Critics on Both Sides Blast the Deal which Rolls Back 3% at 50 But Only For New Employees –
Governor Brown and Democratic leaders on Tuesday outlined their compromise proposal for what they are calling “a sweeping pension reform agreement that saves billions of taxpayer dollars by capping benefits, increasing the retirement age, stopping abusive practices and requiring state employees to pay at least half of their pension costs.”
“These reforms make fundamental changes that rein in costs and help to ensure that our public retirement system is sustainable for the long term. These reforms require sacrifice from public employees and represent a significant step forward,” said Governor Brown.
Meanwhile, Speaker John Perez added, “The comprehensive pension reform proposal to be reviewed by the Conference Committee meets and exceeds the Governor’s pension reform proposal.”
“We will outlaw the most objectionable pension practices, impose a cap on the maximum value of pensions, and generate the long-term savings that will ensure the fiscal health of state and local pensions,” he added.
The Speaker concluded, “Assembly Democrats on the Conference Committee, Co-Chair Warren Furutani and Chair of the Committee on Public Employees, Retirement and Social Security Michael Allen, have taken their commitment to fair pension reform and helped provide an in-depth review of all the issues, including six hearings and 10 months of discussion. Their extensive efforts are clearly reflected in the final agreement.”
However, unions and pension reform advocates criticized the deal.
Dave Low, who chairs a coalition representing around 1.5 million public employees, California for Retirement Reform, said, “We are outraged that a Democratic Governor and Democratic Legislature are taking a wrecking ball to retirement security for teachers, firefighters, school employees, and police officers. While we support common-sense changes to end spiking and abuse of the system, this package is unfair and wrong.”
He added, “This is far more than ‘low hanging fruit.’ This is the fruit, the branch, the tree trunk, and the roots. This is a sweeping proposal that undermines collective bargaining, and is being enacted unilaterally thru the political process rather than in good faith negotiations at the bargaining table.”
According to a release from the governor’s office: “The pension reform agreement includes substantial benefit rollbacks for public employees. It requires all current state employees and all new public employees to pay for at least 50 percent of their pensions and establishes this as the norm for all public workers in California. Importantly, these new reforms eliminate state-imposed barriers that have prevented local governments from increasing employee contributions.
“Further, it bans abusive practices used to enhance pension payouts.”
“No more spiking, no more air time, no more pensions earned by convicted felons,” said Governor Brown. “We’re cleaning up a big mess and the agreement reached with Legislative leaders today is historic in its far reaching implications.”
However, the biggest savings come not from current employees, but rather for employees hired after January 1, 2013 when the compromise bill would reduce pension formulas. In addition, those employees would have a two year or more delay before earning maximum benefits.
But none of the cost savings would apply to current employees. Moreover, the proposed cap would not impact 95 percent of future employees.
However, it does end the 3% at 50 public safety enhanced benefit, but only for those employees hired after January 1, 2013.
Governor Brown’s original proposal would have included a hybrid pension plan for new hires. That plan was controversial, with pension reformers supporting it but unions blasting it as an idea that would deliver lower benefits at higher costs. CalPERS itself was lukewarm on the idea, believing that hybrids would not significantly cut costs to the state but might save local public agencies money.
Daniel J.B. Mitchell, a professor emeritus at UCLA’s Anderson Graduate School of Management, told the Sacramento Bee that the legislation would have been too complicated as it would have required obtaining some form of guaranteed return from a plan based on individual investments that would be unpredictable and volatile.
“The hybrid was the showpiece of Brown’s plan,” Professor Mitchell told the Bee. “But it never appeared to be particularly workable.”
In the meantime, while the plan splits the costs of pensions roughly evenly, it does not fund the system’s unfunded obligations.
“The unfunded liability question is still lurking out there and threatening the finances of governments across the state,” Pepperdine University political scientist Michael Shires told the Bee.
While pension reformers were not happy, neither were union leaders who blasted the governor for creating the measure legislatively rather than at the bargaining table. The unions also reminded Democrats that their members did not create the problems on Wall Street and should not serve as scapegoats.
Lou Paulson, of the California Professional Firefighters, released a statement arguing: “The pension proposals outlined today represent a retreat from collective bargaining and basic principles of retirement security. The proposal imposes rollbacks to levels not seen in four decades – the biggest pension rollback in California history. They punish everyday working people who have already sacrificed hundreds of millions of dollars in wages and benefits lost to furloughs, layoffs and downsizing.”
He would add, “Beyond its punitive nature, these pension changes could actually wind up imposing greater costs on public agencies, especially in the short term. According to a RAND study, firefighters over the age of 55 have a workplace injury rate that is more than a 60 percent greater than firefighters under the age of 45 years. That translates to higher workers’ comp and disability costs, as well as being bad for the safety of our citizens.”
