March 2, 2020

By Ed Mendel

A new study says the economic downturn has prompted 17 states to make cost-cutting public pension reforms during the last two years — lower benefits for new hires, extended retirement ages and bigger payments from workers.

California is not among them.

An attempt to put an initiative on the November ballot to reduce pension payments and extend retirement ages for new state and local government hires was suspended last week.

Marcia Fritz, president of Californians for Fiscal Responsibility, warned that the reform drive might switch from trimming monthly pensions to giving new hires a 401(k)-style individual investment plan common in the private sector.

“If legislators do nothing to reduce pension costs next year, we will try again to qualify a pension reform initiative — except one that provides for a defined contribution plan, not a defined benefit plan,” Fritz said on the group’s website

The group had hoped to get major funding from Meg Whitman, a wealthy Republican candidate for governor. Whitman said in an article in the Orange County Register last week that she supports a switch to 401(k) plans and more.

“On pension reform, we need to align public employee retirement benefits to those available in the private sector,” Whitman wrote. “New state workers should receive a 401(k)-style defined-contribution plan.

“For most existing state workers, we need to increase the retirement age from 55 to 65, require longer vesting periods, and ask them to contribute more to their retirement benefits.”

A Public Policy Institute of California poll in January said two-thirds of Californians (67 percent) favor switching new public employees from monthly pensions to a 401(k)-style individual investment plan.

Changing the pension benefits of current workers may be difficult, unless they consent. Most pension reforms focus on new hires because the courts have ruled that pensions promised current workers are vested rights, protected by contract law.

Reformers argue that the current level of public employee pensions is “unsustainable” and will divert too much money from education, health, law enforcement and other public services.

A deep economic recession, punctuated by a historic stock market crash, punched a big hole in the investments expected to provide 75 percent of the money for pension funds like the giant California Public Employees Retirement System.

Now the retirement systems plan to boost the annual payments from governments, a three-year phase in for CalPERS, to help rebuild pension funds — an untimely added cost during an era of huge budget deficits.

Some public employee union officials say they are willing to consider cost-cutting proposals. But any change should be done through labor negotiations, they say, not imposed by legislation or a ballot measure.

A proposal to switch new hires to a 401(k)-style plan is probably a non-starter in labor talks, particularly after the market crash illustrated how those near retirement have little time to regain investment losses.

A report on state retirement systems issued last month by the Pew Center on the States says in recent years only two states have switched to 401(k) plans: Alaska in 2005 and Michigan in 1997.

“In light of severe investment losses in 2008 and 2009 that resulted in decreased pension funding levels, policy makers are once gain openly discussing defined contribution plans,” said the Pew Report.

The report mentions Louisiana, Florida, Kansas and Utah as states where there has been talk of switching to 401(k)-style plans in which governments only make a payment into a worker’s individual investment plan.

For the employer, the “defined contribution” 401(k)-style plan avoids the long-term debt, and unpredictable future costs, that come with the “defined benefit” that guarantees a retiree a monthly pension payment for life.

“Because unions and other employee representatives often have vigorously opposed defined contribution plans,” said the Pew report, “it is unclear whether any state will find such a switch viable, or if such plans are primarily being proposed as a starting point for hybrid plans or other opportunities.”

Hybrid plans combine a smaller monthly pension with an individual investment plan. The city of San Diego and Orange County both adopted hybrid plans last year after negotiating agreements with labor unions.

City managers in San Diego County and the San Francisco peninsula are pushing for increased employee contributions and other ways to cut government pension costs. Pension reform ballot measures have been proposed in Los Angeles and San Francisco.

The Pew Center, which plans to study local pensions next, issued a report on state retirement systems that included CalPERS and the California State Teachers Retirement System.

The nationwide study found a troubling $1 trillion gap between current state pension funding and the cost of providing pensions and retiree health care promised in the future.

The California funds were placed in the middle rank, “needs improvement,” with a funding level of 87 percent. The minimum acceptable level or trouble line in the view of the U.S. Governmental Accountability Office and others is 80 percent.

But because of the long lead time for the sweeping study, the California numbers do not reflect losses in the stock market crash. CalSTRS is now reporting a funding level of 77 percent. CalPERS has dropped all the way down to 61 percent.

The funding level is the projection of the amount of future pension obligations that will be covered by the annual employer-employee contributions to the pension fund, along with investment earnings.

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