Budget woes driving plans to cut government pensions, health care

The pensions and health care of millions of retired government workers is coming under increasing scrutiny in cash-strapped California, not only by the governor and lawmakers looking to erase red ink, but at the ballot box in form of proposed initiatives.

But tinkering with public pensions and retirees’ health care is fraught with political peril.

Public-employee unions are strongly Democratic, can marshal thousands of grass-roots campaign volunteers and can contribute tens of millions of dollars on behalf of their political battles. The advocates for downsizing pensions, benefits and pay, also well-heeled, have been led by anti-tax and anti-union groups and small-government advocates.  

The fiercest advocates in the pension-reform battle say the issue is pocketbook, not politics. But the purely political dimension of the on-going fights between unions, who traditionally back Democrats, and businesses and anti-tax advocates, who frequently support Republicans, is never far from the surface.

More than 4 million Californians – about 11 percent of the state’s population – are members of one or more of the state’s 134 public retirement systems, according to a December 2009 report to the state attorney general by the Legislative Analyst’s Office. At the state level, a government office worker typically qualifies after five years of service for a defined-benefit pension at age 55 equal to 2 percent of the worker’s highest annual salary, and after 25 years, the worker can retire at half-pay.  Some classes of government employees, including some peace officers and fighters, have a 3 percent factoral. One pension initiative would cut that to 2.3 percent, and cut the other workers’ 2 percent level to 1.65 percent.   

Across the state, governments contribute about $13 billion annually to public retirement systems, the LAO said. About $5 billion is paid for retirees’ health care benefits.

The LAO’s comments were contained in an analysis of an initiative pushed by John Romano, an advocate of limiting public pensions.

Two other proposed ballot initiatives have been proposed by the California Foundation for Fiscal Responsibility, a non-profit political organization that describes itself as “committed to educating the public and key decision makers about California public employee retirement benefit issues and developing fiscally responsible solutions that are fair to employees, employers and taxpayers.”

Romano seeks to bar new government pensions above $100,000 for the first year, then adjusted to cost-of-living increases pegged to the California Consumer Price Index. No pension, however, could ever get larger than $162,500. The only way the provisions could be changed is with a three-fourths vote of the Legislature or through voter approval.

The CFFR seeks to boost the mandatory retirement age, in part to conform with federal Social Security rules – no earlier than 62 years of age – and limit increases in retirees’ compensation and retirees’ health-care costs. In effect, it would set up a two-tier retirement system in which the benefits of new employees would be less than those of current employees.

About 4,900 public-sector retirees have pensions of $100,000 or greater, according to the LAO, or about 1 percent of the 490,000 retirees currently receiving pension checks.

The figures are daunting, and offer ample ammunition for critics of state and local pension systems, who hope to collect enough signatures on petitions – they need nearly 700,000 valid signatures to qualify the measure for the November ballot.

“California’s huge legacy retirement costs have been aggravated by pension benefit enhancements granted to public employees over the last 10 years combined with average pay increases of 50 percent both at the  to 70 percent at the state level and among local agencies,” said CFFR President Marcia Fritz.

“Actuaries did not anticipate wage hikes of this magnitude, nor did they expect the market losses that have seriously reduced the value of pension assets set aside to pay for pension benefits,” she added.

CFFR’s Web site is CaliforniaPension, whose advisory board includes anti-tax activist Lew Uhler, Jon Coupal of the Howard Jarvis Tax Reform Association and Ted Costa of Peoples Advocates.

Since only about 1 percent of the retirees getting pension checks receive $100,000 or more, the potential impact of capping the pension is relatively insignificant, at least initially, state fiscal analysts say. But as time goes on, and as more employees retire under the new system, the impact would be greater. “A few decades after this measure’s passage, its pension limitation provisions would apply to the majority of public employees,” the LAO said.

“Several decades from now, these savings could total in the billions of dollars per year.”

Editor’s Note: Corrects 7th graf to show that LAO is referring to Romano initiative, not CFFR initiatives.

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