CalPERS sponsored legislation resulting in more generous city police and firefighter pensions, SB 400 in 1999, a well-known issue in the debate about whether growing pension costs are “unsustainable.”
But CalPERS also backed legislation, AB 616 in 2001, giving most local government employees the option of bargaining for generous pensions once limited to police and firefighters, who face hazardous duty and may need to retire early from their physically demanding work.
The “3 at 50” pension for police and firefighters in SB 400, which provides 3 percent of final pay for each year served at age 50, is capped at 90 percent of final pay. There is no cap on the three AB 616 pension formulas.
The most generous of the three AB 616 formulas for non-safety or “miscellaneous” employees, “3 at 60,” provides a pension at age 60 that is 90 percent of final pay after 30 years of service and 120 percent of pay after 40 years of service, according to a CalPERS benefit chart.
Why provide a monthly pension payment that is higher than the monthly paycheck earned on the job?
“The 3% at age 60 formula encourages skilled workers with invaluable experience to stay in their jobs longer,” said a CalPERS analysis of AB 616. “If public agencies are willing to pay for the higher formulas in order to increase the benefits they provide to their employees, they should be allowed to do so.”
Another CalPERS analysis of the bill said it could be argued, on the other hand, that the “enhanced benefit” provided by the “3 at 60” formula, which begins with 2 percent of final pay at age 50, will “encourage earlier retirement for some employees.”
All three of the AB 616 local government formulas, including “2.5 at 55” and “2.7 at 55,” are more generous than the “2 at 55” formula received by most state workers hired before a pension reform on Jan. 1, 2013.
CalPERS calls employees hired before the reform “classic” members. Employees hired after the reform have a cost-cutting miscellaneous pension formula, “2 at 62,” and are called “PEPRA” members, the abbreviation for Public Employees Pension Reform Act.
Like most CalPERS miscellaneous formulas the “2 at 55” received by state workers is uncapped. At age 60 with 40 years of service the formula provides a pension of 90.48 percent of final pay, much less than the 120 percent provided by the “3 at 60” formula.
How many CalPERS members retire with pensions of 100 percent or more of their final pay? A poorly worded Calpensions public records act request to CalPERS last year yielded 2,217 names with no time frame, employer or pay and pension amounts.
About 40 percent of the local government CalPERS classic miscellaneous plans provide the three AB 616 formulas. According to a CalPERS public agency summary 112 plans are “3 at 60,” 276 plans “2.75 at 55,” and 242 plans “2.5 at 55.”
As an incentive to adopt the more generous AB 616 formulas, CalPERS offered to ease the cost for local governments by inflating the value of their investment funds from 90 to 95 percent of market value, drawing opposition from the chief actuary then, Ron Seeling.
As the sponsor of SB 400, CalPERS gave legislators a 17-page pamphlet with a quote from the CalPERS president then, William Crist. He said the pension increase would not cost “a dime of additional taxpayer money,” a phrase often cited later as employer rates soared.
A legislative analysis of SB 400 said CalPERS expected the state employer rate to “remain below the 1998-99 fiscal year for at least the next decade.” Not mentioned in the pamphlet or legislative analysis was a word of caution from CalPERS actuaries.
One SB 400 scenario given the CalPERS board in June 1999 showed that if investment earnings averaged 4.4 percent, instead of the 8.25 percent forecast, the artifically low annual $159 million state payment to CalPERS could soar to $4 billion in a decade, which happened.
Last month a pension sustainability study by Bartel Associates actuaries for the League of California Cities said the “most prominent source” of CalPERS cost escalation began with state and local “enhanced pension benefits” granted following SB 400 and AB 616.
“Cities throughout California followed the state’s lead in providing enhanced benefits and, when negotiated, statute required those enhanced benefits apply to both prior and future service,” said the Bartel study.
“These enhanced benefits have caused a ripple effect that have fundamentally altered the way in which local agencies can retain employees and provide basic and critical services to the public.”
Over the next seven years, the study found, city CalPERS costs will increase more than 50 percent and reach 15.8 percent of the average general fund, nearly doubling from 8.3 percent a decade ago and forcing revenue increases or service cuts.
Four other factors were cited in addition to more generous pensions: investment losses, automatic cost-of-living adjustments, a policy that delayed payment of debt or “unfunded liability,” and a demographic change causing debt for retirees to exceed debt for active workers.
Among “classic” employees hired before the reform the study found a costly gap between projected CalPERS rate increases for those with pensions increased or “enhanced” after SB 400 and AB 616 and those with “unenhanced” pensions.
When a big rate increase is fully phased in by fiscal 2024-25, the average CalPERS rate for “safety” or police and firefighters with enhanced pensions is projected to be 60.3 percent of pay, far above the rate for unenhanced pensions, 37 percent. (see chart above)
A smaller rate gap is projected in seven years for classic non-safety or “miscellaneous” employees: an average 36.7 of pay for pensions enhanced by the AB 616 formulas, compared to an average rate of 28.1 percent for unenhanced pensions. (see chart at bottom)
As a booming stock market gave CalPERS a surplus at the end of the century, equity was a leading argument for raising pensions. The 17-page pamphlet for SB 400 was titled: “Addressing Benefit Equity: The CalPERS Proposal”.
A reform gave state workers hired after July 1, 1991, a lower formula, “1 at 60,” than the “2 at 60” formula received by state workers hired earlier. The inadequate lower formula hurt recruitment, said the pamphlet, and side-by-side state workers doing the same job received different benefits.
Another inequity, said the pamphlet, was that two-thirds of CalPERS local government members received a “2 at 55” pension, more generous than the state worker formulas. In small type on three pages the pamphlet listed nearly 400 local governments with a “2 at 55” formula.
SB 400 gave most state workers a retroactive “2 at 55” formula, retirees received a one-time permanent pension increase of 1 to 6 percent, and the Highway Patrol received the “3 at 50” formula that also was made available to local governments.
Two years later the equity argument was used again. Backers of AB 616 said local safety employees were enabled by SB 400 to negotiate a 50 percent increase in their pensions, while local miscellaneous workers were not offered a similar benefit increase.
“This bill seeks to provide a local option formula for these members that would increase their retirement benefits by 33 percent,” said a legislative analysis of AB 616.
Now there is a new equity issue. The PEPRA reform cost-cutting formulas for new hires, “2 at 62” for miscellaneous and “2.7 at 57” for top safety, are less generous than the pensions received by classic state and local government employees under SB 400 and AB 616.
The League of California Cities “sustainability principles” call for a “single benefit level for every employee” and converting employees in pre-reform or classic plans to PEPRA formulas for work they do in the future.
As cities opposed more employer rate increases last fall, officials from Hanford and Benicia told the CalPERS board some of their unions are willing to negotiate switching to lower-cost pensions, but current state law does not allow it.
“Currently, the Public Employees’ Retirement Law (PERL) provides different benefit formulas for pre-PEPRA (i.e. Classic) employees,” Amy Morgan, CalPERS spokeswoman, said via email.
“Any modification in benefit design would require legislation and will be analyzed in accordance with contact clause of the state and federal constitutions. CalPERS administers pension benefits in accordance with the PERL.”
The state Supreme Court has agreed to hear appeals of two cases pension reformers hope will weaken or eliminate the “California rule,” a series of court decisions said to mean the pension offered at hire can’t be cut without providing a comparable new benefit.