Governor Brown Unveils Pension Reform Plans

Jerry-BrownAngry Response From Public Employees to the Governor’s Plan

On Thursday, Governor Jerry Brown unveiled the statutory and constitutional language to implement the 12-point pension reform plan he presented last October.

“These major reforms for state and local pension systems will improve their long-term sustainability while providing employees a fair retirement,” the governor wrote.  “These reforms also will end system-wide abuses and reduce taxpayer costs by billions of dollars over the long term.”

“Current benefits, contributions and retirement ages don’t reflect the changing demographic realities we face and are not sustainable,” he continued.  “Continuing these plans in their current form will put taxpayers on the hook for substantial costs now and in the future.  Urgent and decisive action is imperative.”

The governor’s plan includes a provision for equal sharing of pension costs between all employees and employers.

“My plan will require that all new and current employees transition to a contribution level of at least 50 percent of the annual cost of their pension benefits,” the governor said.

It also creates a hybrid risk-sharing component that will add a 401(k)-style defined contribution plan that will reduce the risks on public agencies and place the entire risk of loss on investments on employees.

“I believe that all public employees should have a pension plan that strikes a fair balance between a guaranteed benefit and a benefit subject to investment risk. The ‘hybrid’ plan I am proposing will include a reduced defined benefit component and a defined contribution component that will be managed professionally to reduce the risk of employee investment loss,” the governor said.

It would also increase the retirement age to 67, the same age as social security, and it would require three-year final compensation to be the guide in order to stop spiking.

“Raising the retirement age will reduce the amount of time retirement benefits must be paid and will significantly reduce retiree health care premium costs. Employees will have fewer, if any, years between retirement and reaching the age of Medicare eligibility, when a substantial portion of retiree health care costs shift to the federal government under Medicare,” the governor said.

The governor also argued, “That one-year rule encourages games and gimmicks in the last year of employment that artificially increase the compensation used to determine pension benefits.”

It would also calculate benefits based on regular and recurring pay as another way to stop spiking, by manipulating benefits through the supplementing of salaries with special bonuses, unused vacation time, excessive overtime and other pay perks.

His plan would limit post-retirement employment.

“Retired employees often have experience that can deliver real value to public employers, though, so striking a reasonable balance in limiting post-retirement employment is appropriate,” the governor said.  “My plan will limit all employees who retire from public service to working 960 hours or 120 days per year for a public employer. It also will prohibit all retired employees who serve on public boards and commissions from earning any retirement benefits for that service.”

It would enable felons to forfeit pension benefits.  It would prohibit retroactive pension increase, pension holidays and purchasing of service credit, and it would also increase pension board independence and expertise.

The governor wrote: ” ‘Independence’ means that neither the board member nor anyone in the board member’s family, who is a CalPERS member, is eligible to receive a pension from the CalPERS system, is a member of an organization that represents employees eligible to or who receive a pension from the CalPERS system, or has any material financial interest in an entity that contracts with CalPERS. My plan also will replace the State Personnel Board representative on the CalPERS board with the Director of the California Department of Finance.”

Finally, it would reduce retiree health care costs by requiring more state service to become eligible for health care benefits at retirement. New state employees will be required to work for 15 years to become eligible for the state to pay a portion of their retiree health care premiums. They will be required to work for 25 years to become eligible for the maximum state contribution to those premiums.

Reaction to the governor’s plan, however, was swift and severe.

Californians for Retirement Security, a coalition representing more than 1.5 million public employees and retirees, issued a heated and pointed statement:

“Governor Brown’s pension proposals amount to an unprecedented and unacceptable assault on current and future California teachers, firefighters, peace officers, school employees and other public employees. They abrogate the very collective bargaining laws he first enacted, attempt to violate Constitutional rights of current workers, severely harm middle-class and low-wage workers and will force workers in back-breaking manual labor jobs to work 30 to 40 years, until age 67, only to receive 50 percent less in stable defined benefits.

“Nonpartisan analyses already have found these sloppy proposals won’t yield the savings promised and are full of major legal and constitutional minefields. Research from the University of California, Berkeley, released today, concludes that forcing public employees in California into risky retirement plans like the one the governor proposes will disproportionately harm low and middle-income workers – further crumbling California’s middle class.”

