Governor Candidate Jerry Brown’s Pension Reform Proposal A Step in the Right Direction

Jerry-BrownFor those who do not believe that pension reform is quickly becoming inevitable, the proposal by Democratic Governor Candidate Jerry Brown probably makes it exactly that.  And while his opponent Meg Whitman was quick to attack the proposal, it has always been my hope that more moderate forces would get out in front on this issue.

From my perspective, the fiscal problems that cities face with pensions have little to do with the average worker’s pension and far more to do with the 3% at 50 safety enhancement, early retirement ages, pension spiking, and the large pensions earned by those in top managerial positions.  The average state worker will earn roughly $27,000 upon retirement.  My hope is to protect that average state worker while reforming the excess at the top.

Jerry Brown’s plan as unveiled on his website, moves in that direction.  The big portions of his proposal include state employees contributing more to their pensions, requiring them to work long and be older prior to their entitlement to full benefits.

First, he seeks to stop pension spiking and abuse. “Pensions are meant to be a percentage of regular salary,” he writes.  “Unfortunately, there are a number of reported instances (most often at the local level) where special bonuses, last minute promotions, excessive overtime, or other gimmicks are used to artificially inflate final compensation and consequently the favored employee’s pension. These abuses must be stopped.”

He continues, “Pension benefits should be based on normal, recurring salary only.”

He puts out there should be a three year average.  That is certainly a start in terms of correcting the pension spiking problem.  It is more realistic than perhaps a total career average which would not take into account inflation.  “When I was Governor, “final compensation” was based on the average of the last 3 years of salary,” he writes.  “The next governor changed it to just 1 year. This one year rule encourages games and gimmicks in the last year of employment. We should return to a rule where “final compensation” is based on the average of the last 3 years of salary, not just the final year.”

“The average CalPERS pension is $2,100 per month,” he writes, which is a point that many miss.  The average worker is not getting six figures.  They are getting a modest pension for government service, which was the original goal of the plan.  “There are, however, instances of highly compensated government employees earning excessively large pensions, and a reasonable “cap” on these excessive retirement benefits should be imposed.”

Secondly he proposes a two-tiered system.  “Over time, formulas have been negotiated that have allowed employees to retire at earlier ages for higher pension amounts,” he writes. “I intend to renegotiate current pension formulas. We should require employees to work longer and to a later age for full retirement benefits.”

The big proposal here would be to extend the working time of employees until they are at least 60 and frankly, given longer life expectancies, we should be raising the age of retirement across the board, encouraging people to work longer.  This would help ease the burden not only on government pensions but also entitlements like Medicare and Social Security.

“For example, when I was Governor, a miscellaneous employee could retire at 2% per year at age 60. In recent years, this was changed to 2% at age 55. For new employees, these ages must be brought back to the more appropriate levels in place when I was Governor,” he continues.

I am not a fan of two-tiered systems, but given the constraints, they may be the only feasible way to implement reform.  However there are two serious drawbacks to a two-tiered plan.  First, any savings derived will occur down the line.  From the standpoint of the state government, that is not a huge problem.  But from the standpoint of local governments, it could be a catastrophic.  The second problem is a fairness issue, new employees get far less than current employees.  Furthermore I question whether it is sustainable long term as employees will seek during every bargaining session to get back up to the level of the previous employees.  At some point, down the line, they will likely get it as the current crisis fades.

Third he wishes to stop retroactive application of benefit enhancements.  He writes, “To date, when new retirement benefits have been approved/negotiated, those new benefits have applied retroactively to years already worked. That practice should be ended.”

He also seeks to increase employee contributions for all employees.  This is another approach that sounds good on paper, but is more difficult to enact.  In Davis for instance, we got increased employee contributions in exchange for a slightly higher pay raise.

“Pension benefits are funded through a combination of employer contributions, employee contributions, and investment returns. Currently, state employees contribute between 5-9% of their salaries to their pensions; at the local level, contributions vary widely among different jurisdictions,” Jerry Brown writes.

“Recently, a number of unions have agreed to increase their current employee contributions to 10% of salary. This will save California as much as $100 million in the upcoming fiscal year,”  he continues.  “We need to obtain similar increases in the employee contribution rate for the other government employees.  We must consider extending vesting periods to qualify for retiree health care and also negotiate greater employee contributions to retirement health plans.”

