By Ed Mendel
Monday, May 5, 2014

A CalPERS report intended for policymakers, noting that a reform cuts $435 a month from the pensions of many new hires, suggests that a pay raise may be needed to “compete for quality employees.”

Gov. Brown pushed a cost-cutting pension reform through the Legislature two years ago, arguing voters needed assurance that a tax increase on the November 2012 ballot would not be eaten up by soaring retirement costs.

In the view of critics who say pensions are too generous and costly, diverting money from basic services, the reform did little to cut massive retirement debt. CalPERS estimated that in present-day dollars the reform would save $12 billion to $15 billion over 30 years.

The reform is limited to new hires because of the widely held view that a series of state court decisions, a key one in 1955, mean that pensions promised on the date of hire cannot be cut, unless offset by a new benefit of comparable value.

Last month CalPERS issued two reports, one for policymakers and one for new members, focused not on employer cost savings but on the gap between the pensions of workers hired before the reform took effect Jan. 1 last year, and those hired since then.

“To compete for quality employees, government employers may find they need to adjust salaries to make up for the reduction in retirement compensation,” said the report intended for policymakers.

The Public Employees Pension Reform Act (AB 340) cuts pensions for new hires in several ways, mainly by using a smaller percentage of final pay to multiply with years of service to set the pension amount.

In the CalPERS policymaker report, the example is a worker with a starting salary of $46,000 who retires after 20 years at age 62. The pension for the pre-reform or “classic” worker is $2,140 a month, compared to $1,705 for the new hire — $435 less.

The policymaker report might look to some like an argument for higher salaries, particularly for new hires. The report said pensions are deferred compensation, and money contributed to CalPERS stretches dollars.

For every dollar contributed to CalPERS, said the report, government employers and employees receive an estimated $3, nearly twice the amount received from a dollar contributed to Social Security, $1.66.

CalPERS researchers using U.S. Census data found that employee compensation is a slightly smaller part of total state and local government spending in California than the national average, 30.92 percent compared to 30.98 percent.

Salaries were a lower percentage of total state and local government spending in California than the national average, 26.68 compared to 27.05, but retirement costs (pension and Social Security) were a little higher than average, 4.24 compared to 3.94 percent.

“While PEPRA is projected to decrease California state and local government retirement contributions in the long run, it also decreases employee compensation,” the report intended for policymakers concludes.

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