“We implore the Legislature to reject the governor’s attempts to subvert the collective bargaining process entirely by locking these ill-considered proposals into our state’s Constitution. We urge the Legislature to consider facts instead of Republican-created political rhetoric when examining retirement safety for California workers.”

“Pensions make up a tiny fraction of the state budget, less than 3 percent, and public employees who already pay up to 12 percent of their salaries into their own retirement plans have made hundreds of millions of dollars in concessions to help save taxpayers’ money. The nonpartisan Legislative Analyst has determined that two proposed ballot measures that contain some of the same proposals outlined by the governor would cost taxpayers at least $1 billion a year for the next three decades. Meanwhile, pension costs are one of the smallest growing costs in all of state government, while recently approved tax breaks for corporations are costing taxpayers a billion dollars a year.”

“Governor Brown and the Legislature should focus on meaningful, legal and fair pension changes.  We will continue to support them in that endeavor. But we will use everything at our disposal to fight any attempts to rescind collective bargaining rights or break promises to this state’s middle class working families.”

“It’s time to fix our pension systems so that they are fair and sustainable over a long time horizon,” said Governor Brown. “My plan raises the retirement age and bans abusive practices like ‘spiking’ and ‘air time’ while mandating that public employees pay an equal share of pension costs.”

The governor’s office said, “When fully implemented, these reforms will cut roughly in half the cost to taxpayers for providing pension benefits for state employees. It will cut the risk to taxpayers for pension debt by more than half. Similar savings are expected across all systems.”

In our view, these reforms fix most of the problems – at least down the line.  The unfortunate part is that we cannot implement those changes for current employees unless they agree to it.  Governor Brown conceded as much.

The short-term benefits are limited.  However, his administration said that over the next 30 years, the plan could save the state $4 billion to $11 billion.

The effect on existing public employees would be minimal.  However, critically, public safety employees would have to pay 2% more towards their pensions.

“I try to protect working people whenever I can,” said Governor Brown, “but I’m also responsible to the taxpayer and making sure we have a solvent state government.”

And that is the dilemma that we face.  The average state worker is not the problem here.  In fact, neither is the average pension receiver, who receives 2% at 60 and makes an average of less than $40,000.

“We can’t forget that the vast majority of public-sector employees are middle-class workers, and their average pensions are far from exorbitant,” State Senate leader Darrell Steinberg said in a statement.

He is right.  But he forgets the key point: what kills us are those making over $100,000.  Those who are able to retire at 50.  Those who get 3% for every year that they work at the final salary which can be spiked using a variety of means.

The two main culprits are management and public safety.

Until the worst abuses are reined in, the pensions to the rank and file will be in jeopardy.  Governor Brown skirts a fine line, but most of the changes here will fix the system.

—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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19 Comments

  1. medwoman

    “The two main culprits are management and public safety.

    Until the worst abuses are reined in, the pensions to the rank and file will be in jeopardy.  Governor Brown skirts a fine line, but most of the changes here will fix the system.”

    I am sure that this is a reasonable approach for those making over $ 100,000. My concern is for those making far less, who are working in good faith and will now be looking at substantially less than their already very modest retirement. I am concerned that this may be a very short sighted mistake by unintentionally forcing those at the lower end of the compensation scale into poverty. Will we then be hearing from the “no increased taxes for any reason” folks that we should not have to pay more to support the increasing numbers of elderly poor ?

  2. rusty49

    “Will we then be hearing from the “no increased taxes for any reason” folks that we should not have to pay more to support the increasing numbers of elderly poor ?”

    I doubt it Medwoman, in liberal California there will always be a larger group of “all taxes are good taxes” or “pay their fair share” folks to keep the tax dollars flowing.

  3. E Roberts Musser

    [quote]a defined contribution component that will be managed professionally to reduce the risk of employee investment loss,” the governor said.[/quote]

    “managed professionally”? LOL No amount of professional mgt, even if it is the best in the world, can insulate a defined contribution component from the vagueries of the stock market/economy. Secondly, how do you decide what constitutes “professional” management? What is considered “professional” is in the eye of the beholder – and the state has a biased view on that score, but a retiree may not view it the same way…

    [quote]“We implore the Legislature to reject the governor’s attempts to subvert the collective bargaining process entirely by locking these ill-considered proposals into our state’s Constitution. We urge the Legislature to consider facts instead of Republican-created political rhetoric when examining retirement safety for California workers.”[/quote]

    How is this “Republican-created political rhetoric”? It is coming from Brown, a Democrat!

