California governor plans pension reform

Two of America’s largest pension funds, CalSTRS and CalPERS have warily offered support to the interjection of California Governor Edmund G Brown Jr into the debate on how to finance the state’s ballooning pension liabilities.

Brown (pictured) has released a sweeping 12-point pension reform plan, which includes moving new public employees onto a hybrid system and increasing the retirement age to 67.

Local and State Government employees normally retire at 60, but some can retire as early as 55 with full benefits.

The plan, which Governor Brown claims will save the State $900 million, also pushes for new public employees to share the risk of investment losses via a hybrid system that would include a reduced defined benefit component and a defined contribution component.

Under the plan, employees would have to contribute at least half of the total annual cost of their pension benefits. Currently, State employees contribute 8 per cent of their salaries, but some public employees contribute nothing.

Brown would also abolish the so-called “pension holidays”, where employers and employees stop contributions, making it more difficult for pension funds to meet their liabilities.

CalPERS chief executive officer Anne Stausboll says in a statement that some of the Governor’s proposals would require constitutional changes, while others could be achieved through collective bargaining.

“CalPERS is closely involved in the pension policy dialogue that will affect our employers and members in the State, schools and local government,” Stausboll says.

“We encourage discussion between all parties to ensure that public employee retirement plans are sustainable, secure and cost-effective.”

Stausboll’s statement does not address aspects of Governor Brown’s plan that seek to “increase pension board independence and expertise” by appointing two public members to the board of CalPERS.

Under the plan, Brown would add two public members with “financial expertise” to the board and replace the current state personnel board representative with the director of the California Department of Finance, Ana Matosantos.

A spokesman for CalPERS says it is too early to address details of the plan and would not comment on the proposed board changes.

He says CalPERS will participate in California Legislature interim committee hearings into the plan, scheduled for early next year.

The majority of CalPERS’ 1.6 million members contribute 50 per cent of the cost of their pensions, the spokesman says.

Stausboll says the $231.9 billion fund welcomes debate on improving California’s pension system, but backs the current defined benefit system as the best able to provide a secure retirement for the State’s public employees.

“At CalPERS, we believe that defined benefit plans are an important cornerstone to adequate and secure retirement,” she says.

“Pension change dialogue should focus on the critical policy issue of how to provide adequate and secure retirement income for public workers in a cost-effective way, while honouring vested rights for existing employees. We are committed to serving as an honest broker of information and an expert in pension administration as all parties work together on pension solutions.”

Brown’s 12-point plan has no detail on how to tackle the looming funding shortages at CalSTRS.

The fund states its funding shortage is $56 billion but that it can provide for its pension liabilities until 2044.

In a statement responding to Governor Brown’s plan, CalSTRS says that while the plan is an “important first step”, a more specific plan of action to tackle funding shortages is needed.

“The most important reform CalSTRS needs is a plan of action to address its long-term funding shortfall, which only the Legislature and Governor have the authority to implement,” the statement says.

“We will continue to work with the Governor, Legislature and our stakeholders to develop a plan that includes contribution increases that are gradual, predictable and fair to all parties.”

The fund also says that many aspects of the plan, including prohibiting “pension holidays”, do not apply to CalSTRS.

“Since CalSTRS contribution rates are set in statute by the Legislature, our contribution structure is extremely predictable and has not experienced pension ‘holidays’,” the fund says.

“CalSTRS members contribute 8 per cent of salary to fund their pension, while their employers contribute 8.25 per cent. These rates haven’t changed since 1972 and 1990, respectively. The State’s contribution of 2.541 per cent was reduced from 4.607 per cent in 1998.”

CalSTRS also says it already administers a “hybrid pension system” that consists of a mandatory traditional benefit pension and a cash balance plan, similar to a 401(k) plan.

It also offers voluntary contribution supplemental savings programs.

CalSTRS members currently retire at the age of 62 after 27 years of service, with members receiving a pension that replaces nearly 60 per cent of their salary.

They typically receive $49,000 in earned benefits annually and do not earn social security benefits.

Under Brown’s plan, the defined benefit and defined contribution components combined with social security would account for a retirement benefit that replaces 75 per cent of an employee’s salary.

That would be based on a 35-year career for public employees and a 30-year career for safety employees, such as police and fire fighters.

The plan also aims to put a stop to so-called pension spiking. This is where the final year salary used to calculate ongoing pension benefits is artificially inflated with bonuses and other pay perks.

Under the new plan, pension benefits would be calculated on the highest annual compensation over a three-year period.

This system currently applies to State employees. The calculation would also be made on the normal base pay and not include pay perks or bonuses.