Furthermore he seeks to avoid pension holidays.  The problem as he identifies, “In recent years, with high investment returns ensuring well funded pension plans, employers (State or Local Governments) decided to reduce or temporarily cease (take a “holiday” from) contributions into pension plans.”

Instead he proposes, “We must require consistent contributions to public pension funds over time – no more “contribution holidays” by employers or employees.  This will ensure that we maintain funds adequate to pay promised benefits and that the state’s annual pension obligations are steady, adequate and predictable.”

Next he seeks to establish independent oversight of pension funds.  This is a good idea, although in reality there is no such thing as independent oversight. “We must ensure that public pension decisions are actuarially sound and free of improper outside influence by requiring absolute transparency of all investment policies and decisions. We also need to ensure that investment decisions are prudent,” he suggests.

“The Director of Finance, reporting to the Governor, should monitor actuarial assumptions, anticipated annual rate of investment return, and investment activities of the pension boards to create more openness and opportunity for public accountability,” the former Governor writes.

Likewise, he seeks to hold current board members accountable with heightened pension board standards and accountability.  This seeks to avoid the scandals we have seen in the last two years.  “We must hold Board members accountable as fiduciaries/trustees to ensure prudent investment decisions and to guard against undue influence of reckless Wall Street practices and special interests,” he states.

“Board members must be required to undergo specialized training to ensure that they can fulfill their duties as knowledgeable and effective pension fund trustees,” Jerry Brown concludes.

And finally he hits at the other scandal, those of placement agents. Jerry Brown writes, “Fees paid to placement agents have increased the costs of our state pension systems. Recently, three private equity firms agreed to cut management fees to CalPERS by $165 million by eliminating placement agents. Going forward, we need to carefully control or eliminate the use of placement agents to generate savings for the pension systems and increase the integrity of the CalPERS investment process.”

Jerry Brown also endorsed contract changes negotiated recently between Gov. Arnold Schwarzenegger and six labor unions, saying, “We need to obtain similar increases in the employee contribution rate for the other government employees.”

Naturally his opponent, Republican Meg Whitman released a TV ad Thursday attacking Jerry Brown’s plan as not having enough specific policy proposals. Jerry Brown’s plan would keep defined benefit plans in place as opposed to his opponent who wants to not only raise the retirement age and require increased employee contributions, but also move to 401(k) style defined contribution plans instead of defined benefits plans that workers now receive.

However, I am not sure where she is coming from as his plan hit on each of the main points, suggested where the changes needed to occur, and it sure seems like the policy proposals here are fairly specific.

As the LA Times suggested on Friday, “The proposals could vex the labor unions whose money fuels his campaign, but they allow him to draw a contrast with his Republican opponent, Meg Whitman.”

An article by Jon Ortiz and David Siders in the Fresno Bee suggests the tactical move will stake out what has traditionally been Republican ground, however is increasingly becoming a bipartisan issue especially by those focusing on local government.

They cite Democratic strategist Garry South who said “Brown is likely responding to an argument by Whitman that he is partly responsible for soaring pension costs. In 1977, then-Gov. Brown signed legislation that extended collective bargaining rights to state workers.  “I think he’s trying to operate a little bit counter to type by suggesting that he might take on the public employee unions” South said, even though the state’s pension costs didn’t rise dramatically until after a benefits upgrade in 1999.”

Meanwhile labor will have little choice but to accept this so as to avoid ceding the issue to more draconian Republican reforms.  “Labor will probably take a long view of Brown’s pension plan, said Sacramento-based Republican political strategist Wayne Johnson. While the unions aren’t happy with rolling back benefits, they’d rather not hand the hot-button issue to Whitman,” the Fresno Bee reported.

This is certainly a plan I could support and it does not harm to the lower level employees that the system was really created to help.  The problems of the system are really at the top, pension spiking, low retirement age, and large benefits for those making over a certain amount of income.  People should not be retiring from public service to make six figures.  Pensions were never supposed to allow for that kind of retirement.  And we cannot afford it.

However, I cannot support calls to reduce the benefit below 2%, because that hurts the average person who is not the problem here.  I have wanted Democrats and liberals, those who are pro-union and will work within the collective bargaining system to get out in front on these and prevent the more draconian reforms to be implemented as the public recoils from a wave of scandals and bad management at the local levels as well as the state.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. E Roberts Musser

    dmg: “I have wanted Democrats and liberals, those who are pro-union and will work within the collective bargaining system to get out in front on these and prevent the more draconian reforms to be implemented as the public recoils from a wave of scandals and bad management at the local levels as well as the state.”

