Bloomberg News

California Lawmakers Set Vote to Limit Retiree Pensions

August 28, 2012

California Democrats Cue Up Last-Minute Public Pension Changes

Governor Jerry Brown had wanted new employees to get a third of their retirement income from Social Security, a third from something like a 401(k), which doesn’t provide a set return, and the balance from the conventional component. Photographer: Rich Pedroncelli/AP Photo

California’s Democratic legislative leaders today are set to unveil a package of bills aimed at curbing public employee pension costs and handing Governor Jerry Brown ammunition in his campaign to raise taxes.

New state employees in California would face a cap on the size of their retirement checks, Senate President Pro Tem Darrell Steinberg said yesterday. They would also have to put in more time on the job than current workers before they collect, he said.

Brown, 74, wants to cut pension benefits and curb abuses before he asks voters in November to raise income and sales taxes. A weak recovery from the longest recession since the 1930s, reducing job prospects and retirement benefits for most nongovernment workers, has churned up a backlash against the pay and benefits of public employees nationwide.

“If voters think that legislators have made a serious policy change, then the chances for the tax increase improve,” said Jack Pitney, who teaches politics at Claremont McKenna College in Claremont, California. “But if they think it is nothing but window dressing, then chances get a lot worse.”

Steinberg said the package won’t include a hybrid pension proposed by Brown last year that would combine elements of a 401(k) savings program with conventional government benefits. The governor, a fellow Democrat, had called for the hybrid plan to spread some of the investment risk to employees that’s now borne by taxpayers.

‘Robust’ Changes

The Democrat-led Senate and Assembly are scheduled to vote on the plan Aug. 31, the last day of the Legislature’s two-year session. Brown scheduled a press conference in Los Angeles today to discuss the proposal.

“The package that the Legislature will vote on will be robust, it will touch on virtually every element of pension reform that has been talked about for a year or more,” Steinberg said. “There are going to be some people out there, people in organized labor, frankly, that are not going to be happy with this package.”

The pension bills, if approved, would require current employees to pay more toward their benefits, Steinberg said. The legislation would also take aim at public employees who artificially inflate future retirement payments through unjustified late-career raises and overtime in a practice known as pension spiking.

Later Retirement

Brown had wanted new employees to get a third of their retirement income from Social Security, a third from something like a 401(k), which doesn’t provide a set return, and the balance from the conventional component. For those who don’t get Social Security, such as teachers, the conventional pension would have made up two-thirds.

He also wanted to raise the retirement age to 67 from 55 for most new state employees.

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 recession.

California’s state pensions in 2010 had about 81 percent of what they needed to cover the benefits they promised, down from 87 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent, the data show.

Steinberg said the pension changes would save the state “tens of billions of dollars” over the next 20 to 30 years, though he later added that an analysis of the cost savings had yet to be done.

The California Public Employees’ Retirement System, the largest pension in the U.S. with $239 billion of assets, has called a special meeting tomorrow and the next day to discuss the package.

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

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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