There was a mixed reaction to Governor Jerry Brown’s 12-point pension reform plan that he unveiled on Thursday. Five of the proposals are described as “proposals under development.”
Unions argued that the proposal should take place at the collective bargaining table, while reform groups called it “unambitious,” and Republicans said that, while it is a good start, they would prefer something put before the voters.
The first seven points are in draft language for legislation, and the governor will seek to pass that legislation.
First, the proposal calls for the elimination of purchase of airtime. This “would eliminate the opportunity, for all current and future employee members of all state and local retirement systems, to purchase additional retirement service credit.”
Second, it would prohibit pension holidays, so that agencies would be “prohibited from suspending employer and/or employee contributions necessary to fund the normal cost of pension benefits.”
Third, it would prohibit employers from making employee pension contributions.
Fourth, it would prohibit retroactive pension increases.
Fifth, it would prohibit pension spiking by making the three years of compensation the determining wage. “Final compensation for new employees would be defined as the highest average annual compensation during a consecutive 36-month period.”
It would sixth, further prohibit pension spiking by defining compensation as only regular, non-recurring pay.
Finally, it would prohibit “payment of pension benefits to those who commit a felony related to their employment.”
There are also five proposals under development. This includes imposing a pension benefit cap, improving retirement board governance, limit post-retirement public employment, the hybrid option, and addressing CalSTRS unfunded liabilities.
My reaction is that I preferred the broader proposal that Governor Brown came up with during his campaign. This deals with some of the key issues, but even the proposals under development do not address key issues such as retirement age and public safety enhanced benefits.
The unions are complaining about this, wanting this to be done via collective bargaining, but what Jerry Brown has done here is really address a lot of the key issues and done so in a way that will preserve most of the system.
There are four of the proposals I really like and want to talk about further.
First, the third proposal is important. The City of Davis, up until the last Memorandum of Understanding, paid the entire employee portion for the miscellaneous employees. The employees under the most recent contracts will pay up to three percent of their share. That was an obvious area for change.
That said, part of the problem here is that picking up the employee share was a bargaining decision, the employees gave up a pay raise in order for the employers to pick up a portion of their share of the pension costs. So how that will resolve itself going forward is a key question. How the math works for this I do not know.
The fourth item is huge. When they enhanced benefits back around 2000 to 3% at 50 for public safety and up to 2.5 or 2.7 at 55 for non-safety, they did it retroactively which was a gift of public funds and created huge unfunded liabilities. So this is a key reform.
What it does, however, is take some of the steam out of the movement for a two-tiered pension system (which, by the way, was not included in the provisions here). One reason bargaining groups like the two-tiered system is that it gives them 20 years to wait for a good economic time and a good legislature or local government to undo, retroactively, the second tier. Now they can only undo it prospectively – in the future. This would change the second tier formula and the willingness for bargaining groups to accept it.
Pension spiking is a huge problem. The two changes here are very good. The three-year average is key so that people do not get a huge last-year increase. Moreover, a lot of times employers threw in all sorts of benefits, overtime and cash outs at the end, to spike the pensions. That will disappear.
So those four proposal are mostly good.
The pension benefit cap is probably less helpful than granting agencies the ability to prospectively reduce pension rates for existing employees. You cannot and should not take away vested benefits that have already been paid into, but there should be a way moving forward that one can reduce from 3% at 50 to 2.5% at 55, for example. The cap does not necessarily get at that, unless it caps to a percentage of final income rather than a hard cap.
Improving the retirement board governance is a good goal, but I’m not sure how that gets achieved in the abstract.
Limiting post-retirement public employment is a huge one. That will prevent double-dipping and those who retire and then become consultants.
I am not a fan of the hybrid option unless the 401K plan is voluntary.
And the CalSTRS unfunded liability is a big report that came out this week.
Overall my goal is to protect the pensions for those who are on the lower end of the scale while limiting pensions for those making large salaries and those with enhanced benefits, while at the same time finding a way to increase the age of retirement to at least 60 or 65 for everyone.
This is a somewhat disappointing start, but there appear to be a couple of pretty good proposals in there even if the core issues are still not being addressed.
—David M. Greenwald reporting
This is a good start but needs to go farther and while David raises some interesting issues, the basic problem is simple. Our pension system will bankrupt the State and most cities. Collective bargain is part of the problem unfortunately,so are local elected officials beholding to unions. We need drastic measures now.
