California Gov. Jerry Brown proposed a 12-point pension reform plan on October 27 that he said goes as far as legally possible to reduce retirement benefits for state public workers and cut state pension costs in half.
Brown is attracting more interest and support for his proposal from Republican lawmakers and business groups than from Democrats and labor unions, who have been his strong supporters in the past. The plan contains elements sought by Republicans but opposed by state worker unions, especially increased employee contributions and a mandatory hybrid pension that would rely equally on a defined benefit from employers and employee investment in tax code Section 401(k)-type plans.
The governor is asking lawmakers to approve the package and agree to place it on the November 2012 statewide ballot. The ballot is necessary partly to ensure future legislatures cannot change pension benefits easily, and partly because some of the provisions require voter approval, Brown said.
Brown said his plan would apply mainly to newly hired workers across the public sector, including employees of the state, cities and counties, school districts, special districts, the university system, and judiciary branch. A few provisions, including the boost in employee contributions and a limit on double-dipping for retirees, would apply to current workers as well.
“What I’ve laid out is a minimum that I think everyone in California ought to meet,” Brown said.
If adopted, the plan would reduce current annual state costs from $1.8 billion to $900 million, according to Department of Finance Director Ana J. Matosantos. Long-term savings would be $4 billion to $11 billion over the next 30 years and $21 billion to $56 billion over the next 60 years. Savings to local governments would be roughly equivalent, she said.
Under the 12-point plan, all of the 3,100 public retirement systems in the state would:
- Increase employee contributions for new and current employees to at least 50 percent of the annual cost of their pension benefits. The amounts employees pay now vary, with state employees paying at least 8 percent of salary but many local government workers paying little or nothing of their salaries toward pension costs. Increased contributions would be phased in based on current contributions and collective bargaining agreements.
- Create a hybrid pension plan that would provide retirees with 75 percent of their salary, with one-third coming from a defined benefit portion of the plan, one-third coming from a Section 401(k)-type portion, and one-third coming from Social Security. Teachers and law enforcement employees who do not receive Social Security would get 50 percent from a defined benefit portion of the plan and 25 percent from a defined contribution portion. Brown also said his administration plans to cap defined benefit payments but is still crafting a specific proposal. Pension plans such as the California Public Employees’ Retirement System would manage the defined contribution investments for employees.
- Increase the retirement age for non-safety workers from 55 to 67, to conform to the current Social Security retirement age.
- Require pension benefits to be calculated based on the highest average annual compensation over three years, rather than the current one-year rule, to cut down on “spiking.” Spiking refers to practices designed to artificially inflate employees’ compensation in the years leading up to retirement and thereby boost their pension benefits.
- Limit retirees from returning to public employment and double-dipping with a pension and a salary by capping retirees at 960 hours per year of work for a public employer.
- Forfeit pension benefits for workers convicted of felonies related to performing official duties, seeking an elected office or appointment, or obtaining salary or pension benefits.
- Prohibit retroactive pension increases that give workers benefits they did not earn.
- Prohibit pension holidays in which employers suspend annual pension contributions they or their employees make when they are fully funded.
- Prohibit employees from purchasing service credit, or “airtime,” so they can retire earlier, which increases state costs.
- Increase independence and expertise on the CalPERS board by adding two independent, public members with financial expertise to the board of directors.
- Reduce retiree health care costs by increasing from 10 years to 15 years the length of service to be eligible for partial state payment of retiree health care premiums, and from 20 to 25 years to be eligible for the maximum state contribution for retiree premiums.
The plan would also enforce rules that require retirees to look to Medicare for coverage to the fullest extent possible. Together with the increase in retirement age to 67, the health benefits changes would reduce costs and massive unfunded liabilities for retiree health care benefits across state and local governments, according to the administration.
Brown said the plan goes as far it can without running afoul of constitutional protections of retirement benefits for current employees. 11.01.2011