California’s acrimonious pension overhaul stirs emotions News added by Benefits Pro on August 30, 2012

Benefits Pro

Joined: September 07, 2011

By Andy Stonehouse

Looking for the future of public DB plans? If you use the example of America's most populous - and economically challenged - state, Tuesday's news regarding drastic pension reform plans in California should put everyone on notice.

And according to the many critics of the plan proposed by Democratic Governor Jerry Brown and his Democratic Legislature, it's a prescedent-setting move that may spread to systems in other states. And have some spin-off effects to the private DB world, suffering major issues of its own.

After a summer of debate that's seen several California cities severely limit their own municipal pension plans and restrict benefits - not to mention others that have declared bankruptcy, partially based on their pension plan costs - Brown's proposal suggests putting a $110,000 cap for the salary employee pensions would be based upon, as well as boosting the retirement age to 67 for employees hired after Jan. 1, 2013, except those working in public safety positions.

Local governments with their own pension funds would be exempt. And new employees would have to wait until age 57 to collect their top benefits, instead of the current 50.

Employees would also be asked to boost their pension contributions to split the "normal" costs with their government employer. That portion of the plan particularly irked the Service Employees International Union of California; government relations advocate Terry Brennand told the L.A. Times the deal " punitive. It attacks public employees for no reason."

Other groups, including the Californians for Retirement Security coalition, said they believe the deal contravenes the principles of collective bargaining and will drastically transform the entire system, for the worse.

"While we support common-sense changes to end spiking and abuse of the system, this package is unfair and wrong," Dave Low, the coalition's chairman, also told the Times. Low said he blames the financial industry for triggering the 2008 meltdown that helped precipitate current pension deficits, and wonders why public employees are being held accountable. "We've seen a concerted effort from Wall Street to say, the problem isn't the banking industry, it's those fat public pensions."
While the outrage from employee unions was to be expected, pro-reform forces said they believe Brown's proposals don't go far enough to make any impact on those looming pension deficits which have plagued the state.

Pension activist Dan Pellissier told McClatchy that the wage cap is a ruse, as almost 95 percent of future employees would never make that much income.

An earlier proposal floated by Brown called for instituting a hybrid system, with a smaller DB program combined with a 401(k)-styled component, but the lack of ability to guarantee returns and the complicated nature of the proposal led to things being scaled back.

The issue of "normal" pension costs was also red-flagged, as it doesn't include the unfunded obligations of the pension funds.

"The unfunded liability question is still lurking out there and threatening the finances of governments across the state," Michael Shires, a Pepperdine University political scientist, noted.

For his part, Brown said the changes would move employee benefits to a level they were at three decades ago - when he was formerly governor of the state - and could save California up to $30 billion in the next three decades.

The case is also seen as a litmus test to gauge whether or not California voters will support more austerity measures in the future - a lesson that might spread to other parts of the country with embattled pension systems, such as Illinois.

"Pension reform is just a big issue for folks these days," Larry Gerston, a San Jose State University political scientist told Reuters. "This helps build his credibility."

As followed in the wake of votes to restrict pension benefits in San Jose and San Diego, the entire issue will end up in the courts, as police and other public employee unions in those cities have already filed suits to block the changes.

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