    [quote]And that is the dilemma that we face. The average state worker is not the problem here. In fact, neither is the average pension receiver, who receives 2% at 60 and makes an average of less than $40,000.

    “We can’t forget that the vast majority of public-sector employees are middle-class workers, and their average pensions are far from exorbitant,” State Senate leader Darrell Steinberg said in a statement.

    He is right. But he forgets the key point: what kills us are those making over $100,000. Those who are able to retire at 50. Those who get 3% for every year that they work at the final salary which can be spiked using a variety of means.

    The two main culprits are management and public safety.[/quote]

    But what percentage of the budget do the benefits of management/public safety represent? I would like to know. Is this pension reform just a solution in search of a problem? It sounds good on the surface, but I wonder in practice if it really will resolve any real problems of significance… I’d want more analysis I think…

  4. medwoman

    “How is this “Republican-created political rhetoric”? It is coming from Brown, a Democrat”

    The concept that “what we have is a spending problem, not a revenue problem” and thus the road to prosperity is to make cuts rather than increase taxes tends to be a Republican driven idea more than a Democratic supported one. Because a Democratic governor is backing such a proposal does not change that fact.

    There is ine piece of this plan that I would strongly support although I am sure that it is a relatively small piece of the picture overall. That is limiting the amount of compensation, or number of hours worked by retired annuitants, at least at the upper pay ranges. This is altogether a far too chummy little system that allows select retirees to collect their full retirement while coming back to work at full compensation. While I think there is a very limited role in terms of tapping into experience and “institutional memory” I have direct knowledge of this system being essentially exploited to maximize the individual gain of favored individuals.

  5. rusty49

    “Because a Democratic governor is backing such a proposal does not change that fact.”

    We Republicans should embrace the fact that Gov. Brown has finally seen the light.

  6. Frankly

    For some reason I have an “I will believe it when I see it” feeling about this. The Brown political engine has proven they are very adept at spin while leveraging the decision dysfunction of the state legislature. They can put out this report knowing full well it will get blocked and/or watered down.

    But, at least it is encouraging on paper that Brown is going to try and tackle this problem.

    I still question whether we can even afford this approach. a 50% guarantee continues to leave risk with taxpayers. Employees in the private sector have a 0% guarantee… they have to invest wisely to manage risk. If CalPers underperforms – and it is likely considering their irrational projections of high returns – the same private-sector people having to manage their own investment risk are going to be stuck paying for their neighbor’s public-sector pension commitments. Guaranteed pension benefits for government employees should be eliminated, IMO. They already enjoy much greater job security than the average private-sector worker.

    A 401(k) plan with a fixed or matching employer contribution is the standard in the private-sector world. It should be just fine for the public-sector world.

  7. Frankly

    Saw a report last night on the local news that the State government has about $3 million in lost fixed assets. Most of these things were purchased by the state corrections agency. The spin from the Brown camp was that it is just a record-keeping problem. In other words, the state employees are failing to do their job. Yet, we should make sure their job security and pensions are guaranteed for life.

    If this were my company and I got a report that $3 million of equipment had to be written down because it was lost, I would be firing several people in the accounting department.

  8. medwoman

    JB

    “If this were my company and I got a report that $3 million of equipment had to be written down because it was lost, I would be firing several people in the accounting department.”

    It seems that both you and Mitt relish the idea of firing someone.

    “they have to invest wisely to manage risk.”

    And no matter how wisely they invest, they can still be wiped out by a downturn in the economy, a major illness of themselves or a family member, a lawsuit….. but you would have us all base our lifetime well being on economic prowess and luck. I would recommend just the opposite, that the private sphere provide the long term security of the public sphere. People should be rewarded for a lifetime of hard work and contribution to the society, not forced to live in fear that a major downturn in the economy, or a bit of spectacularly bad luck will plunge them into poverty.

  9. medwoman

    rusty49

    “We Republicans should embrace the fact that Gov. Brown has finally seen the light. “

    That light looks suspiciously to me like a train coming through a tunnel we have just entered in error.

  10. preston

    It is nice to see that the new city manager is doing his best to reign in high salaries…not. If you disagree with me, check this out.

