Thursday, October 27, 2011

Governor Releases "Twelve Point Pension Reform Plan"

On October 27, 2011, Governor Edmund G. Brown Jr. released his 12 proposed major reforms for state and local pension systems. The governor stated the proposals “would end system-wide abuses and reduce taxpayer costs by billions of dollars over the long term” and cut in half the cost to tax payers of state employee pensions.

The “Twelve Point Pension Reform Plan” and its explanation are set forth as follows:

1. Equal Sharing of Pension Costs: All Employees and Employers: Will require that all new and current employees transition to a contribution level of at least 50 percent of the annual cost of their pension benefits.

2. “Hybrid” Risk-Sharing Pension Plan: New Employees: The “hybrid” plan will include a reduced defined benefit component and a defined contribution component. The hybrid plan will be combined with Social Security to provide an annual retirement benefit of about 75 percent of an employee’s salary. The 75 percent target is based on 30 years for safety employees and 35 years for non-safety.

3. Increase Retirement Ages: New Employees: For most new employees, retirement ages will be set at the Social Security retirement age, now 67. The retirement age for new safety employees will be less than 67, but commensurate with the ability of those employees to perform their jobs.

4. Require Three-Year Final Compensation to Stop Spiking: New Employees: Eliminates one-year rule to discourage efforts in the last year of employment to increase the compensation used to determine pension benefits.

5. Calculate Benefits Based on Regular, Recurring Pay to Stop Spiking: New Employees: Will require that compensation be defined as the normal rate of base pay, excluding special bonuses, unplanned overtime, payouts for unused vacation or sick leave, and other pay perks.

6. Limit Post-Retirement Employment: All Employees: Will limit all employees who retire from public service to working 960 hours or 120 days per year for a public employer. It also will prohibit all retired employees who serve on public boards and commissions from earning any retirement benefits for that service.

7. Felons Forfeit Pension Benefits: All Employees: Will require that public officials and employees forfeit pension and related benefits if convicted of a felony in carrying out official duties, in seeking an elected office or appointment, or in connection with obtaining salary or pension benefits.

8. Prohibit Retroactive Pension Increases: All Employees: Will eliminate unfunded liability from increased pension benefits.

9. Prohibit Pension Holidays: All Employees and Employers: Will prohibit all employers from suspending employer and/or employee contributions necessary to fund annual pension costs to avoid repeat of past where many public employers stopped making annual pension contributions during wall street boom years.

10. Prohibit Purchases of Service Credit: All Employees: Will avoid the investment risk associated with allowing purchase of service credit for time not actually worked.

11. Increase Pension Board Independence and Expertise: Will add two “independent” persons with financial expertise to the CalPERS Board and require that persons and their family are not eligible for CalPERS pension. Will also replace State Personnel Board representative on the CalPERS board with the Director of the California Department of Finance. Intended to achieve greater independence and greater sophistication.

12. Reduce Retiree Health Care Costs: State Employees: New state employees will be required to work for 15 years to become eligible any retiree health care and required to work for 25 years to become eligible for the maximum state contribution. Will encourage local governments to make similar changes.

These proposals will have to be debated and passed by the California Legislature before Governor Brown can sign them into law.