Thursday, April 7, 2011
By Ed Mendel

As San Diego officials joined forces this week on an initiative to switch all new hires except police from pensions to 401(k)-style plans, Mayor Jerry Sanders said the city’s troubled pension system could become a “national model.”

But in Sacramento, none of the half dozen pension overhauls proposed this year by Gov. Brown and reform advocates inside and outside of state government is a pure 401(k)-style investment plan.

Brown took a big step last week by expanding the eight-point pension reform plan issued during his campaign to a 12-point plan. Among five undefined concepts still under development are a “pension benefit cap” and a “hybrid option.”

The governor issued the plan shortly after a breakdown in talks with Republicans, who must provide at least four of the legislative votes needed to place a crucial tax extension on the ballot. It’s half of his plan to close a $25 billion gap.

Was Brown offering potential Republican budget votes a chance to help shape pension reform? Could it become a companion to a tax-extension initiative intended to show voters cost control?

Was it an attempt to demonstrate independence from public employee unions, who want any pension changes done through collective bargaining? Or is it simply something Brown thinks should be done?

A brief governor’s news release did not go into motivation.

“All 12 of these pension reform measures were presented and discussed in detail with Republican legislators,” said the release. “Talks broke down, however, over other issues. Brown intends to introduce these pension reforms with or without Republican support.”

A “hybrid” retirement plan is a combination pension and 401(k)-style plan. An example is a plan adopted for new federal employees in 1987 that provides a low guaranteed pension with a 401(k)-style plan, coordinated with Social Security.

Most of the private-sector employers that offer retirement plans have switched to 401(k) plans with no monthly pension guaranteed for life. The change protects the employer from long-term debt and the risk of soaring costs if investment earnings fall short.

The employer makes a fixed annual payment into the employee’s tax-deferred 401(k) investment account and often matches the employee contribution, usually up to about 6 percent of pay.

Critics of a stand-alone 401(k) plan say employees tend to make poor investment choices and have plans that charge high management fees. The critics say the 401(k) was originally intended to be a supplement to a pension, not a replacement.

When there is an economic downturn or stock market crash, the 401(k) plan investments of employees nearing retirement have little time to recover. A study earlier this year found that household heads age 60 to 62 with 401(k)s have less than a quarter of what is needed in retirement.

Recent pension reform proposals have not been stand-alone 401(k) plans.

A bipartisan state watchdog, the Little Hoover Commission, suggested a federal-style hybrid plan while urging a freeze of pensions earned by current workers. A freeze could curb rising pension costs threatening to “crush” government, but would also trigger a legal test of whether promised pensions can be cut.

The non-partisan Legislative Analyst recommended a hybrid plan or a cost-sharing plan that would increase contributions from both employers and employees when a pension fund needs more money.

Former Assemblyman Roger Niello, R-Fair Oaks, who may run for state senate or state controller, filed an initiative last month that would extend retirement ages and lower benefits and require equal employee-employer contributions for new hires.

A new proposal from a pension reform group would cap employer pension contributions at 5 percent of pay for most workers and 7 percent of pay for police and firefighters.

Last year the reform group led by Marcia Fritz hoped to get funding from wealthy Republican gubernatorial candidate Meg Whitman to put a plan on the ballot that would extend retirement ages and give new hires lower pensions.

But Whitman said she favored switching most new hires to a 401(k) plan, while continuing to give new police and firefighters a pension. The issue of exempting safety employees from a 401(k) plan split San Diego officials earlier this year.

San Diego Mayor Sanders and Councilman Kevin Faulconer, who wanted to exempt police and firefighters, reached an agreement with Councilman Carl DeMaio and others, who wanted no exemptions.

Placing a single 401(k) initiative on the June ballot next year, and continuing pensions only for new police, is intended to unite financial support from the business community and avoid dueling initiatives.

Supporters said the initiative is expected to save the city $363 million during the first five years. But much of the savings would come from a five-year cap on pay used to calculate pensions, which is likely to draw a legal challenge from labor unions.

San Diego, dubbed “Enron by the Sea“ in the national media, dropped city contributions below the actuarially required amount in 1996 and 2002 in deals that also raised pensions, leading to lawsuits, a moratorium on bond sales and deep budget cuts.

Sanders announced that he would pursue a 401(k) initiative last November after voters rejected a sales tax increase linked to pension reforms. He said it’s a “radical” idea for municipal government, but pensions were designed for another era.

“Public employees are now paid salaries comparable to those in the private sector, and there’s simply no reason they should enjoy a far richer retirement benefit than anyone else,” he said in a news release.

A statewide poll by the Public Policy Institute of California last month found strong support for switching new hires to 401(k) plans. It was a single question, without the follow-up questions that labor officials say can change results on pension issues.

“Would you favor or oppose changing the pension systems for new public employees from defined benefits to a defined contribution system similar to a 401(k) plan?” asked the pollster.

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