Pension Initiative, Legislation Planned

FEB. 7, 2011


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.


Write a comment
  1. Steven Maviglio
    Steven Maviglio 7 February, 2011, 22:57

    What’s wrong with this picture? Start by taking a look at who is behind the “California Foundation for Fiscal Responsibility.”

    The group consists of individuals who stand to profit handsomely from pension “reform” including a political signature gathering firm, political groups, and a former state legislator turned lobbyist. Apparently their self interest is more important than the state’s fiscal interests.

    Also, Ms. Walters might have more luck convincing her GOP colleagues in the Senate and Assembly support pension “reform.” Because last year, when the chips were down, many Republicans voted NO.

    Reply this comment
  2. Pension Actuary
    Pension Actuary 8 February, 2011, 10:03

    Would Mike Davis get on board for responsible pension reform if his racist set-asides are approved? I doubt it.

    Reply this comment
  3. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 8 February, 2011, 12:40

    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.
    STOP giving public safety sweetheart deals or this will be DOA.

    They can work past age 55, and do not deserve a multiplier 35% higher than everyone else while they receive a retirement age 35% lower.

    Reply this comment
  4. Charles
    Charles 8 February, 2011, 13:05

    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.

    The last time a member of the Calpers board came up with an idea like this he was kicked off within a few days. The purpose of the board and investments is to get as large of a return as possible to keep tax inputs as low as possible. It certainly is not a forum to invest in losing businesses. There is no need to determine ethnicity and gender of investment management firms unless the proposal is to invest in losing firms to be politically correct and lose money which will raise your taxes.

    Reply this comment
  5. SkippingDog
    SkippingDog 8 February, 2011, 13:23

    These are DOA anyway. See the US Constitution on Ex Post Facto laws and Bills of Attainder.

    Reply this comment
  6. Charles
    Charles 8 February, 2011, 14:23

    Something needs to be said about unfunded liabilities. If you bought a house for $200,000 on a thirty year loan,and had %160,000 in investments tied to your loan you would be 80% invested at a zero% return on investment rate over inflation. If you earned 4% you would have a lower unfunded liability. At 7.75% your liability would probably be nothing.

    Calpers earned 7.79% over the last twenty years. If they think it is obvious that they will not be able to earn that in the next twenty years, they should lower their return on investment (ROI) assumptions and the unfunded liability estimates will go up. You have to remember that these are not concrete numbers, they are estimates, which are really informed guesses.

    The ROI assumed in the Stanford study of 4.1% as in T-bills is unreasonable. Such an assumption would result in Calpers being far, far over paid. That would indeed be a waste of public funds needed for public services. Any group of grad students suggesting such an investment plan for a company would be fired on the spot. Of course, they were hired by ex-governor Arnold, so what do you expect?

    The economy will turn around as it always does and all the yellow sheet muckraking editorials of the far right rags will fade into history. Until the next economic downturn. Keep those editorials in your desk drawer for another 7 to 10 years and you won’t have to write them all over again. “Save a tree!”

    Reply this comment
  7. Roy Bleckert
    Roy Bleckert 8 February, 2011, 19:58

    Government Employee Unions love Taxes , here is one for em

    We will tax all government pensions over 40,000 $ at 90%

    The Government that gives you something is The Government that can take it away from you !

    Reply this comment
  8. Kurt Hahn
    Kurt Hahn 10 February, 2011, 17:04


    CalPERS did not have a unfunded liability in 2008 and over the preceeding 10 years was on average 90% funded.The problem in addition to the crash fall into two catatgories.

    First there were poor investments. They invested excessively in real estate portfolio and secondly some corruption in selecting investment advisors. Also there was too much infulence by State officer holders in the investment decession making process.

    Next there were unsustainable benefits specifically to Public Safety members in the form of 30% per year at 30 years of service and lesser excesses for miscellaneous employees. There have been some rollbacks in recently negotated union contracts for new hires but more needs to be done.

    Putting upper limits on pension benefits fails to recognize health care professionals and other with advanced technical training or very qualified senior managers. The other benefit proposals don’t just go back before the 1998-1998 round of unsustainable benefit increases but go back 40 years.

    CalPERS befefits historically are paid for 90% by investments and 10% by contributions. Maybe employee contributions need to be incrreased back to the original 8% for miscellaneous and 12% for Safety members but forcing all into a 457 Plan is not a good alternative.

    I hope the authors of the proposed initiative give it a little more thought because today’s outline could make things worse. CalPERS by and large has been well run and for most years absent any significant unfunded liability. It wasn’t until Gray Davis gave away the store even though CalPERS own actuaries said it wouldn’t work and we had a serious problem. The problem compounded a bit because Arnold and others did offer the appropriate oversight. The problems can be fixed.

    Reply this comment
  9. Over-Lee Generous
    Over-Lee Generous 10 February, 2011, 22:32

    The boomers are coming. The pension funds cannot possibly earn enough return to keep up with the dazzling increase in payouts immediately ahead – for years to come. Unless the current retirees and current employees are subjected to dramatic pension cuts it’s all smoke and mirrors baby. Listen . . . can you hear the fiddle music? Nero?

    Reply this comment
  10. mimi really sucks
    mimi really sucks 21 February, 2011, 20:57

    I think Mimi Walters should stay home in the kitchen and fix sandwiches. Was very glad Lockyer stomped her in last year Treasurer’s election. Just another Orange County Tax Whacko Politico.

    Reply this comment

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