Bloomberg News

California Assembly Passes Biggest Public-Pension Cutback

August 31, 2012

California’s Assembly passed the broadest rollback of public-employee pension benefits in the state’s history after Democrats who control the Legislature and Governor Jerry Brown struck a last-minute deal.

The overhaul, which may save taxpayers as much as $55 billion over 30 years, won approval 48 to 8. It would require new employees to pay half the cost of their benefits and work longer before they can retire. It also reduces formulas for calculating benefits and caps pension payments.

Brown, a 74-year-old Democrat, pressed for a revamp to show progress in curbing soaring retiree costs before he asks voters for higher income and sales taxes in November. Public resentment of government employees has grown as taxpayers saw their own job prospects and benefits shrink in the longest recession since the 1930s.

“This is not the end-all, be-all, but it brings us considerably down the road to public-pension reform,” said Assemblyman Warren Furutani, the Long Beach Democrat who headed a conference committee that drafted the legislation.

The bill must also be approved by the Senate before it’s sent to Brown for his signature. The Legislature is scheduled to adjourn today for the rest of the year.

The measure would require new state and local government employees under the California Public Employees’ Retirement System or Calpers, the largest public pension in the U.S., to pay for half of their benefits. The same savings will be sought from current employees through bargaining with their unions.

Smaller Checks

Retirement checks for new workers would be based on wages capped at about $110,000 a year, or $132,000 for those not covered by the federal Social Security system, adjusted for inflation. For most new civil servants who aren’t police officers or firefighters, the minimum retirement age for full benefits would go to 67 from 55.

The bill also takes aim at so-called pension spiking, a practice that inflates future retirement payments by manipulating overtime, unused vacation and special compensation. It also would limit “double dipping,” involving retirees who collect benefits and also take another government job. And it would ban workers from buying service credit to boost their payouts.

Charter counties or cities with their own pension plans, such as San Jose, Los Angeles and San Diego, would be exempt from the new rules.

Republican lawmakers panned the overhaul saying it didn’t go far enough, while public-employee unions said the bill was overreaching and undermined collective bargaining.

“It doesn’t even scratch the surface of what’s needed in this state before we ask to raise taxes,” said Assemblyman Allan Mansoor, a Republican from Costa Mesa.

Cost Savings

Calpers said today the changes may save the state and local governments $42 billion to $55 billion over the next 30 years. It wouldn’t immediately improve the system’s unfunded liability, its actuary said.

Calpers, with assets of $237.3 billion, had 72 percent of the assets needed to cover obligations to its 1.6 million beneficiaries as of June 30, 2011, according to a report.

The fund earned 1 percent in the fiscal year that ended June 30, below its target of 7.5 percent. When Calpers underperforms, the state and municipalities must make up the difference to meet its obligations.

Brown last year called for a new type of pension, combining elements of a 401(k) savings plan common among nongovernment employers with conventional defined-benefit systems that guarantee payments for life. Such a so-called hybrid plan would have spread to workers some of the market risk now borne by taxpayers, who must make up for pension-investment shortfalls.

To contact the reporters 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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