Bloomberg News

Brown Proposes Overhaul of California Pension Programs

November 02, 2011

(Updates with Brown comment in fourth paragraph.)

Oct. 27 (Bloomberg) -- California Governor Jerry Brown unveiled a sweeping package of changes to the biggest U.S. public-employee pensions that would shunt new workers into a hybrid of conventional and 401(k)-style coverage to lower costs.

Brown would raise the retirement age for full benefits to 67 from 55 for most, curb abuses known as “pension spiking” and “double dipping,” and revamp the board overseeing the $225 billion California Public Employees’ Retirement System.

Rising pension obligations are straining the budgets of states such as California and cities across the U.S. that are already grappling with income- and sales-tax revenue slammed by the longest recession since the Great Depression. The cost of pension benefits for California’s state workers is forecast to rise to $1.8 billion this fiscal year. Brown said his proposal could cut that “in half.”

“My goal is to provide a fair but sustainable income- security plan,” the 73-year-old Democrat said. “It’s a shared risk and we feel that’s fair. We’re increasing income security in relation to the private sector, but we’re shifting more of the burden onto employees.”

The proposals won rare praise from Republicans and resistance from labor unions, traditional supporters of Democrats.

Brown’s “one-size-fits-all” proposals go too far, said Willie Pelote, political and legislative director in California for the American Federation of State, County, and Municipal Employees. The union represents 160,000 public employees.

‘Shifting’ to Workers

“All this is doing is shifting the increased cost to employees,” Pelote said by telephone. “You’ve got millions of dollars in pension concessions that have been negotiated at the state and local level. We need to take a look at that.”

The new plan would provide elements of a traditional defined-benefit pension and a 401(k) individual-retirement account, where employees bear more investment risk.

That combination is a step toward fixing “unsustainable” public pensions, said state Senator Mimi Walters, a Laguna Niguel Republican who sits on a panel examining the programs.

“Brown is moving in the right direction,” Walters said in a statement. “A hybrid pension system is a positive shift in the pension conversation. I am also pleased that he is looking at raising the age limit, depoliticizing the Calpers board, dealing with retiree health-care and curbing abuses.”

Police, Fire Exception

New public-safety workers, such as police and firefighters, would have to wait longer to retire with full benefits, though not as late as 67. Their new age limits weren’t specified today.

California’s state pensions in 2010 had 80.7 percent of what is needed to pay promised benefits, down from 86.6 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 74.6 percent, the data show.

About 12 percent of the state’s general fund goes toward paying down debt and covering employee pensions, “which we consider high,” Standard & Poor’s analyst Gabriel Petek said in an April 25 report.

Petek had no immediate reaction to Brown’s proposals because they remain preliminary, Olayinka Fadahunsi, a spokesman for the ratings company, said by e-mail.

California has S&P’s lowest credit rating among states, A-.

Current workers would remain in the defined-benefit system in which the government carries the risk. In February, the independent state oversight panel known as the Little Hoover Commission recommended moving most employees into a hybrid plan, even it meant fighting lawsuits challenging such a move.

Double Dipping

Brown proposed to limit double dipping, when a retiree collecting benefits takes another government job. He would also bar pension spiking, which inflates future retirement payments by manipulating overtime, unused vacation and special compensation.

To add more financial expertise to the requirements for those serving on the governing board of Calpers, Brown will seek an amendment to the state’s constitution.

The governor didn’t propose increasing contributions to the $146.6 billion California State Teachers’ Retirement System that taxpayers, local school districts and teachers must pay to cover pensions for educators. Jack Ehnes, the chief executive officer, said earlier this month that he hoped Brown would include such a a boost in his proposals.

Risk to State

Auditor Elaine M. Howle in August listed the unfunded liabilities of Calstrs as a risk for California, along with the state’s chronic budget deficits, prison overcrowding and its level of emergency preparedness.

The pension’s unfunded liability, or what it will owe compared with projected assets, has more than doubled since 2008 to $56 billion, in part because of investment losses, according to the fund. The increase in contributions would be the first in 21 years, fund documents show. Teachers pay 8 percent of their salaries toward retirement. Districts add 8.25 percent of pay, and the state pitches in 2.017 percent.

Without additional revenue, the pension plan may run out of money in the early 2040s, managers said in April, citing an actuarial report. The system serves about 852,300 beneficiaries.

Ana Matosantos, Brown’s budget chief, said the proposal would halve future unfunded liabilities and that those savings could assist Calstrs with its underfunding.

Ricardo Duran, a spokesman for Calstrs, said fund officials had no immediate reaction to Brown’s proposals.

Taxpayer Backlash

The weak national economic recovery from the recession that ended in June 2009 has churned up a backlash against the pay and benefits of public workers nationwide, as taxpayers saw their own job prospects and 401(k) balances shrink.

Pension changes became a sticking point in the fight over Brown’s first budget proposal since taking office in January. He wanted Republican lawmakers to agree to extend $9.3 billion of expiring taxes and fees to help erase what was a $26 billion deficit at the time.

Republicans, while a minority in both legislative chambers, were needed to obtain the two-thirds majority needed to approve the measure. They jockeyed to replace the current pension system, which guarantees benefit levels, with a hybrid. Talks collapsed in May and Brown and Democrats passed a budget without the tax extension and the pension changes.

A poll by the University of Southern California and the Los Angeles Times in April showed that a majority of California’s registered voters support capping pension payments to current and future public employees to help balance the state’s budget.

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Sacramento at Jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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