This is the first of a wave of posts. The West Coast Labor Management Institute and the PAL (Partnership of Administration and Labor) Retreat have eaten up much of my spare time so I haven't been as diligent about writing as I should. As things start to settle in the aftermath of those two events I can catch everyone up on what's going on behind the scenes in ABCFT.
SACRAMENTO – Following is a statement by Dave Low, chairman of Californians for Retirement Security, about Gov. Jerry Brown’s pension proposals:
“We are disappointed that the governor is proposing pension changes that will undermine retirement security for public employees. It is unfortunate that he has proposed to increase the retirement age, shift greater costs to workers and impose a hybrid plan on new employees, when public employees already have agreed to hundreds of millions of dollars in pension concessions at the state and local level. Workers across California have negotiated contributing more to their pensions and two-tier benefits. We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining.
We will continue to work with the Governor and the Legislature on reasonable, common sense measures to sustain our state's retirement system. We will continue to act as partners with taxpayers in finding solutions to help rebuild our state’s working class. Our goal is simple. We must provide adequate retirement benefits, eliminate abuses and tackle fiscal realities in a balanced and fair manner.”
Here is the Governor's 12 point plan:
Twelve Point Pension Reform Plan
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October 27, 2011
The pension reform plan I am proposing will apply to all California state, local, school and other
public employers, new public employees, and current employees as legally permissible. It also
will begin to reduce the taxpayer burden for state retiree health care costs and will put California
on a more sustainable path to providing fair public retirement benefits.
1. Equal Sharing of Pension Costs: All Employees and Employers
While many public employees make some contribution to their retirement – state employees
contribute at least 8 percent of their salaries – some make none. Their employers pay the full
amount of the annual cost of their pension benefits. The funding of annual normal pension costs
should be shared equally by employees and employers.
My plan will require that all new and current employees transition to a contribution level of at
least 50 percent of the annual cost of their pension benefits. Given the different levels of
employee contributions, the move to a contribution level of at least 50 percent will be phased in
at a pace that takes into account current contribution levels, current contracts and the collective
bargaining process.
Regardless of pacing, this change delivers real near-term savings to public employers, who will
see their share of annual employee pension costs decline.
2. “Hybrid” Risk-Sharing Pension Plan: New Employees
Most public employers provide employees with a defined benefit pension plan. The employer
(and ultimately the taxpayer) guarantees annual pension benefits and bears all of the risk of
investment losses under those plans. Most private sector employers, and some public employers,
offer only 401(k)-type defined contribution plans that place the entire risk of loss on investments
on employees and deliver no guaranteed benefit.
I believe that all public employees should have a pension plan that strikes a fair balance between
a guaranteed benefit and a benefit subject to investment risk. The “hybrid” plan I am proposing
will include a reduced defined benefit component and a defined contribution component that will
be managed professionally to reduce the risk of employee investment loss. The hybrid plan will
combine those two components with Social Security and envisions payment of an annual
retirement benefit that replaces 75 percent of an employee’s salary. That 75 percent target will
be based on a full career of 30 years for safety employees, and 35 years for non-safety
employees. The defined benefit component, the defined contribution component, and Social
Security should make up roughly equal portions of the targeted retirement income level. For
employees who don’t participate in Social Security, the goal will be that the defined benefit
component will make up two-thirds, and the defined contribution component will make up the
remaining one-third, of the targeted retirement benefit.
The State Department of Finance will study and design hybrid plans for safety and non-safety
employees, and will fashion a cap on the defined benefit portion of the plans to ensure that
employers do not bear an unreasonable liability for high-income earners.
3. Increase Retirement Ages: New Employees
Over time, enriched retirement formulas have allowed employees to retire at ever-earlier ages.
Many non-safety employees may now retire at age 55, and many safety employees may retire at
age 50, with full retirement benefits. As a consequence, employers have been required to pay for
benefits over longer and longer periods of time.
The retirement age for non-safety workers in 1932, when the state created its retirement system,
was 65. The retirement age for a state highway patrol officer in 1935 was 60. The life
expectancy of a twenty-year old who began working at that time was mid-to-late 60s, meaning
that life expectancy beyond retirement was a relatively short period of time. Now with a growing
life expectancy, pensions will pay out not just for a few years, but for several decades, requiring
public employers to pay pension benefits over much longer periods of time. Under current
conditions, many years can separate retirement age from the age when an employee actually
stops working. No one anticipated that retirement benefits would be paid to those working
second careers.
We have to align retirement ages with actual working years and life expectancy. Under my plan,
all new public employees will work to a later age to qualify for full retirement benefits. For most
new employees, retirement ages will be set at the Social Security retirement age, which is now
67. The retirement age for new safety employees will be less than 67, but commensurate with
the ability of those employees to perform their jobs in a way that protects public safety.
