Last week, on the last day of its session, the state Legislature passed important pension reform legislation. The legislation applies to most public entities throughout California. Here’s what it does and doesn’t do:
The most significant parts of the legislation apply only to public employees hired after Jan. 1, 2013. The legislation helps prevent the current pension hole we are in from getting deeper, but does little to get us out of that hole.
CalPERS estimates cumulative savings from this legislation of up to $55 billion over the next 30 years — on average less than $2 billion per year, most of that well into the future. Yet CalPERS faces an unfunded liability of at least $100 billion for pensions already earned. The legislation does nothing to address that.
Here are the key elements which impact new employees:
New pension formulas with higher retirement ages and lower pension benefits. The pension multiplier for most public safety employees moves from 3 percent at 50 to 2.7 percent at 57 and for “all other” employees from as high as 2.7 percent at 55 and 3 percent at 60 to 2.5 percent at 67.
A cap on the employee compensation which can be used to calculate pensions. The cap for employees who receive Social Security will be $110,100. The cap for those who don’t will be $132,120. The actual pension received will be some percentage of that cap based on longevity.
Pensions will now be calculated against an employee’s highest average annual pay over three years instead of against the highest 12-month pay actually received. This limits pension spiking.
Tighter definitions on the compensation that is pensionable. In general, just regular recurring pay — no severances, bonuses or leave payouts; no overtime unless required by 12-hour or 24-hour public safety shifts; no vehicle or uniform allowances . (Most of these items were already excluded by CalPERS.)
A requirement that new employees pay half the “normal” cost of their pensions. The normal cost is part of the pension cost that public employers pay. When the pension fund has an unfunded liability like now, employers must kick in additional funds to pay down that liability.
Here are the key elements that impact all employees:
After Jan. 1, employees will no longer be able to purchase “airtime” (fictional years of service) to increase their pension benefit.
Employers will no longer be able to increase pension benefits retroactively. The principle reason for the CalPERS unfunded liability is that most public employers, starting in 1999, awarded retroactive increases to employees without funding those increases.
Employers will not be able to defer making pension payments unless CalPERS has a fund balance of greater than 120 percent. In the early years of the last decade, CalPERS allowed public employers to take a pension payment “holiday.”
Public employees convicted of a felony related to their employment will forfeit pension benefits earned after the date of the felony.
There will be new restrictions that limit a retiree’s ability to return to government service. This is designed to reduce “double-dipping,” but the legislation does nothing to close the primary loophole which allows it to take place. That’s when a retiree from one pension system gets hired by a public employer covered by another system.
Finally, there is an additional element that impacts existing employees. After Jan. 1, 2018, employers will be able to require existing public safety employees to pay 12 percent of their pay for pensions and all other existing employees to pay 8 percent. Until that date, such payments may be negotiated freely, but cannot be imposed.
Does this legislation represent “real” pension reform? For new employees, it does. For existing employees, it doesn’t. Gov . Jerry Brown, who has been driving this issue, chose not to tackle the pension benefits of existing employees because court rulings are seen as restricting the state’s ability to do so. It makes sense that pension benefits for prior years of service are protected. It makes little sense that this is the case for future years of service. After all, public employers can reduce future health benefits and future pay scales, so why not future pension benefits?
Significant movement on the existing employee issue awaits future court rulings. Voters in San Diego and San Jose have recently authorized changes to existing pension benefits. Those votes are being challenged by employee groups, so the courts will have to weigh in. Also, bond holders in Stockton are challenging in bankruptcy court the sanctity of existing pension benefits.
The only other opportunity for movement on the existing employee issue would be the qualification of a statewide pension reform initiative.
Andrew Carter serves on the San Luis Obispo City Council. He’s also a member of the Employee Relations Committee of the League of California Cities.