Gov. Jerry Brown unveiled a plan Tuesday that he says will save the state tens of billions of dollars by capping pensions, increasing the retirement age, and requiring employees to pay more toward their retirement.
The bill is written to apply to all public employees in California — state and local — though it would not affect charter cities and counties such as Los Angeles. University of California employees also would be exempt.
Under the bill, which will be heard by a committee in Sacramento Tuesday afternoon, current and future public employees would pay half of their pension costs. Unions for current employees would have up to five years to negotiate the increase before it becomes automatic. The increase would be immediate for new employees.
“This was not easy," said Brown, speaking at a press conference at the Reagan State Office Building in downtown Los Angeles. "We’ve been negotiating for months up in Sacramento, but people have come together in the Legislature to bite the bullet and to clean up what has been a big mess.”
For future hires, the plan also caps the amount of an employee's salary that can be used to to calculate the retirement payout. The cap would be $110,000 for workers who collect Social Security and $130,000 for employees who don't.
The bill also increases the retirement age by two years for all new employees. Most employees would have to work until age 67 to receive the maximum benefit. Currently, civil employees can cash out at 55. Retirement age for new public safety employees — fire and police — would rise to 57 from the current 50 years.
The governor rejected the suggestion the retirement age should not be hiked for public employees who have labor-intensive jobs.
“I would say that as a 74-year-old worker, I’m applying a lot of stuff in Sacramento," Brown said. "May not be asphalt, but it’s just as heavy."
The proposed legislation is getting plenty of criticism — from some who say it goes too far and from others whosay it doesn't go far enough.
"We are fighting back and we're struggling, and in this case it appears like we're losing," said Dave Low, chairman of Californians for Retirement Security, a labor coalition representing more than 1.5 million public employees and retirees.
David Crane, who served as economic adviser to former Gov. Arnold Schwarzenegger and now president of Govern for California, said the proposal doesn't address the current long-term unfunded liability of the state's pension systems because it leaves benefits for current employees unchanged. Brown and legislative advisers have indicated that the courts have deemed retirement benefits guaranteed by contract and difficult to take away for current employees.
The bill does not move California to a 401(k) style plan or even a hybrid model with defined benefits. Doing so would have been more expensive than capping pensionable salaries, according to the secretary of the California Labor and Workforce Development Agency.
“Because of the change in the investment strategies that (actuaries) have to use, with a defined benefit plan, you’re going to get your benefit when you retire, regardless of how the stock market did last year,” said Marty Morgenstern. “If you have a defined contribution plan and the stock market drops the year before you retire … it kills people’s pensions.”
As a result, actuaries invest in lower risk funds and that lowers their return, Morgensten said.
Other highlights of the plan include:
- Prohibitions on pension holidays and retroactive pension increases
- Requirement that felons forfeit pension benefits
- Calculates benefits based on regular, recurring pay