    Talk about scandals – in the news today inre the CA School Bd Association Exec Director: “Public records show Plotkin earned $352,000 in tax year 2006. The next year, he received $540,000 — an increase of 53 percent. In 2008, he got a $175,000 bonus. The bonus is part of his total compensation for 2008 of $562,333.” The article goes on further to say “The issue arose at a time when many school districts are facing budget cuts and teacher layoffs. The association represents 965 local school boards throughout California.” Geeeeeeeeeeeeeeeeeeze…

  2. E Roberts Musser

    Oh by the way, I forgot to mention the article goes on to say “Plotkin said Friday that he’s retiring come September, and said he made “misstatements” about his pay at the association.”

  3. wdf1

    RE: CSBA

    Well, a little off topic, but…

    At least they moved quickly to take care of the mess. Davis’ own Davis Campbell will be stepping on an interim basis to take over from Plotkin. Campbell recently announced that he would not be seeking reelection for his seat on the Yolo County Board of Education. Campbell is also a former Executive Director of CSBA.

    See: [url][/url]

  4. Rich Rifkin

    The “average” pension number you and Jerry Brown are quoting is meaningless.

    Why? The average includes a great number of people who only work 5 or so years for a CalPERS’ affiliated agency. Take a look at the average of pensioners who worked 30 or more years for a PERS-affiliated agency. I would be that number is now around $75,000/year. And for those, such as a Don Saylor or a Rose Conroy, who retired from desk jobs on the 3% at 50 formula after 30+ years, I bet the average is well over $100,000 per year. (Keep in mind that these pensions inflate by 2% compounded every year.)

    As to why your average number is meaningless, consider a person who, in a 40-year career worked 8 years for a city in California. The rest of his working years he was employed in private industry or out of state. So he will get a CalPERS pension based on those 8 years. Most pensioners from PERS probably did not work their entire careers for a PERS-agency. Those folks bring down the average and that clouds the picture.

    My view is that the pension problem is not just with the actual amounts most individuals who worked their entire careers for cities like Davis or counties like Yolo. The main problems are:

    1) the pension formulas encourage premature retirements;
    2) because PERS had overstated its ability to profit from its investments, cities like Davis are picking up too much of the cost and cannot afford the increased costs; and
    3) in Davis, at least, those workers on 2.5% at 55 are not contributing enough — zero is not enough — toward their own pensions.

    As far as I can tell, pension spiking has never occurred in Davis and I would guess that is true with most agencies. Obviously, when it occurs it is abusive. But I think it is generally quite unusual.

    If we ultimately adopt labor contracts in Davis which cap the increases in total compensation (as we did with the last fire contract), so that when medical benefits and pension costs go up too fast salaries are adjusted downward, that will solve the second and third problems.

    However, that solution could create a serious problem for city employees if, say, that resulted in everyone taking a 12 percent pay cut to account for rising medical and pension costs. But I suppose a pay cut is better than being laid off.

    As to the first problem, of encouraging early retirements, we need to revert to our pension formulas of 1999 and before; and we need to stop paying retiree medical benefits to young retirees until they reach age 65 (save those disabled on the job).

    Ending medical+dental+vision benefits for retirees under 65 can be implemented immediately and doing so will mostly solve our unfunded retirement liability. Changing the formulas won’t immediately have an impact on the problem of pensions costing too much, because it will only apply to new hires. But over time, it will help put us back on a sustainable course.

  5. Rich Rifkin

    [i]”Campbell recently announced that he would not be seeking reelection for his seat on the Yolo County Board of Education. Campbell is also a former Executive Director of CSBA.”[/i]

    How much money does the DJUSD pay to be a part of the CSBA? Is our district forced to be a part of the CSBA? Can we just quit?

    I cannot imagine that any benefits our district gets from that lobbying organization would not be achieved were we not a member of the CSBA. In political science-speak, we could just free-ride. In that is the case, my guess is that there is some kind of law requiring we belong. If not, let’s get off that boat.

  6. Rich Rifkin

    One more note on CSBA. I have not been following the issue closely. But a friend of mine at a party last night told me that Plotkin, the director, got something like a 100% increase in his salary in recent years. Then when the economy turned sour, he told a reporter that he took a 4% pay cut in order to set an example. But my friend, who is a counselor at a charter high school in Sacramento, said that Plotkin was lying, that he never even took a pay cut. What a putz! He gets a 100% raise; and then decides that taking a 4% pay cut will send a signal of his frugality? That alone makes this guy a shmuck. But the fact that he was lying about his small pay cut makes him a complete shmeggegge.