    [url]http://www.ralphandersen.com/jobs/detailed_job_pdfs/davis_gm_utilities_dev_and_operations_brochure.pdf[/url]

  11. Frankly

    [i]”It seems that both you and Mitt relish the idea of firing someone.”[/i]

    Good one medwoman!

    Seriously though, if you understand the role of accounting, this is inexcusable.

    Firing is not something I enjoy doing because I know how hard people can take it… it can make people feel rejected and feel like a failure. I will find every way possible to prevent it. However, jobs are not entitlements. They are a contracted agreement between employer and employee. When the employee fails to perform or fails to correct performance problems, firing is the correct thing to do. For employees, my view and approach is one of “fit” and “development pace”. Basically there is a requirement for every employee to demonstrate they fit the role (as defined by a specific set of performance expectations) and develop capabilities and confidence at the expected pace. Managers are a bit different. They have top-level decision authority and are also responsible for planning and execution of the plan. In addition to the same fit and development pace assessment, Managers can be fired for a single poor decison, or failing to meet group or organizational goals, or failing cover some critical need within their scope of responsibility.

    If you are a senior accounting manager or CFO, and in an etreme budget climate you allow $3 million in assets to be unaccounted for, you should be fired. Sorry.

    Related to Romney and Bain Capital, private equity companies look for publically-traded compaines that have current or liquidatable assets exceeding their business valuation. Basically these are poorly managed companies. The result is a better managed, leaner, more viable company where those employed have a better chance to retain their job. For the companies that are liquidated, it releases the capital to invest in other companies that provide jobs.

  12. medwoman

    I do understand your point on this although I feel termination for a single error is unreasonable. If doctors were fired for a single error leading to even a very bad outcome, we would not have any doctors. I quite literally do not know anyone in my field ( which is considered very high risk)
    Who has not made a significant error. The assumption that we make is that mistakes will be made, so much so that one of the standard questions we ask of applicants is : ” Describe how you handled your last surgical complication”
    We know there will be one, the question is, how does a person respond to the inevitable, do they step up take ownership and devise a plan for mitigating the harm and to improve, or do they attempt to duck ?

  13. preston

    [quote]Managers are a bit different. They have top-level decision authority and are also responsible for planning and execution of the plan. In addition to the same fit and development pace assessment, Managers can be fired for a single poor decison, or failing to meet group or organizational goals, or failing cover some critical need within their scope of responsibility. [/quote]
    Obviously you are not talking about the managers working for this city.
    If you haven’t yet checked out my above link, here it is again.

    [url]http://www.ralphandersen.com/jobs/detailed_job_pdfs/davis_gm_utilities_dev_and_operations_brochure.pdf[/url]

    Just one more overpaid manager to delegate the work, and take credit when it is good, and blame others when not.

  14. wdf1

    The Onion: More Americans Falling For ‘Get Rich Slowly Over A Lifetime Of Hard Work’ Schemes ([url]http://www.theonion.com/articles/more-americans-falling-for-get-rich-slowly-over-a,5101/[/url])

  15. Frankly

    [i]”I do understand your point on this although I feel termination for a single error is unreasonable.”[/i]

    I generally agree but it should depend on the type and scope of the error. Accountants are supposed to count for all revenue, expenses, assets and liabilities. It is a fundamental dropping of the ball and not so much just a single mistake.

    One possibility here… purchasing decisions delegated to departments while the main accounting function is centralized. In that case newly acquired equipment might not be properly tagged and recorded.

    The problem with this type of story is that they are like cockroaches. If you see one, it means there is probably many more hiding.

  16. Frankly

    preston,

    $150k per year for that level of responsibility doesn’t bother me too much, it is the 2.5@55 pension that is killing us. The retirement age should be 67 and there should be no defined-benefit pension. It should be a 401(k) that includes a matching employee/employer contribution. Let’s say for the sake of argument that this includes a generous 10% employer contribution.

    Assuming this manage put up 10% (pre-tax) to get the full 20%, and she starts on the job at age 40 and retires at 67. With a 5% average rate of return and a 2% per year annual wage inflation, she would have well over $2 million in the bank by retirement age.

    This would cost the city about $550k over the 27 years.

    Compare this to the present value of a 2.5 @ 55 assuming she lives to be 90 years old and considering the additional cost to hire her replacement working those additional 12 years (between retirement ages 55 and 67). I don’t have time to run the numbers, but it is obvioulsy going to be orders of magnitude higher.

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