August 30, 2012
By JUDY LIN Associated Press
Gov. Jerry Brown recently announced systemic reforms to California's badly underfunded public pension system that he says will save taxpayers billions of dollars over time, but he also was unable to persuade his fellow Democrats to give him some of the fundamental changes he had sought.
The reform deal does not include putting new government workers in a hybrid system that includes a 401(k)-style plan, greater independence for the board that oversees the state’s main pension fund or a reduction in retiree health care costs, which are skyrocketing.
Pension reform supporters say the proposal won’t make much of a dent in the state’s pension problem but labor leaders were angered by what they saw as a violation of collecting bargaining rights.
“We are fighting back and we’re struggling, and in this case it appears like we’re losing,” said Dave Low, chairman of Californians for Retirement Security, a labor coalition representing more than 1.5 million public employees and retirees.
Nevertheless, Brown hailed the deal as a landmark achievement and said it will make pension benefits for public employees lower than they were during his first term in office, in 1975.
“These reforms make fundamental changes that rein in costs and help to ensure that our public retirement system is sustainable for the long term,” the governor said in a statement. “These reforms require sacrifice from public employees and represent a significant step forward.”
Pension reform has been an undercurrent throughout the entire legislative session this year, in part because the state's two main pension funds, the largest in the nation, are so badly underfunded — by at least $150 billion.
But the governor also had a lot at stake: He has promised reforms since rolling out a 12-point plan last October and is trying to persuade voters that he is fiscally responsible at a time when he is asking them to increase the sales and income taxes in November.
Although pension payments account for a fraction of state spending, the cost has been growing in recent years.
Republicans note that the state’s main pension system cost $370 million in 2001, but the cost went up to $1.7 billion in 2011, nearly the amount the state spends to fund the 23-campus California State University system.
Brown’s original plan was projected to save $4 billion to $11 billion over 30 years. On Tuesday, the governor said the changes, if enacted by the Legislature, would save $30 billion, although the time period for that savings was not clear.
The changes that will save the most money apply primarily to new workers, rather than existing ones, so the greatest financial benefit to the state will be decades in the future.
“We’ve lived beyond our means. The chickens are coming home to roost,” Brown said during a news conference in Los Angeles, referring to the difficulty of negotiating pension reforms with the Legislature’s Democratic majority and the public employee labor unions that fund their campaigns.
The reforms include a cap on annual pension payments for new employees at $110,100 for most workers and $132,120 for employees not covered by Social Security, such as teachers and some public safety workers.
They also require new employees to contribute at least half of their pension costs and sets a similar target for current workers, although that will be subject to collective bargaining.
Reflecting longer life spans, the reform plan also raises minimum retirement ages for new employees. A civil service worker will now have to work until age 67, rather than 55, to receive full benefits. For public safety workers, that goes from age 50 to 57 and the maximum benefit formula is reduced.
The plan also ends some of the most egregious abuses of the pension system, including a practice known as “spiking” in which employees are given big raises during their last year of employment as a way to inflate their pensions.
Employees also will not be able to buy additional years of service — or “air time” — which allows them to get pension benefits they did not earn through working.
One politically popular provision, although it will apply to only a very small pool, will prevent government workers from collecting pensions if they are convicted of a work-related felony.
“Those items may be worth addressing for other reasons, but they have little to do with rising retirement costs,” said David Crane, who served as economic adviser to former Gov. Arnold Schwarzenegger and now president of Govern for California, which advocates for government changes.
Crane said the proposal doesn’t address the current long-term unfunded liability of the state’s pension systems because it leaves benefits for current employees unchanged. Brown and legislative advisers have indicated that the courts have deemed retirement benefits guaranteed by contract and difficult to take away for current employees.
Some public employee unions were upset by the reforms, which must be acted upon by the Legislature by Friday.
“This is a one-size-fits-all approach that really does not work for all the different bargaining units and situations,” said David Miller, president of the California Association of Professional Scientists, which represents scientists throughout state government.
He said guaranteed defined benefits are the best way to deliver a secure retirement for public employees.