Last February the governor unveiled the statutory and constitutional language to implement the 12-point pension reform plan he presented last October.
Two critical pieces of that plan seem to be points of contention. One is raising the retirement age to 67 and the other is the creation of a 401(k)-style defined contribution plan that the governor’s office claims will reduce the risks on public agencies and place the entire risk of loss on investments on employees.
“The governor could not agree to some of the changes in the pension counterproposal,” Governor Brown’s spokesman Gil Duran said in a statement. “These complex issues cannot be resolved in two days and he has asked the Legislature to continue to work with him over the recess to resolve the substantial differences.”
In a statement from Assembly Speaker John Perez, “The Assembly has been working diligently to finalize a pension proposal that not only satisfies the 12 points of the Governor’s plan, but also goes further in finding needed reforms that will create real savings, help ensure financially strong and fiscally responsible pension systems in California, and prove fair to taxpayers and retirees.”
“This is a complex issue that requires a thoughtful approach, and we will continue to work with the Governor and our colleagues in the Senate to put forward and pass a proposal by the end of the legislative session,” the Speaker added.
“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,” said the governor last winter.
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.
Assemblymember Warran Furutani, who chairs the Legislature’s pension committee, indicated that while the Democrats can support most of the governor’s proposals, they disagree on how to raise the retirement age and also want changes to the hybrid pension system.
The Democrats said they are willing to cap pensions but support a defined benefit program called the “cash balance plan,” which would be tied to a lower guaranteed interest rate to supplement pensions.
Democrats also oppose a hard raise of the retirement age, but are willing to have reduced benefits for early retirees.
“It’s going to be a sliding scale with a minimum of hurt for the people that retire early,” Assemblymember Furutani said. “If you stayed until 67, you’ll be able to get a sweetened amount that’s extra.”
That means that the Democrats are agreeable to some of the other key provisions of the bill, including a shift away from pension formulas being based on the final year’s pay. The governor’s proposal moves it to a three-year average.
As the governor 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.”
From our standpoint, the Democrats’ compromise on the retirement age may work. We would have to calculate the numbers. By encouraging later retirement, it would also ease the burden for extra coverage of medical benefits.
Assembly Speaker John Perez said Democrats would keep working on passing a proposal before the legislative session wraps up at the end of August. Although Republicans support Brown’s plan, the Democratic governor needs support from members of his own party to pass legislation.
Democrats need to act fast if they want to avoid more draconian measures to be put on a ballot before the voters.
The Legislative Analyst’s Office calculates pension contributions accounted for 2.4 percent of state spending in 2006. It’s expected to reach 3.9 percent of this year’s $91.3 billion budget.
The California Public Employees’ Retirement System, the nation’s largest public pension fund, has an unfunded liability of around $85 billion. The California State Teachers’ Retirement System has about $64.5 billion in unfunded liabilities.
—David M. Greenwald reporting