A six-part Bloomberg News investigative series that began last week found that California has the nation’s highest-paid state workers. Pensions could have been added to the lucrative list.
State pensions were boosted by the same forces cited in the series that pushed up pay. But while the high wages, overtime and lump sum payouts revealed by Bloomberg may continue, pensions for new hires will be cut beginning Jan. 1.
Gov. Brown, urging action to aid voter approval of a major tax increase, persuaded a Democratic-controlled Legislature to impose cost-cutting pension rollbacks for new employees of the state, schools and most local governments.
As the stock market boomed more than a decade ago, creating state budget and pension fund surpluses, the first Democratic governor in 16 years, Gray Davis, faced a pent-up demand to boost pay and pensions held down by his Republican predecessors.
A bill sponsored by the California Public Employees Retirement System, SB 400 in 1999, gave active state workers a large increase in the promised pension, retroactive to the date of hire. Those already retired received a 1 to 6 percent pension increase.
Higher pensions spread to local government. The pension bill gave the Highway Patrol a trend-setting 50 percent increase (from 2 percent of final pay for each year served at age 50 to 3 percent at 50) and authorized local police to bargain for the same formula.
Another bill, AB 616 in 2001, added three high-end formulas for most local government workers. CalPERS told legislators investment earnings would cover SB 400 state costs and offered to inflate investment values to help pay for higher local pensions.
Experts say pension comparisons are difficult because of variables: formulas, pay factors, retirement ages, worker contributions and whether Social Security is received in addition to pensions (common in California except for police, firefighters and teachers).
In one of the few professional comparisons, the Legislative Analyst’s Office said California had the most generous typical state worker pensions of 15 states surveyed in 2004, based on starting at age 34 and retiring at age 55 with $60,000 final pay.
“For longer term employees or those covered by particularly generous formulas at the local level, some can receive more annual income in retirement than when they worked,” said the analyst’s budget“Perspectives and Issues” for 2005-06.
Most state workers have a SB 400 formula, “2 at 55,” that provides a pension equal to 100 percent of pay after 40 years of service, CalPERS benefit charts show. One of the local government formulas, “3 at 60,” provides 120 percent of pay after 40 years.
In addition to the pension, the typical state worker receives federal Social Security. Eligibility for retiree health care, which includes dependents, begins after 10 years of service and reaches full coverage after 20 years.
State workers can boost pensions by buying up to five years of “air time” service credit. Only California uses one year’s pay to calculate pensions instead of three years, getting the highest base and enabling pay manipulation to boost or “spike” pensions.
A Sacramento Bee investigation in 2004 found that the one-year rule was a last-minute addition to a state budget agreement in 1990, the price of approval from unions concerned that accounting changes might shrink retirement benefits.
“The one-year pension rule became law with little fanfare,” the Bee reported. “Yet workers who retired in the past four years have received 5 percent more in pensions than they would have under a three-year system.”
State workers hired before Jan. 1 will continue to get current pensions, regarded as “vested rights” protected by contract law under a series of long-standing court decisions, which allow cuts only if offset by a new benefit of equal value.
After Jan. 1 new employees covered by the reform, AB 340, will get a pension that drops back toward the national average. The legislation affects CalPERS, CalSTRS and 20 county systems, but not UC retirement and independent big-city systems.
Formulas are reduced to the pre-SB 400 level or lower, retirement ages extended, “air time” eliminated, “spiking” curbed and pensions are capped at up to 120 percent of the maximum income taxable for Social Security, $136,440 next year.
A pension collected by a city of Vernon official, Bruce Malkenhorst, reached $540,876 a year before CalPERS cut it to $115,848 last May. The “$100,000 club” posted by a pension reform group has 12,338 CalPERS members and 6,609 CalSTRS members.
The reform calls for an equal employer-employee split of “normal” pension costs, the amount actuaries say covers pensions earned during a year. Employers will continue to pay all of any “unfunded liability” or debt from previous years, the major pension risk.
Most current state workers are paying half the normal cost, 9 percent of pay for most. The state payment is more than twice that amount because of the large unfunded liability.
For roughly a third of state workers, who are not currently paying half the normal cost, the reform legislation will increase their contribution to CalPERS by 1 to 3 percent of pay over the next two years.
The SB 400 pension formula that has received the most public attention is “3 at 50” for the Highway Patrol, capped at 90 percent of pay. The formula set a new benchmark for labor bargaining and became widely used for local police and firefighters.
These safety workers are a big part of local government budgets. Arguments that public pensions are “unaffordable” and “unsustainable” sometimes cite the “3 at 50” formula as an example of excessive retirement benefits.
The reform legislation authorizes three formulas for new safety employees: “2 at 57,” “2.5 at 57” and “2.7 at 57.” The three levels are intended to be lower versions of current state safety formulas that vary with the level of responsibility.
An example might be the Highway Patrol, correctional officers and nurses in correctional facilities. Employers must offer new hires the formula closest to the one for current employees in the same classification, with a lower benefit at age 55.
Labor bargaining that moved employees up the old formula menu is still allowed for new safety workers — but only for a lower formula on the new three-level menu, not for an increase.
The legislation authorizes a single formula for new non-safety employees in CalPERS and the county systems, “2 at 62,” lower than the “2 at 55” for most current state workers and lower than the “2 at 60” bargained for new state hires two years ago.
The new formula for non-safety employees moves the earliest retirement age to 52, up from 50 under the old formula. The new “2 at 62” formula provides 1 percent of pay for each year served at age 52, reaching a maximum 2.5 percent at 67, up from 63.
The reform gives new members of the California State Teachers Retirement system a “2 at 62” formula, lower than the current “2 at 60.” The earliest retirement is at age 55 with 1.16 percent of pay per year served and a maximum of 2.4 percent at age 65.
CalSTRS savings under the officially titled Public Employees Retirement Act (PEPRA) are projected to be $22.7 billion over 30 years. CalPERS savings are projected to be $43 billion to $56 billion over 30 years.
–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/