Feb. 25 (Bloomberg) -- California should scale back pension promises to public workers and reshape the benefits system to make it similar to those used in industry to rein in costs, a state oversight panel recommended.
Government pension costs are no longer sustainable, the independent Little Hoover Commission said yesterday. It called on lawmakers and Democratic Governor Jerry Brown to hold benefits at current levels and recalculate yet-to-be-earned payments under a new hybrid that includes elements of a traditional pension plan and a 401(k) account where beneficiaries bear the investment risk.
The rising cost and underfunding of public employee pensions has sparked a national debate, most recently in Wisconsin where Republican Governor Scott Walker has asked the Legislature to boost contributions from state workers. California’s 10 largest public pension funds were short a combined $240 billion in 2010, the commission found.
“California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently,” commission President Daniel Hancock said in a letter to lawmakers and Brown yesterday. “Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to severely reduce services and lay off employees to meet pension obligations.”
The state’s contributions to its pensions are expected to rise 10.8 percent to $2.4 billion next year, according to a summary of the governor’s budget plan.
“Any change must honor the promises made to all public servants,” said Brad Pacheco, a spokesman for the California Public Employees’ Retirement System, the nation’s largest pension fund with $229 billion in assets. “We recognize that pension costs are a source of fiscal concern.”
Ricardo Duran, a spokesman for the California State Teachers’ Retirement System, known as Calstrs, the second-largest U.S. fund, said that “any recommendation that weakens the financial security of our members” would not be “constructive.”
“This includes recommendations that suggest breaking long-held legal decisions protecting vested pension rights,” he said.
State and local governments need the authority to restructure future, unearned retirement benefits for their employees, the commission said, even though doing so may require courts to reverse previous decisions protecting benefits of current employee.
The commission also recommended that salaries for calculating pensions be capped at $90,000 and that lawmakers enact a prohibition on granting new benefits retroactively.
Many of the Hoover proposals, including the limits on so-called spiking of pay in the latter years of employment to boost pensions, caps on salaries and the ban on retroactive increases, had been advocated by the California Foundation for Fiscal Responsibility, a pension-reform group.
“All of that is consistent with what we’re recommending,” said Marcia Fritz, the foundation’s president, in a telephone interview. “I love it.”
Brown has proposed a combination of spending cuts and tax extensions to close a $25.4 billion budget gap over the next year and half. While the governor has said current pension plans should be defended, he said reforms are needed.
Joel Fox, a Republican political consultant in Los Angeles, said the Wisconsin protests gave ammunition to California Republicans pushing Brown for pension changes in exchange for their endorsement of his budget plan.
“He may be forced to go there by Wisconsin,” Fox said.
The Little Hoover Commission, created in 1962, was modeled after a federal commission chaired by former President Herbert Hoover that was charged with recommending changes to the federal government.
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