Mr. Paulson concluded, “Nobody condones abuse of the pension system – least of all our members. But these proposals go far beyond ‘reform.’ Instead they threaten basic retirement security for generations of front line first responders and their families.”
Dean Vogel of the California Teachers Association released a statement, as well, “We have been working in good faith with the governor and Legislature to obtain pension solutions that will move our state forward. This plan does not achieve that goal.”
He argued, “This process has not been transparent, it does not recognize the tremendous cuts that have already been made to our schools, and it does not respect the disproportionate impact it will have, largely on women working in our classrooms. Instead, it will make it more difficult to attract and retain experienced educators to our classrooms.”
While the compromise rolls back critical elements of the plan, here is what it does do:
Public Employee Pension Reform Act of 2012
Caps Pensionable Salaries
- Caps pensionable salaries at the Social Security contribution and wage base of $110,100 (or 120 percent of that amount for employees not covered by Social Security).
Establishes Equal Sharing of Pension Costs as the Standard
- California state employees are leading the way and are paying for at least 50 percent of normal costs of their pension benefits. Requires new employees to contribute at least half of normal costs, and sets a similar target for current employees, subject to bargaining.
- Eliminates current restrictions that impede local employers from having their employees help pay for pension liabilities.
- Permits employers to develop plans that are lower cost and lower risk if certified by the system’s actuary and approved by the legislature.
- Provides additional authority to local employers to require employees to pay for a greater share of pension costs through impasse proceedings if they are unsuccessful in achieving the goal of 50-50 cost sharing in 5 years.
- Directs state savings from cost sharing toward additional payments to reduce the state’s unfunded liability.
Unilaterally Rolls Back Retirement Ages and Formulas
- Increases retirement ages by two years or more for all new public employees.
- Rolls back the unsustainable retirement benefit increases granted in 1999 and reduces the benefits below the levels in effect for decades.
- Eliminates all 3 percent formulas going forward.
- For local miscellaneous employees: 2.5 percent at 55 changes to 2 percent at 62; with a maximum of 2.5 percent at 67.
- For local fire and police employees: 3 percent at 50 changes to 2.7 percent at 57.
- Establishes consistent formulas for all new employees going forward.
Ends Abuses
- Requires three-year final compensation to stop spiking for all new employees.
- Calculates benefits based on regular, recurring pay to stop spiking for all new employees.
- Limits post-retirement employment for all employees.
- Felons will forfeit pension benefits.
- Prohibits retroactive pension increases for all employees.
- Prohibits pension holidays for all employees and employers.
- Prohibits purchases of service credit for all employees.
—David M. Greenwald reporting
I have a couple of questions:
1) How much is this expected to “save” the state?
2) Does it really address the underlying problems?
3) How does Rich Rifkin view this pension reform plan?
4) How does the Vanguard view this pension reform plan?
If Governor Brown is irritating both unions and pension reformers, perhaps he has it just about right? LOL
The state employee unions negotiated a reduction in the pension formula and an increase in employees’ share to roughly 50% not even a year ago. Yet, it is still not enough.
I can safely speak for Rich Rifkin and the Vanguard and the editorial position of the Sacramento Bee: that it doesn’t go far enough. What they won’t say is it will never go far enough until there is no public employee pension plan.
Forget talking about how to build retirement security for everyone or how the public sector retirement plans could fit into that. Just cut it for the few who have it and the rest of us will be much better off. It also doesn’t seem to matter that many public employees support much of what is in the bill relating to spiking, counting overtime, even a reasonable cap because highly compensated employees can afford to contribute to an additional 401k type plan. There just doesn’t seem to be any end in sight to punishing public sector workers, who as we all know are the sole cause of all evil. In the end, I suppose we will all get what we pay for.
“…..Prohibits purchases of service credit for all employees. ….”
As a veteran, I was able to purchase (at my expense!) 4 years of service credit prior to my retirement*. Perhaps someone in the Brown Administration who has served in the military (Governor Brown?!?) ought to run this item past the VFW, American Legion, DAV, and other veteran interest groups before making this decision. Could be some “land mines” ahead!
___________
*My ultimate compensation formula was certainly far more modest than the lofty 3% at fifty described in the article. Military service is NOT the same as “Air (breathing) Time!”
Convert from defined benefit to defined contribution it is the only viable solution.
No Jeff, that is only one solution, and one that has increased the fees collected by fund mangers at the expense of retirees. Additionally 401k plans haven’t done well for those not nimble enough to manage their own money or subject to the mistakes of their managers. As an example did you see Gretchen Mortgensen’s article in the Sunday New York Times about people who can’t get their money out of 401 K plans because their company is in bankruptcy.