  7. wdf1

    How much money does the DJUSD pay to be a part of the CSBA? Is our district forced to be a part of the CSBA? Can we just quit?

    Good question. I don’t know.

    But… when you pay a lobbyist, you are paying somebody to sit through all the tedious legislative deliberations and follow where the conversations are going. News organizations don’t take much interest in most of what goes on in the state legislature. Only when there are “newsworthy” things — scandals, a passed budget, major legislation passes, change in leadership, etc. But there’s plenty out there that doesn’t get reported. That’s the kind of information that lobbyists mine.

    Most elected school board members don’t just walk in with lots of professional experience running a school district. CSBA also provides some training, information, and guidance for understanding all the nuances of ed-code and governance.

  8. Rich Rifkin

    Thanks, wdf. It sounds like you believe we derive benefits from CSBA membership that we would not have otherwise. I guess the only question is are those benefits worth the price? Up to now, our board has said yes. But I don’t know if they have critically looked at that question in recent years.

  9. David M. Greenwald

    [quote]Why? The average includes a great number of people who only work 5 or so years for a CalPERS’ affiliated agency.[/quote]

    That’s a good point. The people I’m referring to are those my wife used to represent, lower level state employees, they make $25,000 to $40,000 and they retire at 2% at 60, which means even they work 35 years, they are only getting at more $28,000 for pensions. I don’t think those people need to have their pensions lowered.

  10. wdf1

    Thanks, wdf. It sounds like you believe we derive benefits from CSBA membership that we would not have otherwise. I guess the only question is are those benefits worth the price? Up to now, our board has said yes. But I don’t know if they have critically looked at that question in recent years.

    I don’t know what the fees are. But I think our board members have some connection to CSBA. Probably fair to ask, but also to evaluate what information and services they offer.

  11. Don Shor

    Susan Lovenburg is listed as a delegate to CSBA.
    The director for the district including Yolo County is:
    Priscilla Cox
    Elk Grove USD
    (916) 686-7700
    It wouldn’t be unreasonable to ask each of them for budget information.

  12. Rich Rifkin

    [b]SF Chronicle: “78 percent of all the fund’s recipients get $36,000 or less” [/b]

    [i]that’s pretty meaningful. [/i]

    I have no idea what meaning [i]you think[/i] it has. It does NOT show that most people who worked their entire careers (30 or more years) in government jobs in California are getting small pensions.

    The truth of the matter is that the majority of CalPERS pensioners who worked for a PERS-affiliated agency for 30 or more years get a pension worth far more than the median household income in California. (That’s what PERS says.) That does not prove they are getting too much. Their pensions were supposedly funded — at least PERS said they were funded, based on what PERS claimed they needed to fund them.

    The relevant questions are:

    1) how much more money cities like Davis are going to have to pay to fully fund the pensions of current workers and possibly how much more Davis will have to pay to make up for past funding deficits if in fact those pensions were underfunded?; and

    2) are we going to continue to support a pension formulary which is very expensive, which is getting more expensive, which encourages early retirement and which [i]does pay most retirees[/i] who worked their entire careers for a city like Davis more each month than most households have in earned income?

    As long as we keep the total compensation package — salary, benefits, and funding costs for retirement benefits — in line with what the city of Davis, the county of Yolo and the state of California can afford, I don’t really care how high the pensions for most retirees are. The real problem is that the total compensation packages are excessive for almost all public employees, relative to what those individuals could make in a competitive enterprise. And they don’t work nearly as much for their money in most government jobs.

  13. Rich Rifkin

    [i]”Susan Lovenburg is listed as a delegate to CSBA.”[/i]

    How much did Susan Lovenburg know and when did she know it? I really don’t know what it means to be “a delegate.” But someone really should have been paying attention to Mr. Plotkin. He did not double his salary without anyone else knowing it. If Ms. Lovenburg signed off on his compensation package, then shame on her. If she had no idea Plotkin was such a goniff with the money given to CSBA by DJUSD, then who did know from our district?

    I would not be surprised to know that Lovenburg had no idea, that the thought never occurred to her. And while that is not a satisfying answer, I hope the lesson is learned. Our trustees have to be stringent guardians of the public’s money.

  14. wdf1

    Webpage has a few comments about what a school district (in this case SFUSD) gets for its dues to CSBA:


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