Raising the retirement age will reduce the amount of time retirement benefits must be paid and
will significantly reduce retiree health care premium costs. Employees will have fewer, if any,
years between retirement and reaching the age of Medicare eligibility, when a substantial portion
of retiree health care costs shift to the federal government under Medicare.
4. Require Three-Year Final Compensation to Stop Spiking: New Employees
Pension benefits for some public employees are still calculated based on a single year of “final
compensation.” That one-year rule encourages games and gimmicks in the last year of
employment that artificially increase the compensation used to determine pension benefits. My
plan will require that final compensation be defined, as it is now for new state employees, as the
highest average annual compensation over a three-year period.
5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees
Where not controlled, pension benefits can be manipulated by supplementing salaries with
special bonuses, unused vacation time, excessive overtime and other pay perks. My plan will
require that compensation be defined as the normal rate of base pay, excluding special bonuses,
unplanned overtime, payouts for unused vacation or sick leave, and other pay perks.
6. Limit Post-Retirement Employment: All Employees
Retirement with a pension should not translate into retiring on a Friday, returning to full-time
work the following Monday, and collecting a pension and a salary. Retired employees often have
experience that can deliver real value to public employers, though, so striking a reasonable
balance in limiting post-retirement employment is appropriate. Most employees who retire from
state service, and from other CalPERS member agencies, are currently limited to working 960
hours per year for a public employer, and do not earn any additional retirement benefits for that
work. My plan will limit all employees who retire from public service to working 960 hours or
120 days per year for a public employer. It also will prohibit all retired employees who serve on
public boards and commissions from earning any retirement benefits for that service.
7. Felons Forfeit Pension Benefits: All Employees
Although infrequent, recent examples of public officials committing crimes in the course of their
public duties have exposed the difficulty of cutting off pension benefits those officials earned
during the course of that criminal conduct. My plan will require that public officials and
employees forfeit pension and related benefits if they are convicted of a felony in carrying out
official duties, in seeking an elected office or appointment, or in connection with obtaining salary
or pension benefits.
8. Prohibit Retroactive Pension Increases: All Employees
In the past, a number of public employers applied pension benefit enhancements like earlier
retirement and increased benefit amounts to work already performed by current employees and
retirees. Of course, neither employee nor employer pension contributions for those past years of
work accounted for those increased benefits. As a result, billions of dollars in unfunded liabilities
continue to plague the system. My plan will ban this irresponsible practice.
9. Prohibit Pension Holidays: All Employees and Employers
During the boom years on Wall Street, when unsustainable investment returns supported “fully-
funded” pension plans, many public employers stopped making annual pension contributions and
gave employees a similar pass. The failure to make annual contributions left pension plans in a
significantly weakened position following the recent market collapse. My plan will prohibit all
employers from suspending employer and/or employee contributions necessary to fund annual
pension costs.
10. Prohibit Purchases of Service Credit: All Employees
Many pension systems allow employees to buy “airtime,” additional retirement service credit for
time not actually worked. When an employee buys airtime, the public employer assumes the full
risk of delivering retirement income based on those years of purchased service credit. Pensions
are intended to provide retirement stability for time actually worked. Employers, and ultimately
taxpayers, should not bear the burden of guaranteeing the additional employee investment risk
that comes with airtime purchases. My plan will prohibit them.
11. Increase Pension Board Independence and Expertise
In the past, the lack of independence and financial sophistication on public retirement boards has
contributed to unaffordable pension benefit increases. Retirement boards need members with real
independence and sophistication to ensure that retirement funds deliver promised retirement
benefits over the long haul without exposing taxpayers to large unfunded liabilities.
As a starting point, my plan will add two independent, public members with financial expertise
to the CalPERS Board. “Independence” means that neither the board member nor anyone in the
board member’s family, who is a CalPERS member, is eligible to receive a pension from the
CalPERS system, is a member of an organization that represents employees eligible to or who
receive a pension from the CalPERS system, or has any material financial interest in an entity
that contracts with CalPERS. My plan also will replace the State Personnel Board representative
on the CalPERS board with the Director of the California Department of Finance.
True independence and expertise may require more. And while my plan starts with changes to
the CalPERS board, government entities that control other public retirement boards should make
similar changes to those boards to achieve greater independence and greater sophistication.
12. Reduce Retiree Health Care Costs: State Employees
The state and the nation have seen the costs of health care skyrocket. The state’s retiree health
care premium costs have increased by more than 60 percent in the last five years and will almost
double over ten years. This approach has to change.
My plan will reduce the taxpayer burden for health care premium costs by requiring more state
service to become eligible for health care benefits at retirement. New state employees will be
required to work for 15 years to become eligible for the state to pay a portion of their retiree
health care premiums. They will be required to work for 25 years to become eligible for the
maximum state contribution to those premiums. My plan also will change the anomaly of
retirees paying less for health care premiums than current employees.
Contrary to current practice, rules requiring all retirees to look to Medicare to the fullest extent
possible when they become eligible will be fully enforced.
Local governments should make similar changes.
