Group Touts New Pension Initiative

DEC. 1, 2010

By STEVEN GREENHUT

A pension reform organization has released a draft initiative plan for the 2012 ballot that would require public employees to pay half their retirement benefit costs, mandate defined contribution plans for new employees, significantly limit public pension benefits and require public employers to fully fund all pension and retiree medical benefit plans by 2020. The initiative will impose stringent new rules on the governance structure of public pension plans.

Sponsored by Californian Pension Reform, the initiative would apply to all public agencies in the state of California. “The last time we tried to reform pensions, the unions convinced everyone that the benefit changes we sought could best be negotiated at the bargaining table,” explained CPR President Marcia Fritz, the head of a Citrus Heights accounting firm. “We’ve seen a little  movement in this direction, but mostly it’s been done to avoid public scrutiny. The unions have offered few changes that would begin to fix a half-trillion-dollar unfunded pension liability problem.  In fact, they’ve actively tried to stop even modest pension reform efforts at the local level. So it’s time to take this matter to the state’s voters.”

Here are the details of the proposal, provided to CalWatchdog from CPR:

The Fair and Sensible Public Employee Retirement Plan Reform Act

The people of the State of California find and declare that:

I.        It is the intent of the people of California to provide retirement benefits to public employees that are comparable to benefits provided to employees in the private sector at a comparable cost to taxpayers.

II.      Public retirement benefit plans have become financially unsustainable, threatening future benefit payments, diverting resources from essential public programs, increasing pressure for higher taxes and burdening future generations with debt from unfunded pension liabilities.

III.    Retirement benefits granted to many public employees now exceed the comparable benefits available to most citizens and taxpayers.

The California Constitution is amended to provide that:

1.       Public employees pay half their retirement benefit costs.

(a)    All public employees shall pay at least one-half of the normal actuarial cost of their retirement plan benefits, including retiree medical benefits.

(b)   Effective July 1, 2013, public employers may not contribute an employee’s share of retirement plan benefit costs.

2.       Defined contribution plans for new employees.

(a)    All public employees hired on or after July 1, 2013 shall be eligible to participate in a competitive defined contribution retirement plan.

(b)   Disability benefits for public employees hired on or after July 1, 2013 shall be provided through insurance policies, self-insurance or joint powers authorities and not by pension plans with the exception of accelerated vesting.

(c)    Public employers shall provide such employees with competitive life insurance and disability benefits that are integrated with federal, state, pension and insurance benefits otherwise provided.

(d)   No public employee hired on or after July 1, 2013 may receive lifetime or formulaic retirement medical benefits prior to age 65.

i.      Before each decennial anniversary of the July 1, 2013 transition date, the Legislature shall adjust this age requirement to reflect changes in longevity.

ii.      Public employers may provide competitive defined contribution medical benefit plans with matching employee contributions and earlier age eligibility.

(e)   Nothing in this amendment shall affect employees’ medical benefits before retirement.

3.       Limited public pension benefits.

(a)    The defined retirement income benefits for employees hired on or after July 1, 2013 shall not exceed the median statewide household income ($56,344 in 2009).

(b)   All benefits from Social Security and California public pension plans shall be integrated for the purpose of determining such employees’ retirement income benefits, not including income from defined contribution plans.

(c)    Pension benefits for employees hired after July 1, 2013, shall be based on an average of three or more years of qualifying compensation excluding overtime, accrued sick and vacation pay, bonuses, severance payments, and all other non-recurring compensation.

(d)   Incumbent employees may remain in their current retirement plans.

4.       Full funding and implementation by 2020.

(a)    The Legislature shall enact a mandatory implementation plan before July 1, 2013, to require the full actuarial funding of all public pension and retiree medical benefits plans no later than January 1, 2020 without increasing taxes for this purpose.

i.      The implementation plan shall require employee contributions of at least one-half the normal actuarial costs of all such plans in 2020 and thereafter, with substantially equal incremental increases during the implementation period.

ii.      The implementation plan shall allow public employees to decline or discontinue participation in any retirement plan and select a lower-cost option, if permitted by federal laws and tax regulations.

