Last year in a post entitled “Pension Reform Options,” the following suggestions were made – none of them terribly original – for ways to restore equity and sustainability to public sector pensions in California:
(1) Lower annual pension accrual to 1999 levels for new hires:
(2) Lower annual pension accrual to 1999 levels going forward for existing
(3) Reverse any retroactive pension accrual enhancement ever granted existing hires.
(4) Retired public employees will see no change to their pension benefit.
(5) Spread “final year” salary calculation over five years and eliminate “spiking.”
(6) Establish ceiling on maximum pension benefit.
(7) Raise eligible retirement age.
(8) Reduce pension benefit by amount retiree earns in new job.
(9) Eliminate tax-free or reduced tax pensions.
(10) Aggregate multiple pensions under same ceiling.
(11) Require conservative pension fund investment strategy.
(12) Require public employees to contribute a fair share to their pension fund.
Last week a group advocating pension restructuring in California, the California Foundation for Fiscal Responsibility, published online two pension reform proposals. These proposals, put forward by experts on the issue, are interesting examples of what may be necessary in order to maintain pension solvency without either punitive tax increases or grotesque service cuts. They are also interesting because, along with including basic recommendations such the ones listed above, they include many nuances that most publicized pension reform proposals don’t cover. Because they are the product of in-depth analysis by qualified experts who have spent years studying the issue, anyone seriously interested in this issue should click to these online proposals and review them carefully. Here are some of the suggestions, not listed above, that are designed to correct less publicized, but equally critical problems with the current system:
(1) Disability benefits for public employees hired on or after July 1, 2013 shall be provided through insurance policies.
(2) No public employee hired on or after July 1, 2013 may receive lifetime or formulaic retirement medical benefits prior to age 65.
(3) Before each decennial anniversary of the July 1, 2013 transition date, the Legislature shall adjust this age requirement to reflect changes in longevity.
(4) The defined retirement income benefits for employees hired on or after July 1, 2013 shall not exceed the median statewide household income ($56,344 in 2009). [a subsequent item provides for adjusting for inflation]
(5) All benefits from Social Security and California public pension plans shall be integrated for the purpose of determining such employees’ retirement income benefits, not including income from defined contribution plans.
(6) After January 1, 2014, at least two-thirds of the members of a public pension plan’s governing trustees shall be independent of that retirement system and its participating employers.
(7) At least two-thirds of independent trustees shall be qualified for service as certified or licensed financial, actuarial, accounting, legal, benefits or investment professionals at the time they are selected.
The pension reform proposals on the CFFR website are comprehensive enough to form the basis of legislation with very little modification, and they fill some huge holes. Item (1) moves the awarding of disability retirement benefits into the private sector, greatly reducing the opportunities for retirees to fraudulently claim disability in order to receive 50% of their retirement pension exempt from state or federal taxes. Item (2) begins to address the huge looming liability for retirement health benefits that often begin when retirees are still quite young. Item (4) places a cap – a pretty low cap at that – on the maximum allowable defined benefit pension. Item (5) prevents retirees from receiving social security and a pension (or social security and two pensions, etc.), if those benefits combined exceed the cap established by item four. Item (6) attempts to ensure an independent governing body for pension benefits, and item (7) attempts to ensure (gasp) that the people on this governing body are qualified to oversee multi-billion dollar pension funds.
Here are the complete proposed pension reforms coming from the California Foundation for Fiscal Responsibility’s website:
Pension Reform Alternative A:
The Fair and Sensible Public Employee Retirement Plan Reform Act
Pension Reform Alternative B:
The Fair and Sustainable Public Pension System
Alternative B contains very provocative language, because it not only proposes lowering rates of pension benefit accruals going forward for existing employees, but provides a method for doing so – declaring a fiscal emergency. Here’s the language:
“Freeze all current defined benefits (DB) plans at all state and local government agencies. Amend the California Constitution to declare the level of unfunded liabilities in current db plans a fiscal emergency and suspend further accruals to plans under 90% funded until they demonstrate they have maintained their funding levels above 100% for three consecutive years using asset market values and conservative actuarial assumptions (5% liability discount rate, 6% earnings assumption). After three years above 100% funding, the governing board of the jurisdiction may place the question of re-opening the current plans before their voters on a statewide general election ballot subject to a majority vote of the affected jurisdiction. The freezing and re-opening of plans shall be excluded from collective bargaining.”
Anyone reviewing these proposals will hopefully already realize that public sector pension benefits in California are going to have to be reduced. They were negotiated during a time of unsustainable, debt-fueled economic growth, and hence are calibrated on unrealistic economic expectations. The more relevant questions are what the specific reforms will be, who is affected, and how deep the benefit reductions will need to be. What is also evident from reviewing these proposals is that there are solutions. This is encouraging to all of us who care about the future of California.