Finally, Some Good News on California Public Pensions

There have been a couple of developments recently that should give California taxpayers some hope in the fight against ever-rising public pension costs. The first was the Third District Court of Appeal decision that upheld a previous ruling that the $560 million pension obligation bond authorized by Gov. Schwarzenegger and the State Legislature in 2004 was invalid because it was not approved by the public or a two-thirds supermajority in the Legislature. (Read the court’s decision here.) According to Harold Johnson, an attorney for the Pacific Legal Foundation, which fought the bonds, “It’s a big victory and a sobering message for the spendthrifts in the Legislature. They can’t use the credit card to cover ongoing costs of government.” (See a good Orange County Register story about the decision here.) The second piece of good news came in the form of a public pension reform initiative proposed by the California Foundation for Fiscal Responsibility, which was formed by former Assemblyman Keith Richman, author of the failed 2005 pension reform proposal. The CFFR’s initiative focuses on improving the state’s traditional defined-benefit (DB) system, rather than switching to a defined-contribution (DC) plan like the 2005 proposal. It would amend the state constitution to limit pension and retiree benefit levels (although these limits could be overturned by a supermajority vote), and would apply to local government agencies as well as the state. Here are some of the details:

  • Retirement age for new, non-safety employees would be aligned with Social Security requirements (65 years for most; public safety workers such as police and firefighters would be eligible to retire ate age 55)
  • Pensions for new public employees (including any Social Security payments) would be capped at 60-67 percent of an employee’s final compensation
  • Pension calculations would be made based on the average salary of the five highest earning years (California is the only state in the nation that bases its pensions on just the single highest earning year, which encourages “pension spiking”)
  • Pension calculations would only include base salaries (no adding in accrued vacation time or overtime to boost pension payments)
  • Post-retirement health benefits would be actuarially reduced for employees that retire early
  • “Contribution holidays,” where the state does not make any contributions to the pension system in a given year because pension fund returns have been particularly good (which then forces the state to make larger payments to compensate when returns are low or negative), would be prohibited
  • Post-retirement health benefits would be actuarially reduced for employees that retire early
  • Retroactive benefit increases, such as those authorized by the now infamous SB 400 legislation in 1999, would be prohibited
  • Death and disability benefits are protected for all new and current employees
  • The state can increase benefits or otherwise modify the provisions of the measure with a three-fourths vote
  • Local governments can increase benefits with a two-thirds vote

The proposal is expected to produce cost savings of at least $500 billion (that’s “billion” with a “B”!) over 30 years. The savings come largely from encouraging employees to work longer, which affords them greater income in the long run and reduces the amount of time (and costs) the government must pay for their post-retirement health benefits.