Pension Initiative, Legislation Planned

FEB. 7, 2011

By DAVE ROBERTS

With California potentially facing a $500 billion-plus unfunded pension liability, several pieces of legislation limiting retirement benefits will be considered in the current session and a more comprehensive reform initiative is being planned for the June 2012 ballot.

The initiative’s reforms have yet to be decided. But California Pension Reform, an offshoot of the California Foundation for Fiscal Responsibility, is looking at a modified version of “The Fair and Sustainable Public Pension System” proposal on the CFFR website. It would:

• Freeze current defined benefit plans at all state and local government agencies.

• Amend the California Constitution to declare the level of unfunded liabilities a fiscal emergency.

• Suspend further accruals to plans that are less than 90 percent funded until they maintain funding above 100 percent for three consecutive years.

• Require that most employees currently covered by defined benefit plans earn at rate of 1.25 percent at 65 until their current plan is unfrozen; public safety workers would earn 1.6 percent at 55.

• Allow employees to have a defined contribution plan that provides a one-to-one match up to 5 percent of salary.

Additional conditions for new hires include: a) no benefit exceeding $40,000 a year – adjusted 2 percent annually, b) benefits are based on the highest three-year average of annual base pay — excluding additional compensation such as overtime, accrued sick leave, vacation pay, bonuses, severance payments and any other non-recurring compensation, c) early retirement is allowed starting at Social Security early retirement age or medical disability at an actuarially reduced rate – except for public safety workers, who may retire at age 50 at an actuarially reduced rate.

The other CFFR initiative proposal, dubbed “The Fair and Sensible Public Employee Retirement Plan Reform Act,” would require public employees to pay at least half of their retirement plan benefits, including retiree medical benefits, and would eliminate retiree medical benefits for new hires (after July 2013).

“We are going to be looking at a number of proposals. Right now I am an open book,” said CFFR President Marcia Fritz. “Right now we are analysis and research. Let’s get the best we can done. After that we may get into advocacy. Based on these (research) products, we will offer the best solution in terms of voter approval, fairness to workers, cost savings, both short term and long term, and likelihood it will prevail in court. No matter what, we expect a lawsuit would occur if there’s an initiative. We will need to know how sensitive it is and the likelihood of setting a precedent.”

While that initiative is still 16 months off, assuming it qualifies for the ballot, several legislative reform efforts are underway. The most ambitious may be the package that will be introduced by Sen. Mimi Walters, R-Laguna Hills, in the next couple of weeks.

“The cornerstone base of our legislation will be to take new employees from the defined benefit to a defined contribution plan,” said Walters. “We also need to require the pension system to set aside monies in order to pay for future health care for our retirees. We also need to repeal the law that was passed in 2003 that said that employees could get service credits of up to five years when they didn’t actually work.”

For now she’s focusing reform only on the lower hanging fruit of new hires, including public safety workers. “Ultimately we may have to look at current employees,” she said. “We are going to introduce legislation for new employees so we can immediately stop the bleeding.”

Walters hasn’t heard Democratic opposition yet. “My hope is that they will be on board,” she said. “I think that these proposals are very reasonable. We haven’t heard anything because we haven’t introduced the actual package yet.”

Asked about the likely push back from the state’s powerful government unions, she said, “We are proposing reform, and we need to have reform and have it be reasonable. My hope is that we won’t see any push back. We need the first step, and the first step is new employees. That will stop the bleeding. We are facing a fiscal crisis, and we can’t continue to kick the can down the road. We have to have pension reform or our state is not going to survive fiscally.”

Despite the dire need to head off fiscal disaster, Walters said she will not link pension reform with support for placing a tax extension on the June ballot. “They have nothing to do with each other,” she said, adding that she will vote against placing the tax extension on the ballot. “We should not be taxing the people in the state of California. Governor Brown wants to tax them $60 billion. That’s the last thing we should be doing. We should be stimulating the economy by cutting regulations, making it easier for businesses to come to California, creating jobs. If we do that, the economy will turn around.”

When Walters was interviewed on Fox Business Network Wednesday, the graphic stated, “GOP legislators want pension reform for tax extension support.” But, in addition to Walters’ disavowal, a representative for Sen. Bob Dutton, who chairs the Senate Republican Caucus, said, “There is no discussion about linking any votes on tax extension on the ballot to pension reform. That is not a conversation the Senate Republican Caucus is currently having.”

Other pension reform legislation has been introduced:

• SB27 is intended to stop pension spiking. It would provide that any change in compensation in order to enhance benefits would not be included in determining the benefit. Sponsored by Sen. Joe Simitian, D-Palo Alto, it’s an update of SB1425, which passed the Legislature last year but was vetoed by Gov. Schwarzenegger.

• AB 89, sponsored by Assemblyman Jerry Hill, D-San Mateo, prohibits state and local public employees from receiving pensions in excess of $245,000 per year, which is the current federal pension limit. In December, 36 University of California executives threatened to sue the UC Board of Regents if their pensions are not allowed to increase above the federal limit.

• AB17, sponsored by Assembly Black Caucus Vice Chairman Mike Davis, D-Sacramento, would require the state, teacher and UC pension boards to report on the ethnicity and gender of the brokerage and investment management firms they do business with and develop strategies to increase the number of minority investment managers and brokers.