said Alexander’s pension should be increased from $7,559 per month to $17,549 per month, with a retroactive lump sum of $463,658 unadjusted for interest. No action was taken.

Three other legislative aides had pensions with the “super escalator.” One died in the early 1980s. CalPERS tried to reduce the pensions of the other two, ending in an unadjudicated settlement in 1996 that did not include Alexander.

Alexander died in 1998 and his widow, Frances Alexander, began receiving his pension. In 2003 a former CalPERS employee told Alexander’s daughter of the apparent underpayment, and a long legal battle began.

By the time Frances Alexander died in 2005 CalPERS was contending that her pension, $10,785 a month, should have been $5,277 a month and that the overpayment in three previous years totaled $191,274.

After Judge Lew ruled in favor of the Alexander heirs, they argued that Lew’s decision must be adopted because CalPERS violated a legal requirement by failing to order a transcript within 100 days or adopt a decision of its own.

A superior court ruling in favor of the Alexander heirs on the 100-day violation was upheld by an appeals court in September 2009. CalPERS paid the $7.7 million settlement in March 2010.

“The outcome is most troubling — double COLAS in any given year that over time resulted in respondent’s allowance being three and a half times greater than the current incumbent’s salary,” Lew said in his decision.

The judge said double cost-of-living adjustments are “windfall benefits” and are “best seen as the byproduct of a system where benefits and eligibility criteria were under the direct control of the persons expected to receive benefits under it.”

Generous benefits from the Legislators Retirement System sparked a well-publicized controversy in 1974. The Associated Press reported that a 1965 law would give several legislators in their 30s lifetime pensions of $10,000 a year.

One of them was former Assembly Speaker Bob Moretti, D-Van Nuys, who was defeated in the Democratic gubernatorial primary that year by Jerry Brown. A freshman Republican, Robert McLennan of Downey, unsuccessfully pushed legislation to change the pensions.

After the Legislature adjourned in September, Gov. Ronald Reagan called them back in special session. The early pensions were repealed with only one dissenting vote from the 118 legislators.

But the angry legislators also voted to slash Reagan’s pension by $15,000 a year to $19,640, the Associated Press reported.

When the 61-year-old McLennan retired two years later, he was criticized for receiving a $3,000 a year pension after serving less than four years in the Legislature. He announced that he would donate the pension to his church.

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 12 Dec 11