Pension Reform: The Key to California's Budget Problems

California has been hard hit since the economy took a dive in 2008, with at least one city declaring bankruptcy and others considering it. The state is struggling to find ways to cut expenses. Pension reform tops the list of items that would save both local and state governments money.  

California Gov. Jerry Brown made pension reform a priority. In October of last year, he came up with a 12-point proposal to help solve the pension crisis. The Senate Republican Caucus has taken on the duty of making Brown’s proposals a reality.

“I am committed to pension reform because I believe there is a real problem,” said Brown in his State of the State Address on Jan. 18. “Three times as many people are retiring as are entering the workforce. That arithmetic doesn’t add up. In addition, benefits, contributions and the age of retirement all have to balance. I don’t believe they do today. So we have to take action. And we should do it this year.”

Brown’s proposal would, among other things, stop current and future employee members of all state and local retirement systems from purchasing additional retirement service credits, would prohibit pension holidays and prohibit employers from making employee pension contributions. It also would prohibit retroactive pension increases and pension spiking and any person who commits a felony related to their employment would no longer receive pension benefits.

The state Senate introduced a Senate Constitutional Amendment last June, which was amended in January 2012, that calls for various pension and health reform measures, including the creation of a hybrid plan for new hires.

The California Public Employees’ Retirement System (CalPERS), which is the nation’s largest public pension fund with $245.8 billion in total net assets as of June 30, 2011, conducted an analysis to find out what the impact would be of offering a hybrid plan to new hires beginning Jan. 1, 2013. A hybrid plan would include a defined contribution plan and a reduced defined benefit plan.

 “One key aspect to keep in mind when a hybrid plan is being considered is the fact that lowering the risk for an employer in a hybrid plan does not necessarily mean lowering the cost,” the CalPERS analysis found.

In the hybrid scenario, new hires would have to foot about half the bill of both plans, taking on more risk while the employer sheds risk. The plan would reduce a new hire’s benefits at retirement from what they are today. 

“Even though the total retirement benefits provided to the member by the proposed hybrid plan are lower than those currently in place, the expected savings are generally not significant and for the State plans cost increases for some plans may largely offset cost savings in other plans,” according to CalPERS.

“We’re doing fairly well. We’re estimated to be around 75 percent funded as of June 30, 2011,” said Amy Norris, a spokesperson for CalPERS. “With the adjustment of our discount rate, that might go down a percentage or two, but if a fund is 80 percent funded, that is fairly good for a pension fund and we’re close to that.”

Currently, CalPERS offers a defined benefit plan.