I disagree completely with this statement:
[quote]You cannot and should not take away vested benefits that have already been paid into…[/quote]
The pensions folks receive now are far in excess of what they put in, in terms of contributions/returns on investments. The issue is similar to social security in that regard. Consequently, we should not have people make six figure pensions which require taking money away from other public services like schools.
These pensions are not fully funded or close to it–we have mortgaged our future. People with lower incomes/pensions should be protected first. Those with higher incomes (and I am one of those folks) should have to fend for themselves a bit more.
Dr. Wu: From a legal standpoint you would never be able to rollback on pensions that have already been paid into. You can lower the pensions into the future with some legislative work, but you can’t for example reduce pensions to 2.5% for firefighters from the years 2000 and 2011. And I don’t think you should be able to do that either.
dmg: “Dr. Wu: From a legal standpoint you would never be able to rollback on pensions that have already been paid into. You can lower the pensions into the future with some legislative work, but you can’t for example reduce pensions to 2.5% for firefighters from the years 2000 and 2011. And I don’t think you should be able to do that either.”
From a legal standpoint, I agree that you cannot reduce an already vested interest – unless the bargaining group agrees to it. Which they may, if the state were really in danger of going bankrupt and was not going to be able to pay for any more pensions period. This has happened in some cities across the nation, so it is not out of the realm of possibility…
Also, I have one question – I am assuming Gov. Brown’s pension reform refers to state employees only (PEUs), not to our city employees?
I agree that Brown’s reforms are anemic, but at least it is a start in the right direction. Increasing the retirement age is something that really should be considered… but so should some sort of collective bargaining reform. The collective bargaining system is just too corrupted…
Why not do away with collective bargaining and pay all public workers the average wage, benefits and retirements of their counterparts in the private sector for the same types of jobs?
[quote]From a legal standpoint you would never be able to rollback on pensions that have already been paid into. [/quote]
I am not a lawyer but from a financial perspective these obligations are unsustainable and tinkering around the edges won’t get it done. Bankruptcy is a real issue here for many cities–the legality of reneging on public pensions is up in the air from what I know. in the private sector its now routine.
Either we inflate our way out of these obligations or renege some other way down the road–I’m talking ten-fifteen years.
I meant legality of reneging on public pensions when one is in public bankruptcy…
Rusty49
The average for whom, and where? At the same age, in the same geographic location, at the same number of years worked ? And where would merit fit into this equation ( not that we have that now, but I still favor it) ?
What about jobs for which there is no public sector equivalent ?
EMR
Agree that current collective bargaining system is inadequate and in need of reform and that pension revisions need to be considered.
We must also be mindful of unintended consequences. Raising the retirement age substantially will also affect the number of new positions available and opportunities for career advancement for younger workers.
Dr. Wu: “I am not a lawyer but from a financial perspective these obligations are unsustainable and tinkering around the edges won’t get it done. Bankruptcy is a real issue here for many cities–the legality of reneging on public pensions is up in the air from what I know. in the private sector its now routine. Either we inflate our way out of these obligations or renege some other way down the road–I’m talking ten-fifteen years.”
I think you are exactly right. If the state doesn’t come to terms with unsustainable pension obligations, then bankruptcy could be the only answer. In which case pensions won’t get paid period. The unions have got to understand that they may very well need to make concessions or get no pension at all…
medwoman: “We must also be mindful of unintended consequences. Raising the retirement age substantially will also affect the number of new positions available and opportunities for career advancement for younger workers.”
This is a valid point, but bc of the lousy economy, seniors are already working longer to make up for the poor performance in their pension/ savings/investment accounts and reduction in wages and/or furloughs. So I’m not sure if this is a big a concern as some would have us believe or not…
Good column, David. I do have a question for you about this: [quote]Pension spiking is a huge problem. [/quote] If pension spiking includes using massive unused vacation and sick-leave time to effectively purchase more years on the job than a person really worked, then I agree with you. That is the norm in many agencies up and down the state. It is especially and exceedingly common for fire fighters. The San Jose Mercury News has covered this topic well. CC Times columnist Daniel Borenstein has also done fine work covering this aspect of pension spiking.
However, I am not aware of specific cases where, say, mid-level employees got big pay raise (by way of a big jump in position shortly before retiring, so that their pensions, based on final salaries were much higher. I would imagine this has happened. And the idea of going to an average of the last 3 years’ salary in place of just the last year implies many think this is a problem. But when I looked for examples in Davis, I was unable to find them.
