By Jon Ortiz
jortiz@sacbee.com
Published: Monday, Jul. 25, 2011 – 12:00 am | Page 1A

Thousands of California public employees have put down big money on what amounts to a bet with the government that they will live long enough to recoup their investment – and then some.

The benefit, which adds to the civil service time figured into employees’ pension formulas, has become a political target in the debate over government pay and perks.

Democratic Gov. Jerry Brown has said he would like to end the benefit. Hard-core pension reformers say it’s a small indication of much larger problems with public retirement systems. Unions say any changes must be bargained, not imposed.

State law lets government workers purchase up to five years of “additional retirement service credit” – sometimes called “airtime” – which in turn increases their pension payouts.

The program isn’t supposed to cost taxpayers anything. Employees pay a hefty fee calculated to cover the pension contribution costs for themselves and their employers had they worked for the service period they’re purchasing.

However, failed investments or inaccurate assumptions about when employees will buy the credit or how long employees will live after retirement can leave government picking up a share of the tab.

Last year CalPERS raised prices after a review showed it hadn’t charged enough.

The benefit is so lucrative that one of California’s most vocal public pension critics bought five years of credit when he worked in the state Assembly.

“It’s a financial no-brainer,” said Dan Pellissier, president of California Pension Reform, which hopes to put a pension measure on the 2012 ballot. “It’s like there’s a window where they’re selling annuities at a discount – and the window is only open to government employees.”

Any active CalPERS member with at least five years of service can buy the credits, which guarantee a monthly payment on top of a retiree’s pension check.

Since the program’s 2004 start, about 49,000 CalPERS members have purchased service time at wide-ranging prices based on their income, age and job category.

A ‘darn good deal’

CalPERS pensions are figured by multiplying the number of service years by a percentage of an employee’s highest salary year (or an average of several years for newer employees) and “seniority credit,” an age factor that increases slightly each year.

The formula for a state manager retiring at 55 after 25 years of service might look like this: 25 (years of service) x $100,000 (final year’s pay) x 2 percent (seniority credit) = $50,000 annual pension.

Three years of airtime would cost that employee about $74,000, according to CalPERS’ online calculator, and add another $5,900 to his or her annual pension payout. A little over 12 years into retirement, at age 67, the employee would reach a break-even point on the investment.

If the employee dies earlier, the fund comes out ahead. CalPERS actuaries figure men in the system live on average to age 83. Women live three years longer.

Credits cost less for younger employees, which lowers their break-even threshold. The earlier the purchase, however, the more time CalPERS has to grow the investment.

Airtime buyers benefit from the same assumptions and guarantees that back CalPERS pensions: payments backed by investments that assume a 7.75 rate of return. If CalPERS beats that target rate, the fund pockets the extra money. If the investments miss the mark, the airtime payment stays the same because the government makes up the difference.

“It’s a pretty darn good deal” for government workers, said Jonathan E. Lederer, president of Sacramento-based Lederer Private Wealth Management LLC.

It’s especially so when compared with an annuity, a comparable private vehicle that invests a buyer’s money and repays it later as an income stream. Many annuities offer variable return rates based on investments.

Lederer, a chartered financial analyst, said a few offer up to a 4.25 percent guaranteed return. “There may be something out there, but I don’t know of anything that can get you 7 percent on a guaranteed basis,” he said. “I usually tell people who have the option that they should buy service credits if they think they’ll live long enough.”

Ryan Kinsella, a 38-year-old state scientist who monitors hazardous waste, said he purchased five years of service credit last year.

He researched other options before he rolled over his IRA and added cash to buy airtime that he figures will add about $500 to his retirement check each month. “I wish I had done it earlier,” he said.

Program’s price adjusted

The federal government began to offer airtime in 1997 as a way for employees entering civil service later in life to boost retirement income. By the time CalPERS opened up airtime seven years later, 18 public retirement systems nationwide had similar programs.

Unlike CalPERS, many offered a discount to employees, said Robert Snell, a pension expert with the National Conference of State Legislatures.

“But now states are taking a closer look,” Snell said. Some are charging employees more.

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