(b)   Until 2020, public employers contributing less than full actuarial funding shall adopt and publish annually their strategic financial plan to achieve full funding without increasing taxes for this purpose.

(c)    The implementation plan shall honor conflicting provisions of employment-related agreements executed prior to the qualification date of this initiative until their earliest possible expiration, extension, renewal or amendment.

(d)   Until 2020, no public employer shall be required to increase its plan contributions by more than its incremental revenue growth in any fiscal year.

5.       Governance.

(a)    After January 1, 2014, at least two-thirds of the members of a public pension plan’s governing trustees shall be independent of that retirement system and its participating employers.

(b)   At least two-thirds of independent trustees shall be qualified for service as certified or licensed financial, actuarial, accounting, legal, benefits or investment professionals at the time they are selected.

(c)    The Governor shall appoint the independent trustees for statewide retirement systems, and the Legislature shall determine the method of selection for other pension plans.

(d)   All trustees shall be held to the highest prevailing standards of fiduciary law.

Definitions. For the purposes of this amendment:

“Actuarial” means the prevailing professional and governmental-standard method of converting accrued and future retirement benefits costs to present values and required funding levels. Whenever professional actuarial practices and generally accepted accounting principles for governments differ, the more fiscally conservative approach shall apply.

“Competitive benefits” do not exceed the level necessary to attract and retain employees in the labor markets from which public employees are recruited. Social Security benefits eligibility shall be considered in such determinations. Benefits which do not exceed comparable and valid local or regional labor market survey averages in the private sector shall be conclusively competitive.  Benefits approved by voters shall be presumptively competitive.

“Full actuarial funding” is the complete and timely payment of the normal actuarial cost and the actuarial amortization of unfunded liabilities accrued in a retirement benefits plan over active employees’ remaining service periods.

“Integrated benefits” are reduced by the amounts paid from other sources including lifetime Social Security benefits.

“Normal actuarial cost” is the current service cost to actuarially fund employees’ retirement benefits and excludes the annual amortization of unfunded liabilities.  For employees hired on or after the transition date, the discount rate used to determine and fund normal actuarial costs shall be a recent five-year simple average of U.S government bond rates and taxable municipal bond index rates. This discount rate shall also apply to public employees who previously received a retroactive benefits increase of more than 25 percent of their accumulated benefits for prior service of more than five years.

“Pension plan” means a defined-benefit retirement income plan paying lifetime income to public employees.

“Public employee” means a paid provider of services to a public employer eligible for retirement benefits.

“Public employer” means the state, a municipality, school district, political subdivision, special district or public agency.

13 comments

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  1. John Seiler
    John Seiler 1 December, 2010, 20:06

    Good news. Fortunately, Arnold and Meg won’t be around to mess it up, as they did previous attempts at reform.

    And by 2010, the pension crisis will be even more acute.

    The only problem is that this reform doesn’t go far enough.

    Reply this comment
  2. Fake Rex ther Wonder Dog!
    Fake Rex ther Wonder Dog! 2 December, 2010, 10:46

    It is a good start. Now the time is ripe to put the nail in the coffin of these death beds.

    Reply this comment
  3. Algernon Moncrief
    Algernon Moncrief 2 December, 2010, 12:16

    WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.

    What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.

    We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.

    If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?

    The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.

    Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.

    PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.

    Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.

    The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.

    Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)

    Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):

    Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
    Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
    Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
    Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
    Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
    Senator Spence said “The bill places an unfair burden on retirees.”
    Senator Scheffel said “We are breaching our promises to existing retirees.”
    Senator Lundberg said “This bill is a deal that was cut before this body met.”

    The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.

    So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.

    The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.

    Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.

    It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.

    Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.

    PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”

    Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.

    Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.

    There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.

    Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.

    The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)

    PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.

    While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).

    The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”

    Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.

