Governor Announces Compromise Deal on Public Pension Reform

Critics on Both Sides Blast the Deal which Rolls Back 3% at 50 But Only For New Employees –

Governor Brown and Democratic leaders on Tuesday outlined their compromise proposal for what they are calling “a sweeping pension reform agreement that saves billions of taxpayer dollars by capping benefits, increasing the retirement age, stopping abusive practices and requiring state employees to pay at least half of their pension costs.”

“These reforms make fundamental changes that rein in costs and help to ensure that our public retirement system is sustainable for the long term. These reforms require sacrifice from public employees and represent a significant step forward,” said Governor Brown.

Meanwhile, Speaker John Perez added, “The comprehensive pension reform proposal to be reviewed by the Conference Committee meets and exceeds the Governor’s pension reform proposal.”

“We will outlaw the most objectionable pension practices, impose a cap on the maximum value of pensions, and generate the long-term savings that will ensure the fiscal health of state and local pensions,” he added.

The Speaker concluded, “Assembly Democrats on the Conference Committee, Co-Chair Warren Furutani and Chair of the Committee on Public Employees, Retirement and Social Security Michael Allen, have taken their commitment to fair pension reform and helped provide an in-depth review of all the issues, including six hearings and 10 months of discussion. Their extensive efforts are clearly reflected in the final agreement.”

However, unions and pension reform advocates criticized the deal.

Dave Low, who chairs a coalition representing around 1.5 million public employees, California for Retirement Reform, said, “We are outraged that a Democratic Governor and Democratic Legislature are taking a wrecking ball to retirement security for teachers, firefighters, school employees, and police officers. While we support common-sense changes to end spiking and abuse of the system, this package is unfair and wrong.”

He added, “This is far more than ‘low hanging fruit.’ This is the fruit, the branch, the tree trunk, and the roots. This is a sweeping proposal that undermines collective bargaining, and is being enacted unilaterally thru the political process rather than in good faith negotiations at the bargaining table.”

According to a release from the governor’s office: “The pension reform agreement includes substantial benefit rollbacks for public employees. It requires all current state employees and all new public employees to pay for at least 50 percent of their pensions and establishes this as the norm for all public workers in California. Importantly, these new reforms eliminate state-imposed barriers that have prevented local governments from increasing employee contributions.

“Further, it bans abusive practices used to enhance pension payouts.”

“No more spiking, no more air time, no more pensions earned by convicted felons,” said Governor Brown. “We’re cleaning up a big mess and the agreement reached with Legislative leaders today is historic in its far reaching implications.”

However, the biggest savings come not from current employees, but rather for employees hired after January 1, 2013 when the compromise bill would reduce pension formulas.  In addition, those employees would have a two year or more delay before earning maximum benefits.

But none of the cost savings would apply to current employees.  Moreover, the proposed cap would not impact 95 percent of future employees.

However, it does end the 3% at 50 public safety enhanced benefit, but only for those employees hired after January 1, 2013.

Governor Brown’s original proposal would have included a hybrid pension plan for new hires.  That plan was controversial, with pension reformers supporting it but unions blasting it as an idea that would deliver lower benefits at higher costs.  CalPERS itself was lukewarm on the idea, believing that hybrids would not significantly cut costs to the state but might save local public agencies money.

Daniel J.B. Mitchell, a professor emeritus at UCLA’s Anderson Graduate School of Management, told the Sacramento Bee that the legislation would have been too complicated as it would have required obtaining some form of guaranteed return from a plan based on individual investments that would be unpredictable and volatile.

“The hybrid was the showpiece of Brown’s plan,” Professor Mitchell told the Bee. “But it never appeared to be particularly workable.”

In the meantime, while the plan splits the costs of pensions roughly evenly, it does not fund the system’s unfunded obligations.

“The unfunded liability question is still lurking out there and threatening the finances of governments across the state,” Pepperdine University political scientist Michael Shires told the Bee.

While pension reformers were not happy, neither were union leaders who blasted the governor for creating the measure legislatively rather than at the bargaining table.  The unions also reminded Democrats that their members did not create the problems on Wall Street and should not serve as scapegoats.

Lou Paulson, of the California Professional Firefighters, released a statement arguing: “The pension proposals outlined today represent a retreat from collective bargaining and basic principles of retirement security. The proposal imposes rollbacks to levels not seen in four decades – the biggest pension rollback in California history. They punish everyday working people who have already sacrificed hundreds of millions of dollars in wages and benefits lost to furloughs, layoffs and downsizing.”

He would add, “Beyond its punitive nature, these pension changes could actually wind up imposing greater costs on public agencies, especially in the short term. According to a RAND study, firefighters over the age of 55 have a workplace injury rate that is more than a 60 percent greater than firefighters under the age of 45 years. That translates to higher workers’ comp and disability costs, as well as being bad for the safety of our citizens.”

Mr. Paulson concluded, “Nobody condones abuse of the pension system – least of all our members. But these proposals go far beyond ‘reform.’ Instead they threaten basic retirement security for generations of front line first responders and their families.”

Dean Vogel of the California Teachers Association released a statement, as well, “We have been working in good faith with the governor and Legislature to obtain pension solutions that will move our state forward. This plan does not achieve that goal.”

He argued, “This process has not been transparent, it does not recognize the tremendous cuts that have already been made to our schools, and it does not respect the disproportionate impact it will have, largely on women working in our classrooms. Instead, it will make it more difficult to attract and retain experienced educators to our classrooms.”

While the compromise rolls back critical elements of the plan, here is what it does do:

Public Employee Pension Reform Act of 2012

Caps Pensionable Salaries

Establishes Equal Sharing of Pension Costs as the Standard

Unilaterally Rolls Back Retirement Ages and Formulas

—David M. Greenwald reporting