It seems to me (in general) a greater problem–and in a sense related–is where agencies give someone a promotion in position (usually not late in his career) which comes with a substantially higher salary (and hence pension) when the person is still doing the same, lower-level job. I have seen instances of this in Davis. So in place of giving a low or mid-level employee a 5-10% raise, they get a new title. And the new title comes with a 75-100% higher salary. Where this really seems to be a serious problem in our region is with Yolo County. If you take a look at almost all of the admins making more than $100,000 per year in salary (there are 102 positions with Yolo County, not counting court personnel, medical doctors or other equally licensed professionals which make a base salary greater than $100k/year), the people holding those jobs were originally hired at less than $50k/year, very often much less than that, and their actual duties and responsibilities have not substantially changed. Most of them don’t manage anyone else. Most of their duties appear to me to be clerical–filling out paper work and filing it where it is supposed to go.
[i]”I am not a fan of the hybrid option unless the 401K plan is voluntary.”[/i]
Why? For the few of the rest of us that are lucky enough to receive employer-paid contributions (usually 2%-4% matching our employee contributions) to our retirement… that is the only “choice” we have. I think PEU employees make up about 4% of the entire national workforce. Is there something better about this 4% that would justify them being entitled to defined benefit pensions while the rest of us are not?
Brown’s 12-point plan is dishonest in that it ignores the root of the problem. It is like offering a box of Band-Aids to a terminal cancer patient.
Great post.
Matt Rexroad
662-5184
Jeff: so, “at the end of the day” your private employer contributes how much to SS, and the 401 k? How much does the employee pay to SS, and what is their match for the 401? How does that compare to contributions and/or benefits from/for the public employees?
“I am not a lawyer but from a financial perspective these obligations are unsustainable and tinkering around the edges won’t get it done. “
Dr. Wu, for the most past we have already paid this. So going forward the biggest change would be having to pay a lower rate in the future.
Rich: The first issue does happen, but I have not seen it in Davis. The second is probably just as common, with this reform, it would make it more difficult to spike a pension with a one year raise.
Rifkin: “It seems to me (in general) a greater problem–and in a sense related–is where agencies give someone a promotion in position (usually not late in his career) which comes with a substantially higher salary (and hence pension) when the person is still doing the same, lower-level job.”
Excellent point…
“Why not do away with collective bargaining and pay all public workers the average wage, benefits and retirements of their counterparts in the private sector for the same types of jobs?”
Because that would mean giving all the public sector employees raises.
“Because that would mean giving all the public sector employees raises.”
Wrong, not when you consider the whole package.
[i]Jeff: so, “at the end of the day” your private employer contributes how much to SS, and the 401 k? How much does the employee pay to SS, and what is their match for the 401? How does that compare to contributions and/or benefits from/for the public employees? [/i]
For SS, employers pay 6.2% on the first 105K or so of salary, and the employee also pays 6.2% (it is actually 4.2% for this year). For 401Ks, many, but not all, employers match all or part of the employees contribution to 401k. No employer match is required, but many match in the 2 – 4% of salary range. Many employers also make a contribtuion to a defined contribution plan. I think the number of employers that contribute to a defined benefit plan are very, very few. That is probably the single biggest problem with the PEUs – many plans are indexed to inflation, and must be paid for the lifetime of the employee. With runaway Medicare availability, lifetimes are extended well beyond the original expectations when the plans were formed and the costs are much higher than originally expected.
These plans should be switched to defined benefit plans, with states and employees making contributions. Public employees should be allowed to choose how to invest that money, and then required to live within their means after retiring.
Jeff: am assuming you meant to say defined [u]contribution[/u] plan, instead of defined [u]benefit[/u]. Ok… for current and prospective public employees, would you advocate that we go to a system where:
– local/state governments move to Social Security?
– if employees set aside 4% of their salary, agencies would match at 4% (or something lower)?
– some combination of the two?
– differentiate between existing and prospective public employees?
If we went to a SS system, there are those approaching retirement age who have been in PERS almost of of their careers. They would need 40 quarters of SS to benefit, and if they get ANY government pension, the SS benefit that they could get would be lowered, dollar for dollar, by whatever pension they ‘earned’ prior to the transition. That would not appear to be “fair”, but life isn’t necessarily either.
I can see that with the defined contribution approach, the electeds could lower the match to 0% at any time for any reason.
Am curious what you (and others) would recommend for a ‘new system’…