California Commission Recommends Pension Reform

February 25, 2011

Set up in 1962 as independent state oversight agency, California’s bipartisan Little Hoover Commission issued a report this week urging a reduction in public pension payouts and taking steps away from the defined-benefit structure. From their report:

One need look no further than the actions of some 200 public agencies in the months since the steep decline in the stock market and housing values in 2008: Rather than foreswear risky behaviors, these public agencies in California instead have improved pension benefits for their employees. Up and down the state, cities, counties, and fire and water districts rewarded employees with “golden handshake” agreements that provide extra service credit to retire early; introduced favorable methods to calculate pension benefits based on the single highest year of compensation; and lowered retirement ages that extend the government’s obligation to pay lifetime retirement benefits. These actions further burden pension plans that already are unsustainable.

In its study of public pensions, the Commission found that the state’s 10 largest pension funds – encompassing 90 percent of all public employees – are overextended in their promises to current workers and retirees.

Here’s a chart from the report showing the share of the state’s general fund budget going to public employee retirement costs. Already a sizeable share, it will continue growing in the near future unless reforms are enacted.

From the Sacramento Bee:

CalPERS says investment earnings account for 64 cents of every dollar it takes in, while employers kick in 21 cents and employees pay 15 cents.

The Commission recommends the employer/employee share be split equally.

Since reducing pensions for the next generation of employees won’t cut costs in the near term, the Commission recommended the Legislature pass a measure that lets state and local governments freeze the pensions of current workers and move them into a less costly hybrid system.

For example, a 20-year government employee planning to retire in 10 years at age 63 with 2.5 percent of salary for each year of service would keep the money built up under that formula.

But once the pension is frozen, the employee would move into a three-legged program that keeps a much smaller guaranteed pension, a professionally managed 401(k)-style savings account and Social Security benefits.[…]

Public employee unions counter that guaranteed pensions make up for government’s generally lower wages. They say the Little Hoover report and politicians like Dutton overstate the pension problem to pursue an anti-union agenda and undercut collective bargaining.

More on California here.

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