Small steps toward pension fix

Steven Greenhut: The governor’s office took issue with my last post that called his pension deal “wimpy,” but there’s no question that the past deal and new one announced today fall far short of the deep pension reductions needed to reform the system. But the governor has pledged that this is a first step toward much-needed reform. If that’s so, then great — this might be a small start in that direction. I do applaud the governor for making pension reform a core budget issue and for appointing David Crane as his adviser.

My criticism isn’t with the governor per se. I simply am fearful that the state and unions will cut a deal that slightly reforms pensions and then everyone will declare victory and move on to other issues. This is a historic chance to achieve major reforms. Those of us who understand the perils of the current system in terms of finances and fairness want to see the kind of reforms that are meaningful.

Here is the governor’s press release announcing the latest deal:

Gov. Schwarzenegger Announces Two More Unions Agree to Contracts with Pension Reform and Reduced Retiree Health Benefit Costs

Significant Reforms Include Rolling Back 1999 Pension Increases, Increasing Employee Pension Contributions & Lowering Unfunded Liability for Retiree Health Benefits

Governor Arnold Schwarzenegger today announced tentative agreements with two additional state employee unions that include significant pension reform and salary reductions. In addition to rolling back the expansion of pension benefits adopted in 1999, the new agreements include one day of unpaid personal leave per month and a 5 percent increase in employee contributions toward pension benefits. Both union contracts already contain provisions that base final retirement compensation on the highest three years of wages, instead of the highest year, to end “spiking” in the last year of work. In addition, these agreements contain reforms to reduce the unfunded liability for retiree health care costs, including pre-funding retiree health benefits and increasing the number of years new employees will have to work before qualifying for retiree health benefits.

“These agreements continue the progress toward critically needed pension reform in California,” said Governor Schwarzenegger. “I commend these two unions for stepping up to help bring our unsustainable pension and health benefits under control. These agreements, along with the four agreements announced last week, will bring much-needed relief to California taxpayers and our state budget.”

These two agreements cover 14,000 employees represented by the Union of American Physicians and Dentists (UAPD) and the International Union of Operating Engineers (IUOE), and include:

  • Rolling back retirement formulas used to calculate pension payments by requiring new employees to work additional years to receive full benefits.
  • Requiring current and new employees to contribute at least 5 percent more of their pre-tax pay toward retirement.
  • Pre-funding retiree health benefits.

As part of comprehensive pension reform, Governor Schwarzenegger has pushed for employee contributions to begin paying for retiree health benefits since his Public Employee Post-Employment Benefits Commission called for that action in its final report, issued in January 2008. To help cover billions of dollars of unfunded liability for retiree health that the state of California has promised its employees, the two unions also agreed that starting in July 2012, current employees will pay 0.5 percent of salary towards pre-funding retiree health benefits.  The IUOE also agreed to change the vesting period that new employees must work to qualify for full health benefits in retirement.  New employees would be required to work 25 years instead of the current 20 to be eligible for full retiree health benefits.

In addition to the pension changes, both unions agreed to the Governor’s proposed employee compensation savings for next year in his January budget proposal.  On top of agreeing to increased employee pension contributions, the unions agreed to one day of unpaid personal leave per month during fiscal year (FY) 2010-11, the equivalent of just under a 5 percent pay cut.  The Administration is already moving forward with the remaining 5 percent reduction in the cost of the state workforce payroll through Executive Order S-01-10, which requires all department directors to reduce their payrolls by 5 percent. These agreements are projected to save the state $66 million on top of the $72 million in savings from four previous union agreements covering 23,000 employees in FY 2010-11.  If similar agreements are reached with the state’s six other employee unions, state savings in FY 2010-11 would total $2.2 billion, with $1.2 billion of that from the General Fund.

The current pension formulas, negotiated under the prior administration and enacted into law by the legislature in 1999, have been responsible for driving up the state’s unfunded pension liability and creating unsustainable pension benefits.  The Governor’s Administration will continue to negotiate in good faith with all of the employee unions on all aspects of the pension reform measures.  However, Governor Schwarzenegger has indicated he will not sign a budget without four elements of pension reform that must be done legislatively separate and apart from any memorandums of understanding:

  1. Roll back the expansion of pension benefits adopted in Senate Bill 400 (Chapter 555, Statutes of 1999) for all new hires upon adoption by the legislature.
  2. Permanent 5 percent increase in employee pre-tax contribution toward retirement benefits.
  3. Calculate the retirement rate based on the highest three years of wages during employment instead of the highest single year.
  4. Require CalPERS’s chief actuary to submit a report to the legislature describing how contributions would change if a lower investment return was assumed and the impact on future state budgets if CalPERS fails to achieve its assumed investment return, and have that report evaluated by a qualified third party.

Both agreements cover the period from July 1, 2010 to July 1, 2012 and are subject to ratification by union members and the legislature.

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