Oct. 28 (Bloomberg) -- California Governor Jerry Brown’s plan for public workers to pay more for retirement and assume some risk with pension investments met opposition from the unions that campaigned for him and helped bankroll his election.
Brown’s proposals also would raise the retirement age to 67 from 55 for most state employees, curb abuses known as “pension spiking” and “double dipping,” and add two outsiders to the board of the $225 billion California Public Employees’ Retirement System.
“Some of the governor’s proposals go too far,” said Allan Clark, president of the California School Employees Association, the union for 210,000 non-teachers. The changes “run the risk of undermining retirement security for thousands of California school bus drivers, special-education aides, custodians, school cafeteria workers and their families.”
Rising pension obligations are straining the budgets of states such as California and cities across the U.S. still grappling with income- and sales-tax revenue slammed by the longest recession since the Great Depression. A weak recovery has churned up a backlash against the pay and benefits of public workers nationwide as taxpayers see their own job prospects and 401(k) retirement funds shrink.
The cost of pension benefits for California’s state workers is forecast to rise to $1.8 billion this fiscal year. Brown said his proposal could cut that “in half.”
“This is a solid plan,” Brown told reporters yesterday when he unveiled the package. “It is going to run into opposition and it’s up to the Legislature to rise above that.”
Under Brown’s plan, most new employees would get a third of their retirement income from Social Security and a third from a so-called defined-contribution plan, such as a 401(k), which doesn’t guarantee a set return. The balance would come from a traditional guaranteed pension. For those who don’t get Social Security, the traditional pension would make up two-thirds.
Current workers would remain in the so-called defined-benefit system in which the government carries the investment risk. In February, the Little Hoover Commission, an independent state oversight panel, recommended moving most employees into a hybrid plan, even if it meant lawsuits.
Brown proposed to limit double dipping, when a retiree collecting benefits takes another government job. He would also bar pension spiking, which inflates future retirement payments by manipulating overtime, unused vacation and special compensation.
At Calpers, the largest public pension in the U.S., Brown would add two independent board members, increasing the panel to 15. Neither of the two could be a public employee or family member, or represent anyone eligible for a Calpers pension. They would also have to be free of any financial interest affected by Calpers contracts. Brown also would replace the Personnel Board representative with his Finance Director.
The governor also wants to prohibit the state and local governments from granting benefit increases retroactively and to stop letting workers buy additional years of credit to add to their pensions. New public-safety workers, such as police and firefighters, would have to wait longer to retire with full benefits, though not as late as 67.
Brown’s “one-size-fits-all” proposals go too far, said Willie Pelote, political director for the 160,000-member California chapter of the American Federation of State, County, and Municipal Employees. “It will be an uphill battle not only for the governor, but for Republicans who have used this as a wedge issue.”
Public-sector unions including AFSCME backed Brown’s 2010 race for governor against Republican Meg Whitman. The unions contributed $1.6 million to Brown’s campaign, about 4 percent of the Democrat’s total contributions, according to data compiled by the nonprofit National Institute on Money in State Politics.
The federation also spent $2 million on television ads attacking Whitman in the month before voters went to the polls, according to state campaign-finance records.
Union support will be critical to determining whether Brown’s measures pass the Democratic-controlled Legislature, said Marcia Fritz, president of the California Foundation for Fiscal Responsibility, which supports benefit cuts for public employees.
“If he doesn’t get the unions behind this, it’s not going through,” Fritz said by telephone.
Brown’s package won rare praise from some Republicans, though they said its provisions should be approved by voters to prevent future lawmakers from undoing the changes.
“Brown is moving in the right direction,” state Senator Mimi Walters, a Laguna Niguel Republican who sits on a panel examining the pension programs, said in a statement. “A hybrid pension system is a positive shift in the pension conversation. I am also pleased that he is looking at raising the age limit, depoliticizing the Calpers board, dealing with retiree health-care and curbing abuses.”
California’s state pensions in 2010 had 80.7 percent of what is needed to pay promised benefits, down from 86.6 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 74.6 percent, the data show.
About 12 percent of the state’s general fund goes toward paying down debt and covering employee pensions, “which we consider high,” Standard & Poor’s analyst Gabriel Petek said in an April 25 report. Petek had no immediate comment on Brown’s proposals because they remain preliminary, Olayinka Fadahunsi, a spokesman for the ratings company, said by e-mail. S&P rates California A-, the lowest credit rating among states.
The governor didn’t ask for higher contributions to the $146.6 billion California State Teachers’ Retirement System that taxpayers, local school districts and teachers pay to cover pensions. Jack Ehnes, the chief executive officer, said earlier this month that he hoped Brown would include a boost. An increase would be the first in 21 years.
Auditor Elaine Howle in August listed the unfunded liabilities of Calstrs as a risk for California, along with the state’s chronic budget deficits, prison overcrowding and its level of emergency preparedness.
The pension’s unfunded liability, or what it will owe compared with projected assets, has more than doubled since 2008 to $56 billion, in part because of investment losses, according to the fund. Teachers pay 8 percent of their salaries toward retirement. Districts add 8.25 percent of pay, and the state pitches in 2.017 percent.
Without additional revenue, Calstrs may run out of money in the early 2040s, managers said in April, citing an actuarial report. The system serves about 852,300 beneficiaries.
Ana Matosantos, Brown’s budget chief, said the governor’s proposal would halve future unfunded liabilities and that those savings could assist Calstrs with its financing.
Pension changes became a sticking point in the fight over Brown’s first budget proposal since taking office in January. He wanted Republican lawmakers to agree to extend $9.3 billion of expiring taxes and fees to help erase what was a $26 billion deficit.
Republicans, while a minority in both legislative chambers, were needed because the measure required a two-thirds majority for approval. With no Republican support, Brown and Democrats passed a budget without the tax extension and minus the pension changes.
A poll by the University of Southern California and the Los Angeles Times in April showed that a majority of California’s registered voters support capping pension payments to current and future public employees to help balance the state’s budget.
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