Bloomberg News

Savings From California Pension Rollback May Take Years

September 12, 2012

Savings From California Pension Rollback Projected to Take Years

California Gov, Jerry Brown with business leaders, holds legislation he signed, on Sept. 12, 2012 in Los Angeles. Brown signed into law sweeping pension changes that will save California taxpayers billions of dollars in the future. Photographer: Nick Ut/AP Photo

The broadest rollback in public- employee pension benefits in California history may bring little short-term savings to the strapped state and local governments, a municipal finance consultant said.

A bill signed by Governor Jerry Brown today caps pension benefits and requires new employees to pay for half of their pension costs. The same savings will be sought from current employees through bargaining with their unions to lower costs as much as $55 billion over 30 years.

“There will be an impact in the long term, in 20 or 30 years when most of the employees are in the lower benefit tier, but not before then,” said Irwin Bornstein, a consultant based in Laguna Hills, near Los Angeles. “That’s in the long run.”

The most-populous U.S. state, where three municipalities have filed for bankruptcy since June, faces rising retiree obligations. At the same time, like states and cities across the U.S., budgets are still straining under the loss of income- and sales-tax revenue from the longest recession since the 1930s.

Asked whether the savings might be too small to relieve stress on state and local governments, Brown, 74, told reporters in Los Angeles: “It changes the direction. Think of this as a big battleship in the ocean. This begins to move it in the right direction.”

For most new civil servants who aren’t police officers or firefighters, the minimum retirement age for full benefits will rise to 67 from 55. New state and local government employees under the California Public Employees’ Retirement System, or Calpers, will be required to pay for half of their benefits.

Largest Pension

Calpers, the largest pension in the U.S., said the changes may save $42 billion to $55 billion over 30 years for retirement plans it administers. Cities and counties with their own pension plans, including Los Angeles, San Diego and San Jose, aren’t affected.

“One of the biggest benefits will be at the local level where they will negotiate based on what their fiscal situations are,” Brown said.

“With this bill, we take the handcuffs off local government,” the Democratic governor said. “Of course, they need the spine of management presence at the bargaining table.”

Senator Mimi Walters, a Republican from Irvine who voted for the bill, said it contained positive changes such as barring workers from buying service credit to enhance their pensions and stripping benefits from convicted felons.

The bills fall short of addressing an unfunded pension liability estimated at more than $250 billion, she said yesterday in a statement.

The changes “will do very little to address California’s growing debt problem,” she said. “The majority of the changes will only impact new employees hired after Jan. 1, 2013. That means most of the identified savings will only slow the growth rate of our debt problem.”

Calpers, with assets of at $241.5 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.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

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


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