California group moves to put pension overhaul on 2012 ballot

Thursday, November 10, 2011

Chronicling civil-service life for California state workers
THE SACRAMENTO BEE

November 2, 2011

California group moves to put pension overhaul on 2012 ballot

California’s current and future state and local employees would pay more for their pensions under two ballot initiative proposals submitted to the state attorney general today with the intent of putting one of them to a statewide vote next year.

“Seventy percent of voters think it’s time,” said Dan Pellissier, president of California Pension Reform, referring to public opinion polls on public pensions.
His group, which includes a former chairman of the California Republican Party, Duf Sundheim, former GOP Assemblyman Roger Niello, Marcia Fritz, president of the Citrus Heights-based president of the California Foundation for Fiscal Responsibility, and Schwarzenegger finance director Mike Genest, is filing the measures for an official ballot title and summary today, less than a week after Democratic Gov. Jerry Brown rolled out a pension October 27th.

Once the measures are labeled, summarized and packaged with fiscal impact analyses from the state’s Department of Finance and the Legislative Analyst’s Office, the pension reform group will conduct polling, select one proposal and launch a signature collection campaign to get it on the November 2012 ballot.

“We admire the governor’s tenacity, but we have little faith that the Legislature will adopt anything of substance,” Pellissier said in an interview with The Bee. “And we fill in some of the gaps” in the governor’s proposal.

The largest, say critics of Brown’s plan, is that the governor’s plan only makes current costs cheaper and skips the more difficult task of paying down down the unfunded liabilities that pension systems have built up in the last decade. Estimate on how the spread between the funds’ assets and their obligations vary widely. The worst-case scenarios peg the obligations at $500 billion for California’s three largest public pension funds.

California Pension Reform’s first ballot proposal, dubbed the “Government Employee Pension Reform Act of 2012, Option NO.1,” prohibits pension funds from incurring new debts or unfunded liabilities. “Defined contribution plans would be the most likely option” for new workers, according to the proposal’s language, “though defined benefits and annuities underwritten by third parties would be allowed.”

The plan caps employer contributions for new employees’ retirement accounts at 6 percent of base pay for non-safety workers and 9 percent for safety employees such as police and firefighters. Employees would have to make up the difference.

Current employees and employers would split contributions equally under Option NO.1 unless the value of a fund’s assets fell below 80 percent of its obligations. Then the 6 percent and 9 percent employer contribution caps would kick in for everyone until the fund’s asset values regained the 80 percent funding threshold. (This provision is also part of the second ballot initiative proposal.)

New employees who don’t participate in Social Security—public safety workers and teachers—would receive a guaranteed “replacement benefit” equal to the Social Security payment they would otherwise earn. Most would have to wait until 67 to receive the full benefit, just like Social Security. Full-career public safety workers would receive their full benefit at age 60, up from the current age of 50 OR 55.

Brown’s plan doesn’t nail down the full retirement age for police, firefighters and other public safety workers. Brown’s Labor Secretary, Marty Morganstern, said during a conference call with reporters last week that the administration hadn’t settled on an age.

Option NO.1 from the pension reform group also mandates that current and future employees’ pensions be calculated on a three-year average of an individual’s highest base wages. Brown’s plan includes that same anti-spiking provision, but restricts it to new hires.

Public employee unions and many legal experts believe that unilaterally downgrading any detail of pensions promised to current employees violates state and federal laws that protect property rights and contracts.

Pellissier said there’s wiggle room.

“We’ve spent a tremendous amount of money on legal fees. There’s a good legal case for changing benefits that are earned in the future,” Pellissier said. “We’re not going to spend a minute arguing about it. We’ll let the court decide. Tell it to the judge.”

Option NO.1 includes other provisions in Brown’s plan or versions of them, including a ban on retroactive benefit increases and a provision that prevents felons from collecting full government pensions if their crimes were connected with their public duties.

Like Brown’s plan, both proposals call for government employers and their employees to equally share the cost of retirement benefits. But the reform group’s plan puts a bigger burden on employees if their fund’s assets equal less than 80 percent of its obligations. If that happens, the government’s cost would be capped at 6 percent of an employee’s base pay while the worker’s contributions would increase to make up the difference until the fund recovers.

Unlike Brown’s proposal, neither of the reform group’s plans address “double dipping” that allows retirees to return to work and collect both a pension and a government paycheck. Nor do today’s proposals ban “pension holidays” that allow government employers to skip pension payments when their pension funds have more in assets than obligations.

Brown also wants to lengthen how long employees have to work to qualify for the state’s retiree health benefit subsidy. California Pension Reform’s proposals stick to pension policies.

“Government Employee Pension Reform Act of 2012, Option NO.2” is “a lot like the governor’s proposal,” Pellissier said, particularly its mandatory “hybrid” pension for new hires.

Hybrids combine a smaller defined benefit with a professionally-managed 401(k)-style defined contribution and Social Security. Option NO.2 provides a larger defined benefit component for employees who don’t participate in Social Security.

The federal government adopted a hybrid retirement plan for its employees in 1987. The policy benefits employers by cutting their contribution costs and making the expense somewhat more predictable. Employees bear the losses when defined contribution investments fall short.

The Option NO.2 hybrid intends to provide new hires with 75 percent of their working income after a full career. For safety workers, that would translate into 30 years ending at age 58, Pellissier said.

A full career for all other employees hired in the future would be 35 years, ending at age 67, the same as Social Security and Brown’s hybrid plan. Workers could retire five years earlier with a lesser benefit.