    Reply this comment
  4. Michael Fuss
    Michael Fuss 2 December, 2010, 19:11

    We wish Ms Fritz and her organization good luck. Perhaps if theirs takes off ours won’t be as necessary. The rough draft of our initiative that was submitted to the Legislative Counsel can be viewed at:

    http://www.cavoteonpublicemployeepay.org/

    The most recent version that we got back from L.C. is a lot cleaner though we are still working out a 14th Amendment concern so the final version has not yet been put up on our site.

    Reply this comment
  5. john moore
    john moore 2 December, 2010, 21:22

    If “1.” Employees to pay half of the actuarial costs,means employees will pay half of rates required to eliminate actuarial deficits,here in pacific grove,most of the employees would have to work for nothing(contribute their entire salary) and borrow money to pay the additional sums needed to pay for employee defined benefit pensions. Here in Pacific Grove,the city pays 1.2 million per year to Calpers,but since 2003,it has incurred 38 million in pension bond debt and now has a current unfunded deficit of 35 million dollars.Chapter 9,or elimination of a paid police and fire dept. is just a matter of time. Seven million would be undoable,but 73 million in 7 years. With Calpers investing,no defined benefit plan is thinkable.

    Reply this comment
  6. SkippingDog
    SkippingDog 2 December, 2010, 21:53

    The 14th Amendment won’t be your only concern, Michael. How do you square your proposal with the requirement that each state guarantee a “republican form of government” under the US Constitution. A republican form of government uses elected representatives to enact the laws, not direct democracy.

    You should be prepared for a significant challenge on that regard as well.

    Reply this comment
  7. Michael Fuss
    Michael Fuss 2 December, 2010, 23:12

    Luckily some cities like San Franciso currently have direct democracy with regards to some aspects of public employee compensation packages. Additionally direct democracy has strong legal precedent in both state and federal jurisprudence. L.C. gave us no resistance to the direct democracy component in the 6 months that we have been working with them. The initiative, referrendum and recall that have been in place in California and many other states for the better part of a century have survived numerous court challenges. Having said that, we do expect meritless legal challenges regardless as the stakes are large.

    Reply this comment
  8. David from Oceanside
    David from Oceanside 5 December, 2010, 07:39

    I am grateful to see any move to end this form of taxpayer abuse and immoral class system. However we much go much further with the current crop of employees or we are screwed.

    Reply this comment
  9. Steve Turnbill
    Steve Turnbill 5 December, 2010, 09:12

    While this reform in many ways is needed for future employees, any of this relating to current retirees or indeed employees betrays a complete ignorance of so many cornerstone areas federal and state law I don’t know where to start.I think reformers though are waking up to this and starting to get more real with proposals…

    Reply this comment
  10. B
    B 6 December, 2010, 11:18

    It is a shame that the bad deeds of a few will ultimately cost many very hard working civil service employees their ability to make ends meet.

    I am sure the retribution toward the voters will be noticeable when calling for some form of service and it is a long time coming.

    Do we attack the private sector as well and limit the profit sharing, 401K’s, free onsite childcare, have the employee pay Medical coverage, OHHH, and let us take away the Xmas bonuses, so profit will be higher for the Executive Officers to walk off with as many already do.

    Reply this comment
  11. Charles
    Charles 8 December, 2010, 17:16

    Your idea of not allowing sick leave to be included in retirement calculations for years served will backfire on you. Either the retiree will leave with no sick leave, or will bank it all and go on sick leave for a year or two before they officially retire and get more money that way.

    And I will repeat ad nauseum California State Employees can not spike their pensions with overtime, vacation pay or any of the other stuff local governments allow. Only your years salary counts. Sick leave can be put towards more months of service, not used to top off your highest pay. I have no idea whatsoever why the locals allow this.

    Reply this comment
  12. Dr.C
    Dr.C 14 December, 2010, 16:13

    Why allow sick pay to be banked? My company doesn’t allow that. The employee is going to take the sick leave one way or another. They should just combine sick leave with vacation like some companies do and let the employee take the time off they have allowed.

    Reply this comment

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