Not present on the ballot this year in California is an initiative to reformulate pension benefits for state and local government employees. The subject of dozens of posts, public employee pensions are financially unsustainable and grossly inequitable. The reasons for those assertions have been fully explored in previous posts, so the purpose of this post is not to reiterate those reasons, but to enumerate some of the key reforms that would, if they were all enacted, bring pension benefits for public sector employees down to a level that would be financially sustainable while still preserving the defined benefit option. In some cases, these reforms would have to be implemented not via an initiative amendment, but via municipal bankruptcy court – but if they were included in an initiative, it would provide a roadmap for bankruptcy courts to follow. Here goes:
(1) Lower annual pension accrual to 1999 levels for new hires:
The public sector pension formula for all new hires would be based, as before, on accruing a percentage of final salary for each year worked. For public safety employees this percent would be reduced from 3.0% per year to 2.0% per year. For all other employees, this percent would be reduced from 2.0% per year to 1.25% per year.
(2) Lower annual pension accrual to 1999 levels going forward for existing hires:
Current employees would, for all years remaining in their public sector career, accrue their retirement benefit at the new reduced percentage rate. Current employees would retain the higher percentage rate they have earned in prior years, subject to the conditions in (3).
(3) Reverse any retroactive pension accrual enhancement ever granted existing hires:
Current employees whose annual pension benefit accrual was increased retroactively from 2.0% to 3.0%, or from 1.25% to 2.0%, will retain this increase for the years subsequent to that change (subject to the conditions in item (2), but will revert to their original rate of pension benefit accrual for the years prior to that change.
(4) Retired public employees will see no change to their pension benefit.
Create a “pension review commission” to audit and adjust any existing pensions where evidence of “spiking” or other inappropriate enhancements are uncovered.
(5) Spread “final year” salary calculation over five years and eliminate “spiking”:
The final salary base for which the accrued percentage based on years worked shall be applied will be calculated as follows: The average of the final five years of each retiree’s annual compensation, adjusted for inflation, but not subject to any other adjustments. Annual compensation shall not include overtime, cashed in sick time or vacation time, bonuses, or any other form of compensation not considered base salary.
(6) Establish ceiling on maximum pension benefit:
A ceiling on eligible pension compensation shall be set at no more than 75% of the average final five years salary as calculated in item (5). Additionally, a ceiling on eligible pension compensation shall be set at no more than triple the maximum benefit awarded under social security. A floor on eligible pension compensation shall be set at no less than the benefit as calculated by social security.
(7) Raise eligible retirement age:
Public safety employees shall become eligible for pension benefits no earlier than age 55, and other employees shall become eligible for pension benefits no earlier than age 62.
(8) Reduce pension benefit by amount retiree earns in new job:
Public employees shall not be eligible to receive their full pension if they engage in work subsequent to their retirement. To the extent a public sector retiree works in any job, public or private, the gross amount they earn shall be deducted from the gross amount of their eligible pension payment.
(9) Eliminate tax-free or reduced tax pensions:
No portion of public employee pensions shall be awarded tax-free status, or subject to a reduced rate of taxation, for any reason.
(10) Aggregate multiple pensions under same ceiling:
Public employees who have earned two or more pensions by virtue of working in two or more public sector jobs for a period sufficient to vest these pensions shall have the sum of these pension benefits subject to the ceiling limitations as set forth in items (6) and (7), and these reductions to benefits shall be apportioned on a pro-rata basis to the applicable benefit plans.
(11) Require conservative pension fund investment strategy:
Public employee pension funds will be required to invest 80% of their assets in low-risk annuities.
(12) Require public employees to contribute a fair share to their pension fund:
All public employees shall contribute 50% of the amount necessary to fund their pension each year in the form of withholding from their gross earnings, with the employer contributing the other 50%.
While many of these items may violate existing collective bargaining agreements, they are worth considering either as an initiative amendment, legislation, or as the product of bankruptcy negotiation. Because these twelve items represent an equitable way to move forward with pension benefits for public employees that remain considerably better than social security, retain the security of being defined benefits, and would – if all of them were enacted today – almost certainly preserve the solvency of the public employee pension system.