Pension reform savings: $40 billion to $60 billion

A pension reform plan worked out by Gov. Brown and Democratic legislators could save state and local government employers $40 billion to $60 billion over the next 30 years.

The preliminary CalPERS estimate, which will be refined before the Legislature votes on the plan Friday, expects most savings to come from two cost-cutting strategies used in labor negotiations: lower benefits for new hires and higher employee contributions.

Instead of negotiations, the plan simply imposes lower pension formulas on new employees in CalPERS and CalSTRS and authorizes employers, if there is no agreement, to use bargaining impasse to raise employee contributions to half of the “normal” cost by 2018.

“I do not know what portion of the savings are due to increased member contributions,” Alan Milligan, the CalPERS chief actuary, told the board yesterday. “I do know that the two biggest pieces of that savings are the benefit changes and the member contribution changes.”

Brown issued a 12-point pension reform plan last October that was opposed by unions. He proposed a “hybrid” plan for new hires aimed at replacing 75 percent of final pay with a smaller pension, a 401(k)-style plan and Social Security.

The plan replaces the hybrid with the lower pension formulas and a cap on final pay used to calculate pensions. The cap is tied to the maximum income taxed for Social Security, now $110,100. For pay above the cap, employers can offer a 401(k)-style plan.

Savings from the cap are decades away, when the new hires retire, and the savings are expected to be limited. The pay of most state and local government employees is below the cap, which will grow with inflation.

When the plan surfaced Tuesday evening, some of the Democrats in the two-house committee that sent the bill (AB 340) to the legislative floors said one of its good points is the eventual elimination of the “100,000 club.”

A pension reform group has a website that lists the growing number of retirees with pensions of $100,000 or more from the California Public Employees Retirement System, the California State Teachers Retirement System and the UC Retirement plan.

CalPERS says only 2 percent of its retirees receive pensions of $100,000 or more. Some big pensions are connected to scandals. After reviews, CalPERS reduced several pensions in the troubled cities of Bell and Vernon, one paying more than $500,000 a year.

The plan excludes UC Retirement and charter cities and counties, a nod to their independence. Reports that the plan would override pension reforms approved by San Jose and San Diego in June drew heated objections from the two big cities.

Assemblyman Warren Furutani, D-Gardena, said the governor, hoping for action later, asked that two of his points not be included: curbing retiree health care costs and restructuring pension boards to increase independence and financial sophistication.

By Furutani’s count, the plan has 10 of the governor’s original 12 points, including curbs on “spiking” to boost pensions, “double-dipping” by having a government pension and a government job, and the “air time” purchase of service credits.

Skeptics thought pension reform, if any, might be limited to curbing abuses and other minor changes. But bypassing collective bargaining and imposing lower pensions on new hires and higher contributions on current employees are not small steps.

“If the Legislature approves these reforms, public retirement benefits will be lower than when I took office in 1975,” Brown said in a news release Tuesday, referring to his first term as governor.

The release said the plan increases retirement ages by two years or more for new hires and “rolls back the unsustainable retirement benefit increases granted in 1999” by a CalPERS-sponsored bill, SB 400.

Among other things, the bill gave the Highway Patrol a “3 at 50” pension formula, three percent of final pay for each year served at age 50. The new plan changes “3 at 50” to “2.7 at 57.”

Critics say SB 400 became a trendsetter, boosting police and firefighter pensions throughout the state as labor negotiators argued that benefits must be increased to compete with other government employers.

At the two-house committee, Sen. Joe Simitian, D-Palo Alto, recalled that a League of California Cities official told a hearing statewide benefit “boundaries” would ease competitive pressure, a change from the league’s usual advocacy of local control.

The new plan would impose a “2 at 62” formula on most new hires, who are classified as “miscellaneous.” The nearly 1,600 local governments in CalPERS can choose from six miscellaneous formulas, ranging from “2 at 60” to “3 at 60.”

Most of the local governments in CalPERS, 51 percent, have a “2 at 55” formula, increasing to “2.4 at 65.” About 30 percent have three higher formulas (“2.5 at 55,” “2.7 at 55” and “3 at 60”).

Imposing the new “2 at 62” plan and extending retirement ages, with a sliding scale that makes the earliest retirement “1 at 52” and the maximum “2.5 at 67,” would be a major pension cut for cities using the higher formulas.

A CalPERS report yesterday said the average miscellaneous state worker retires at age 60 with 23 years of service. The “2 at 55” formula gives this average retiree 53 percent of pay, “2 at 60” provides 46 percent and “2 at 62” drops to 41.5 percent of pay.

The local governments in CalPERS and schools are likely to feel the most impact from having new and current employees pay half the “normal” cost, the pension expense that does not include paying off the “unfunded liability” from previous years.

Milligan said most state worker contributions have been raised in recent years. Last year, for example, miscellaneous state workers contributed 8 percent of pay, more than half the 14.4 percent normal cost, and state employers contributed 18.2 percent.

“Relative savings are greater for the public agencies (local governments) and the schools,” said Milligan.

If the contributions of local government workers and non-teaching school employees go up, employer contributions can go down by a similar amount. Recent increases in state worker contributions are saving the state about $400 million a year.

The new plan authorizes employer savings to be used to pay down pension “unfunded liabilities” or debt. But the Legislature would have to make an annual appropriation.

The plan was praised by two former Republican gubernatorial and legislative aides on the CalPERS board. “A great step forward,” said Richard Costigan. “I applaud the governor and Legislature for bringing this issue forward,” said Dan Dunmoyer.

Said board member J.J. Jelincic, a former state worker union president: “The California public sector has joined the race to the bottom.”

The CalPERS board issued a statement that said in part: “The bill passed by the Committee proposes significant reforms, and as with most changes of such dramatic size and scope, there will be very few people who will be pleased with all of the bill’s details. Some will say it does not go far enough, and others will say it goes too far.”

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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/&nbs
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