Bloomberg News

Brown Prescribes ‘Castor Oil’ to Remedy California Pension Costs

December 09, 2011

Dec. 2 (Bloomberg) -- California Governor Jerry Brown, likening his plan to curb public-employee pension costs to swallowing castor oil, said his proposal is the one most likely to win approval from lawmakers.

Brown’s plan calls for raising the retirement age to 67 from 55 for most state employees, forbidding abuses known as pension spiking and double dipping, and adding two outsiders to the board of the $225 billion California Public Employees’ Retirement System, the largest public pension.

“This is more castor oil, I’m afraid,” the 73-year-old Democrat said in a rare appearance for a governor at a legislative hearing in Sacramento yesterday. “This is not going to be easy because we’re cutting back, but that’s the name of the game right now.”

Rising retiree obligations are straining the budgets of states such as California and cities across the U.S. still grappling with income- and sales-tax revenue slammed by the longest recession since the Great Depression. A weak recovery has churned up a backlash against the pay and benefits of public workers nationwide as taxpayers see their own job prospects and 401(k) retirement funds shrink.

“Speaking for the old geezers, we should be given our due, but not our over-due,” Brown said.

The cost of pension benefits for California’s state workers is forecast to rise to $1.8 billion in the year beginning July 1. Brown has said his proposal may cut that in half.

New Employees

Under Brown’s plan, most new employees would get a third of their retirement income from Social Security and a third from a so-called defined-contribution plan, such as a 401(k), which doesn’t provide a set return. The balance would come from the traditional component. For those who don’t get Social Security, the conventional pension would make up two-thirds.

Current workers would remain in the so-called defined- benefit system in which the government carries the investment risk. In February, the Little Hoover Commission, an independent state oversight panel, recommended moving most employees into a hybrid plan, even if it meant lawsuits.

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

Calpers Change

At Calpers, Brown would add two independent board members, increasing the panel to 15. Neither of the two could be a public employee or family member, or represent anyone eligible for a Calpers pension. They would also have to be free of any financial interest affected by Calpers contracts. Brown also would replace the Personnel Board representative with his Finance Director.

The governor also wants to prohibit the state and local governments from granting benefit increases retroactively and to stop letting workers buy additional years of credit to add to their pensions. New public-safety workers, such as police and firefighters, would have to wait longer to retire with full benefits.

California’s state pensions in 2010 had 80.7 percent of what they 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.

“I’m writing a plan that has a real possibility to get enacted and I’ve laid out a pathway that makes the most sense,” Brown said. “I don’t think we should lurch all the way forward in our first step.”

--Editors: Pete Young, Ted Bunker

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

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


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