Capping big pensions: How much is too much?

Regents last week reaffirmed the use of a federal IRS cap on the amount of pay used to calculate UC pensions, an inflation-adjusted $250,000 limit this year that also is proposed in a bill capping the pensions of all new hires in state and local government.

A letter from 36 of UC’s highest-paid executives threatened a lawsuit because UC, allegedly breaking a promise made in 1999, did not lift the cap after federal approval finally came in 2007, the San Francisco Chronicle reported in December 2010.

The demand was criticized by Gov. Brown, faculty leaders and others. The executives issued the threat as UC regents approved a painful plan to begin closing a $21 billion retirement funding gap amid budget cuts, pay freezes and layoffs.

Big pensions were in the spotlight. An inflated-salary scandal had erupted in the city of Bell, the “$100,000 club” list of big pensions on a reform group’s website grew, and huge investment losses fueled debate about whether pensions are “sustainable.”

The UC demand prompted Assemblyman Jerry Hill, D-San Mateo, to introduce legislation requiring all pension funds to use the IRS limit. AB 89 was one of several bills held last year at the request of Brown, who wants sweeping pension reform this year.

Now a two-house legislative committee on pension reform, scheduled on April 13 to hold its fourth hearing, is expected to include a pension cap in its proposed legislation, even though a cap has not been specifically discussed so far.

Powerful unions oppose or are skeptical of Brown’s proposed cost-cutting structural changes: higher employee contributions, delayed retirement and a “hybrid” plan for new hires. But the unions support curbs on salary “spiking” and excessive pensions.

The nonpartisan Legislative Analyst’s Office and others have suggested that the inequity between public and private-sector security, much like rising employer costs, is a threat to the “sustainability” of public pensions.

Public employee unions support moves to bolster private-sector retirement such as Retirement USA. Unions and Democratic legislators back SB 1234 by Sen. Kevin de Leon of Los Angeles requiring businesses to put employees in a “personal” pension plan.

Big pensions can draw attention to the wide gap between retirement security for government workers and the private sector, where an estimated six million California workers have little or nothing in retirement plans beyond federal Social Security.

Leading the 12,199 members of the “$100,000 club” on the reform group’s California Public Employees Retirement System list of retireesreceiving pensions of $100,000 a year or more:

Bruce Malkenhorst, Vernon city administrator, $530,268; Joaquin Fuster, UCLA neuroscientist, $314,713, and Donald Gerth, CSU Sacramento president, $295,086.

Topping 5,259 retirees on the California State Teachers Retirement System list: James Enochs, Modesto elementary, $296,555; Fredrick Wentworth, San Joaquin County, $290,485, and Edward Hernandez Jr., Rancho Santiago Community College, $286,396.

The highest of the 1,642 on the University of California Retirement Plan list: George Miller, Lawrence Livermore National Laboratory, $270,075; Thomas Cesario, UC Irvine, and James Holst, UC general counsel, $237,129.

After the Los Angeles Times reported in July 2010 that officials of the small city of Bell were receiving some of the highest municipal salaries in the nation, CalPERS began a system-wide review of high pensions.

The Times reported last August that CalPERS had reviewed 2,250 pensions so far and reduced 329, “mostly because employers incorrectly reported employees’ pay.” No updated information was available from CalPERS this week.

Former Bell city administrator Robert Rizzo, once expected to get a $650,000 pension and a second pension boosting the annual total to more than $1 million, had his CalPERS pension slashed to $50,000, the Times said.

The pension of his assistant, Angela Spaccia, was cut to $43,000 from a projected $250,000. Rizzo and Spaccia have been charged with misappropriation of public funds and related crimes.

In addition, CalPERS, criticized for not sounding an alarm about big Bell pay raises, changed internal guidelines and formed a task force to look at pay disclosure, capping pay used to determine pensions and spreading pension costs among employers.

CalPERS and CalSTRS both say they use the IRS cap on pay used to calculate pension amounts. The pay limit under section 401(a)(17) of the Internal Revenue Code increased from $245,000 to $250,000 this year in an inflation adjustment.

UC Retirement, which went two decades without employer or employee contributions, was 132 percent funded in 1999 when the regents delegated authority to exceed two IRS pension limits, a move deemed “critical” for retention and recruitment.

A regent agenda memo last week said exceeding the 401(a)(17) pay limit depended on federal approval and the president receiving the approval of the chairs of the regents and finance committee.

When federal approval came in 2007, said the memo, the president and the chairs did not did not take the second step needed to launch the program. The pension fund surplus was eroding and the regents were considering restarting contributions.

The Chronicle said the 36 executives who signed the letter earned between $174,000 and $756,000 in 2009. Lifting the cap for all eligible employees could boost pension liability an estimated $5.5million a year, plus $51 million retroactive to 2007.

The regent action last week rescinded the conditional 1999 action and affirmed the pay limit cap, preventing more benefits from accruing if the cap is lifted. The UC executives have not yet filed a lawsuit.

With their other action in 1999, the regents approved a plan begun the following January that enables pensions to exceed the IRS section 415(m) limit on pension amounts, which increased from $195,000 to $200,000 this year.

The part of the pension above the $200,000 limit comes from a separate taxable trust fund. CalPERS and CalSTRS also are among the many public pensions that use “qualified” replacement plans to exceed the IRS limit on pension amounts.

In the CalPERS replacement benefit plan, employers make a taxable payment for the amount above $200,000. Then the employer payment to CalPERS is reduced by an equal amount.

Now there are at least four pension cap proposals in the Legislature — a wide range of possibilities for the two-house committee to consider, among other things, if it decides to propose a limit on pensions.

A bill, AB 1633, capping public pensions at $100,000, or $80,000 if the retiree receives Social Security, was introduced in February by Assemblyman Donald Wagner, R-Irvine. A few weeks later Hill reintroduced his bill, AB 1639, with the IRS $250,000 pay cap.

In March Assemblyman Luis Alejo, D-Salinas, introduced AB 2115 imposing a $173,987 cap on public pensions. A Salinas public hospital official will receive a retirement payment of nearly $4 million in addition to a $150,000 annual pension, the Los Angeles Times reported last year.

Brown’s 12-point pension plan, introduced by Republicans as SCA 18 and ACR 22, would give new hires a “hybrid” plan combining a smaller pension with a 401(k)-style investment plan.

The target for the cap on combined benefits in the gov
ernor’s hybrid plan is based on the Social Security earnings limit, $110,000 this year, and 120 percent of that amount if the retiree does not receive Social Security.

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Ed’s Note: 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/