If the Legislature attempts pension reform this month, one of the targets may be “air time,” a decade-old policy that allows CalPERS and CalSTRS members to boost their pensions by buying up to five years of additional service credit.
Another older but also colorfully named policy, the “golden handshake,” allows management to encourage early retirement by boosting pensions with two years of additional service credit.
Some regard air time as an abuse, even though employees make a payment that is supposed to cover the cost. There is the question of fairness, a benefit not available to all citizens, and of taxpayer risk if long-term investment earnings are below the forecast.
The golden handshake, with employers presumably paying the cost, has the same investment risk and often is offered only to higher-paid employees. The CalPERS version also gets competition from a private firm, Public Agency Retirement Services.
Air time and the golden handshake were linked in a bill veto message in 2003 by former Gov. Gray Davis, who signed a major state worker pension increase, SB 400 in 1999, criticized for triggering unsustainable pension increases throughout the state.
Davis vetoed a labor-backed bill, AB 457, that expanded the golden handshake beyond management, added two years of retirement age to the two years service credit, eased the payment schedule and softened cost-saving job vacancy requirements.
The goal of the bill was to make the golden handshake, which had few takers the previous year, attractive enough to avoid a budgeted $470 million cut in state worker pay by allowing the gap to be closed on paper, even if the savings were likely to fall short.
The veto message said the bill could result in employers paying to hasten retirements that would have happened without the incentive or delay the retirement of employees who wait for a golden handshake.
“At any rate, I have already signed AB 719 and AB 55 this year, which would allow state and local government employees to purchase up to five years of service to enhance retirement benefits,” Davis said in the message. “These benefits will encourage early retirement at no cost to the public employer.”
The two bills in 2003 authorized air time for the California Public Employees Retirement System and the 20 county systems operating under a 1937 act. Davis vetoed a county air time bill the previous year because an amendment added legislative employees.
“This bill confers a special benefit on legislative employees not available generally to all state employees,” Davis said in his veto message of AB 2004 in 2002.
Air time is said to have its roots in the federal Taxpayer Relief Act of 1997, which allowed savings in tax-deferred retirement plans such as the 401(k) to be used to purchase service credits in public pensions.
At the California State Teachers Retirement System, legislation in 1997 allowing the purchase of service credits for years in an out-of-state public school was expanded by SB 2126 in 1998 to allow air time purchases.
Service credit in CalPERS can be purchased for military service and leaves of absence — about 52 different things, said a memo to the board this week on members being advised to use an on-line cost estimator before asking staff for a cost estimate.
The federal tax law allows the purchase of up to five years of credit for “non-qualified” service. A legislative bill analysis said this became known as “air time” because it does not correspond to any service actually performed.
CalPERS calls air time “Additional Retirement Service Credit.” CalSTRScalls air time “Nonqualified service credit.”
Air time is expensive (CalPERS raised the rates last year) and not widely purchased. In a system with 1.1 million active and inactive members, 47,000 had purchased air time by last September, CalPERStold the Los Angeles Times in February.
Since then, there have been 8,000 requests for estimates of the cost of purchasing various types of service credit, CalPERS said last week. How many were for air time was unavailable, but recently about 44 percent of requests have resulted in purchases.
Among the roughly 430,000 active CalSTRS members, a spokeswoman said, 859 purchased $46.6 million worth of air time in fiscal 2010-11, up from 709 and $38.4 million in 2009-10 and 748 and $39.3 million in 2008-09.
Air time purchases yield a lifetime monthly retirement payment, with no risk of investment losses, based on a pension fund earnings forecast, now 7.5 percent, said by critics to be overly optimistic in this era.
“It’s a tremendous investment,” said Dan Pellissier, president of California Pension Reform, a former gubernatorial and legislative aide who purchased air time. “I think all of the investment advisers say it’s a no-brainer.”
The golden handshake that adds two years of service credit was received by 211 CalSTRS members retiring in fiscal 2010-11, a year when 13,896 members retired. CalPERS had no specific information on golden handshakes.
A report last August said among the 3,033 local governments in CalPERS there were 10 golden handshake contract amendments in fiscal 2005-06. The number jumped to 35 in fiscal 2008-09, 43 in 2009-10 and dropped to 22 in fiscal 2010-11.
In the San Bernardino bankruptcy, a staff report last month outlined the CalPERS golden handshake as a way to cut costs, if vacancies created by early retirement are left open or filled by employees with lower pay and benefits.
The report also made a pitch (page 25) for a golden handshake plan provided by Public Agency Retirement Services, which the city used in the past for public safety early retirements.
“The PARS early retirement program goes far beyond the limitations of the PERS option and it is far more flexible,” said the San Bernardino report, calling PARS the “third largest multiple employer public retirement system in California.”
The firm in Newport Beach offers a retiree health care prefunding program like CalPERS, alternatives to Social Security for part-time and temporary workers, defined benefit pensions and 401(k)-style defined contribution plans.
“Since 1984, the PARS team has designed and delivered over 1,100 individually customized solutions that have cumulatively saved over 600 public agency clients hundreds of millions of dollars,” said thefirm’s website.
As the Legislature began its summer recess early last month, air time was one of the issues mentioned in a Sacramento Bee story about pension reform talks between Democratic legislators and Gov. Brown.
When the Legislature returned last week for the final month of the session, the Bee said Senate President Pro Tempore Darrell Steinberg, D-Sacramento, gave this reply when asked what pension issues still need to be hammered out:
“Same issues really, the kind of cap, whether or not you have a hybrid, the extent to which all of these changes apply to local governments, what parts and what is left to collective bargaining at the local level. Pre-emption is not an issue.”
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/