The real question here is whether the big state pension funds can remain solvent until the generation of employees who will get the current pay outs passes and how much extra is it going to cost the taxpayers in the interim. Only the actuaries know for sure and i am yet to see that analysis.
“4) How does the Vanguard view this pension reform plan?”
It does most of what I wanted to do. I was not in favor of the hybrid plan as I think we should commit to keeping defined benefits. I will analyze it further in the coming days, but I might be the rare person this pleased.
“I can safely speak for Rich Rifkin and the Vanguard and the editorial position of the Sacramento Bee: that it doesn’t go far enough. What they won’t say is it will never go far enough until there is no public employee pension plan. “
That’s a strange comment coming from you Dave because you know where I stand on this issue and it’s squarely on the side of defined contributions with limitations at the top and to prevent abuse. I’m not in favor of curtailing the typical worker’s pension. I am in favor of reducing 3% at 50 and preventing the abuse at the top. I recall that you yourself once remarked that 3% at 50 was unsustainable and I didn’t get the impression at that time we were all that far apart on this issue.
Jeff… I think think the prevailing sentiment is to have NO retirement benefits for State and local employees, other than (maybe) teachers… local, state, etc. It is where we have come to
Jeff wrote:
> Convert from defined benefit to defined contribution
> it is the only viable solution.
Then Mr.Toad wrote:
> No Jeff, that is only one solution, and one that has increased
> the fees collected by fund mangers at the expense of retirees.
If we kept the same pension fund managers the fees for a defined contribution system should be exactly the same (or even less since they would not need staff time to ask politicians to give funds to make us shortfalls).
> Additionally 401k plans haven’t done well for those not nimble
Only about .001% of investors have been able to invest and get a payout even close to the ROI of a typical California Government pension. In real life investments go up and down not just up (like the pension projections always do). The big lie is that “the s&P 500 stock market average is…” since it is not the average of 500 companies, but 500 companies that are doing well (they kick out bad companies and replace them with better ones so the numbers keep going up)
> The real question here is whether the big state pension funds can
> remain solvent until the generation of employees who will get the
> current pay outs passes and how much extra is it going to cost the
> taxpayers in the interim. Only the actuaries know for sure and i am yet
> to see that analysis.
The actuaries don’t “know for sure” they “don’t have any idea what will happen” (can you show me an actuary that predicted the 20%+ loss in 2009 or the 1% gain this year back in 2005?)
I have a friend that is an actuary for an insurance company and he calls pension fund actuaries “guys with math degrees who can back in to any number the boss wants them to get”.
The current pension system is a Ponzi scheme and as long as California kept growing fast everything would have been OK, but it is time to admit that the benefits promised are far far more than the actual investments of the funds (or the investment returns that could ever reasonably be expected).
[i]Jeff… I think think the prevailing sentiment is to have NO retirement benefits for State and local employees, other than (maybe) teachers… local, state, etc. It is where we have come to [/i]
hpierce, that is not my sentiment. I don’t want to eliminate retirement benefits to public-sector employees.
The private sector is almost 100% defined contributions. Public sector employees make greater pay, get more time off, enjoy greater job security, retire much younger, get much greater retirement benefits that are defined… with the risk for pension fund underperformance completely born by others. Even if this was sustainable it should be scaled back simply because it is unnecessary and unfair. The savings that would be derived from better matching public-sector pay and benefits to the general labor market could be used for other things… like infrastructure and education reform.
But I agree, with cities filing bankruptcy more will completely lose their existing retirement benefits. It is too bad the unions are playing chicken instead of accepting the same reality that most Americans have had to face… that the largess of the last 20 years was largely fake and require much belt tightening.
I think folks still supporting defined benefit plans are either ignorant to their real risk-cost, or are stubbornly selfish, or are taking some weird social stand defending their desired model even though we cannot afford it.
SouthofDavis: [i]If we kept the same pension fund managers the fees for a defined contribution system should be exactly the same (or even less since they would not need staff time to ask politicians to give funds to make us shortfalls).[/i]
Absolutely.
The point Mr. Toad was making about 401k fees being higher is a non-starter because for a large pension fund to convert to a large 401k trust, the trustees would still be able to negotiate fee discounts leveraging the economies of scale. There could even be an investment fund that replicates a defined beneift investment strategy. Assuming all employees put all their defined contributions into this fund, the ONLY difference would the transfer of fund performance risk from tax payers, to the employees.
To minimize the risk that individual employees would make stupid investment moves with their 401k money, the trustee could limit choice to a small list of mutual funds with lower risk profiles. However, this would also limit potential returns.
The bottom line… it is silly to make up arguments against the use of 401k plans since that is what 90% of Americans have for retirement, and there is plenty of best practices for structuring and managing an effective plan.