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Pension reform: A third of state workers pay more

Without the usual bargaining with unions, a new pension reform raises the amount roughly a third of state workers pay toward their pensions, an increase of 1 to 3 percent of pay over the next two years.

The small bite from worker paychecks, authorized by a broad reform approved by the Legislature and awaiting Gov. Brown’s signature, is for state workers not already paying half the “normal” cost of their pensions, a new standard set by the bill.

There has been little public mention of the increase imposed on current workers and apparently no protests from unions, which tend to view any reduction in pension benefits after the date of hire as a violation of “vested” rights protected by contract law.

Most of the cost-cutting structural changes in AB 340 are for new hires with no vested rights: lower pension formulas that roll back higher pensions granted a decade ago in the SB 400 era, extended retirement ages and a cap on pay that sets pension amounts.

In contrast to the treatment of state workers, the bill uses the bargaining process to increase the pension contributions of current workers in the 1,573 local governments that, like the state, are in the giant California Public Employees Retirement System.

Employers are given five years to bargain employee contributions that are 50 percent of the “normal” cost. Then in 2018 an equal cost share may be imposed (it’s not mandatory) through a bargaining impasse including mediation and fact finding.

Why does the bill, prepared in private by the Brown administration and Democratic legislators and quickly passed with little explanation, respect the bargaining process for local government employees but not for state workers?

Several union officials and their representatives declined to comment. The president of a statewide organization representing public safety employee said the answer may be in the state laws authorizing bargaining.

Local government public employee unions operate under the Meyers-Milias Brown Act of 1968. State employee unions operate under a different law enacted a decade later, the Dills Act of 1977.

“In some conversations it was mentioned that this (an employee contribution increase without bargaining) may be doable for state employees,” said Ron Cottingham, president of the Peace Officers Research Association of California.

Former Gov. Arnold Schwarzenegger had to use a record state budget deadlock, lasting 100 days after the fiscal year began on July 1, 2010, to get the largest state worker union to agree to an employee contribution increase and lower pensions for new hires.

Several smaller state worker unions refused to settle with the Republican governor, waiting until Brown, a Democrat, took office last year. The increased employee contributions helped cut $400 million from the annual state CalPERS contribution.

The nonpartisan Legislative Analyst’s Office said much of the long-term savings from the employee contribution will be offset by pay raises at the end of the new labor contracts.

In this way, the agreements negotiated during bargaining loosely follow the widely held view that a series of court rulings mean that public pensions can’t be cut without providing another benefit of equal value.

If higher contributions for current workers and lower pensions for new hires can be imposed on state workers without bargaining, why did Schwarzenegger (see his new $250,000 pickup truck) resort to a painful and costly budget deadlock?

The Republican governor arguably would have had difficulty getting the Democratic-controlled Legislature to impose a pension cut on their public employee union allies without an agreement.

Brown was in a different political situation. He and others argue that pension reform is needed to aid passage of the governor’s tax initiative on the November ballot, Proposition 30, which has union support.

Voters presumably are more likely to approve a tax increase if they have some assurance that the state is trying to control spending and that new tax revenue will not be eaten up by soaring pension costs.

It’s not publicly known to what extent, if any, unions were involved in the private negotiations between the Brown administration and Democratic legislators that produced AB 340. But union interests were not totally ignored:

1) The contribution increases imposed on current state workers are relatively small and create equity with the roughly two-thirds of state workers who already pay half the “normal” cost of their pensions.

2) Employees are not asked to help employers pay for the large “unfunded liability,” the shortfall from previous years mainly due to investment earnings that fall short of the target, now 7.5 percent for CalPERS.

The “normal” cost is the actuarial estimate of the annual employer-employee contribution needed to pay for pensions earned during the year, along with investment earnings expected to cover about two-thirds of the total cost for CalPERS.

For example, last year the “normal” cost for state miscellaneous workers was 14.4 percent of pay. The worker contribution was 8 percent of pay. Employers contributed more than twice that amount, 18.2 percent, due to the large “unfunded liability.”

If some local government officials are at sword’s point with unions, the bill protects employees from an attempt to impose contributions to help pay for the “unfunded liability.”

The contribution that may be imposed through the impasse procedure is capped at 8 percent of pay for most employees, 11 percent for “safety” workers and 12 percent for police and firefighters. The local caps reflect current state worker “normal” costs.

3) The bill provides two small pension boosts, loosely following the legal view that pension benefits cannot be reduced without providing an offsetting benefit — at least in spirit if not the math of gains and losses.

Local government safety employees (police, firefighters and others), who currently qualify for an “industrial disability” payment providing 50 percent of salary, could receive a reduced pension paying more before reaching minimum retirement age.

A CalPERS analysis said the “improved industrial disability retirement (IDR) for safety members” is expected to reduce the savings from AB 340 by about $500 million to $1 billion over the next 30 years.

The bill eliminates the Alternate Retirement Program that since 2004 has put new state miscellaneous and industrial workers into a 401(k)-style plan during their first two years on the job.

The state saved by not making the employer contribution. Ending the program, which was intended to offset the cost of a never-issued $949 million pension bond, also is expected to reduce the reform bill’s savings by $500 million to $1 billion over 30 years.

The total AB 340 savings for the CalPERS state, local government and non-teaching school plans over the next 30 years is estimated to be $43 billion to $56 billion, which is $12 billion to $15 billion when adjusted for inflation.

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/


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