Legislative panel working on ‘hybrid’ pension
SANTA ROSA — A two-house legislative committee is working with Gov. Brown’s Department of Finance on a ‘hybrid’ retirement plan for new state and local government hires, a committee member told a forum here last week.
Assemblyman Michael Allen, D-Santa Rosa, twice referred to a “cash balance” plan while talking about a cost-cutting hybrid, proposed by Brown, that combines a lower pension with a 401(k)-style individual investment plan.
At a hearing in February, the committee was briefed on the cash balance plan of the California State Teachers Retirement System, a pension supplement that guarantees a bond-based rate of return on individual investments.
In a typical 401(k)-style plan there is no protection against major investment losses, widespread during a stock market crash in 2008, or a prolonged period of low earnings like some experts predict for the next decade.
A hybrid plan that combines a lower pension with a cash balance plan instead of a 401(k)-style plan could reduce savings for government employers, who would be responsible for covering the gap if earnings fall below the cash balance guarantee.
But protecting workers from the risk of losses in a typical 401(k)-style plan might make a hybrid more acceptable to public employee unions, who have criticized the governor’s hybrid plan at hearings and in news releases.
“We are working on different models to design a plan that will protect the low-paid workers and also be fair to the higher-paid workers,” Allen told the forum. “It’s complex and we are getting a lot of help from the state Department of Finance on this.”
Brown’s proposal expected the hybrid plan to be developed after the legislation passed. His finance department told a hearing that outside experts would help develop a hybrid plan in about six months, before a Jan. 1, 2013, deadline in the legislation.
The governor’s proposal is a retirement plan that replaces about 75 percent of annual income on the job after a 30-year career, with roughly a third each coming from the smaller pension, the investment plan and federal Social Security.
If the worker is not in Social Security, the pension would be two-thirds of the retirement. A cap on the retirement plan would be based on the Social Security earnings limit, $110,000 this year.
“The whole concept of capping pensions at higher levels is being discussed and probably will be part of the proposal that comes forward,” Allen said.
The assemblyman said the governor’s 12-point pension reform plan is mainly conceptual. Developing legislation for the broad range of California public pension plans is a complicated task, he said, but the committee hopes to issue a proposal in June or July.
“I understand the press believes there has been a long silence on this,” Allen said. “I’ve been advocating for an interim report to let people know what the timelines are, what the expectations are.”
“But we are working on it,” he said. “I do agree when there has been so much controversy and concern on this it would be irresponsible for the Legislature not to respond to the governor’s proposal.”
The six-member committee is scheduled to hold its fourth hearing Friday (April 13) in Chino, this one focusing on county retirement plans. Allen, an attorney, has negotiated labor contracts and served as executive director of SEIU, Local 707.
Asked by an audience member if public pensions are sustainable, Allen said the intent of the governor’s plan is to “inflect a cost curve,” reducing projected government spending on retirement in the future.
“That can be done over a period of time,” he said, “whether done through increased contributions, changing the benefit mix. That’s something we are talking about.”
Allen said the committee also is discussing what some call “intergenerational compacts” and the transfer of debt to future generations through, for example, Social Security or other means. He said the committee wants to strike a balance.
“So what we are trying to do is be fair to the younger generation and also be fair to those who gave their lives in service,” he said.
Allen said the governor’s plan for an equal split of “normal” pension costs between employer and workers is supported by the committee. He said a roughly 50-50 split in recent contracts saves the state an estimated $350 million to $500 million a year.
“The governor talked about implementing it legislatively or unilaterally,” Allen said of an equal split of normal costs. “The conference committee prefers that we do this through collective bargaining.”
The “normal” cost is the amount actuaries say is needed, with investment earnings, to pay for pension obligations accrued in the current year. But many systems have a huge “unfunded liability” mainly due to investment losses in previous years.
Most state workers contribute 8 percent of pay toward their pension, more than half of the 14.4 percent normal cost. But state employers contribute 17 percent of pay toward the pensions of these workers, an amount that includes the unfunded liability.
The governor would extend the retirement age, now 50 for many police and safety workers, to 52 for eligibility and 57 for full retirement after 30 years. For others eligibility, now often 55, would begin at 57 reaching full retirement at 67 after 35 years.
Allen said the committee has agreement on extending the retirement age “at some levels,” but “one size does not fit all.” Manual labor occupations are strenuous, he said, and actuaries say the risk of disability can increase with age.
Some think retiree health care promised state and local government workers is a financial problem nearly equal to pensions. But unlike pensions, little or no money has been invested to help pay for future retiree health care costs.
State Controller John Chiang estimates the state has a $62 billion unfunded liability for retiree health care promised current workers over the next 30 years. The state will pay $1.7 billion for retiree health care this year, up 60 percent in the last five years.
The governor would delay state worker eligibility for retiree health from 10 years of service to 15 years for partial coverage and from 20 to 25 years for full coverage. His plan urges local government to take similar steps.
The committee is working with the governor on retiree health care, Allen said, but believes changes should be done through collective bargaining. He said the governor’s plans to curb salary “spiking” to boost pensions have “unanimous” committee support.
A forum panel member, Cynthia Murray of the North Bay Leadership Council, said the governor wants business backing for a tax increase on the November ballot. She said he will not get support if the new revenue is going to be eaten up by pension debt.
“What we are very adamant about is we will not even consider supporting any kind of tax increase unless pension reform has occurred,” she said.
Allen said he suspects there may be a second round of legislation after the initial committee proposal if cities and counties, due to the complexity of dealing with a wide range of retirement systems, do not get all of the flexibility they want.
“So I expect there will be more dialog,” he said. “I would also point out that at a certain point, and Cynthia alluded to it, I think the governor and the Legislature want to show that we are trying to move forward on reform.”