Under Gov. Jerry Brown’s plan to rein in pension costs, future teachers would work years longer before they could retire with smaller pensions. Current teachers and administrators would soon pay about 1 percent more out of their paychecks toward their retirement. And both current and future educators would be unable to retire, then turn around and return to the classroom full time.
Brown’s pension reforms would uniformly apply to all public employees, state and local, municipal and school. They would significantly decrease benefits, especially for new workers, and lower the risk for governments, by raising the retirement age from as early as 55 to 67 for all new non-safety employees, and by replacing a significant portion of a defined benefit plan with a defined contribution plan similar to a 401(k).
“This is a decisive step forward,” Brown said at a press conference. “The plan will make the pension system more sustainable and fair to taxpayers and the employee.”
Brown’s plan would reduce the state’s pension costs by billions of dollars over the next 30 years. What it would not do, because it applies primarily to new workers, is solve the current huge unfunded liability facing most pension plans. That includes CalSTRS, the nation’s largest pension fund for educators, which is currently only 71 percent funded and could run out of money in 30 years unless the state pays in hundreds of millions of dollars more per year. Nothing in the plan would address the unfunded liability issue, and Brown indicated he doesn’t intend to do so next year.
Here’s how Brown’s 12-point plan would appear specifically to affect to CalSTRS members. The governor has presented only an outline; details aren’t clear on a lot of important aspects, such as terms of early retirement. Brown also indicated he favors a cap on defined benefits, affecting higher-paid administrators and superintendents, though he didn’t specify what the level would be.
- A shift to splitting the contributions of annual normal pension costs between educators and the state/school districts. Current teachers pay 8 percent of their pay toward retirement; districts pay 8.25 percent, and the state 2.017 percent. That adds up to 18.25 percent. (The state pays another 2.5 percent into a cost-of-living fund.) But the key word is normal costs, says Ed Derman, CalSTRS Deputy Chief Executive Officer for Plan Design. That means the annual contributions needed to meet actuaries’ assumptions of pension payouts and revenues not funded by investment returns. That, he says, is currently 17.7 percent. A split of that would be 8.85 percent, so CalSTRS members can expect to pay about 1 percentage point more of their pay, phased in. (Update: School employees who pay into CalPERS– non-classified workers like custodians and secretaries – would be affected more, Sheila Vickers, Vice President of School Services of California, reminds me. They current pay 7 percent of their pay to retirement, while the district contributes 13 percent. Under the 50-50 split, which would be phased in, districts would save money, while employees would pay more.)
However, if the CalSTRS board lowers its expected rate of return on investments, now 7.75 percent, as critics have called for, the contribution rate would increase. Again, this doesn’t take into account the additional payments needed to meet a $56 billion unfunded liability. Based on court decisions, that would be entirely the state’s burden and could raise the state’s contribution by 14 percentage points to 32.25 percent of payroll – a whopping extra burden on taxpayers.
- A new hybrid plan for new teachers that introduces a defined contribution component. Because CalSTRS members do not pay into or receive Social Security, the defined benefit plan would cover two-thirds of the pension benefit and the defined contribution would cover a third. The target pension that teachers/administrators would receive would be 75 percent of their salaries after 35 years of work (with a cap for some higher-paying jobs). That would be less than currently received under CalSTRS. Teachers who retire at age 64 with 35 years in now can retire with 84 percent of final pay, with an additional 2.4 percent for every year beyond that.
- A higher retirement age for new teachers. Saying, “We have to align retirement ages with actual working years and life expectancy,” Brown’s plan would raise the retirement age to 67, the current age for full benefits under Social Security. Currently, teachers who retire at age 60 after working 35 years receive 70 percent of full salary (2 percent times 35 years). Under Brown’s plan, they could not draw full retirement for another seven years, saving the system $364,000 for a teacher who made $70,000 a year.
- Anti-spiking protections for new employees. To avoid perks thrown in during the final year to boost pensions, pensions would be based on the average of an employee’s final three years. Bonuses, unused vacation, and sick pay would no longer count toward compensation.
- No more double dipping. Raising the retirement age will discourage a revolving door of having public employees, including teachers and superintendents, retiring one day and returning the next in a new full-time job. Brown would restrict retirees on public pensions to working 960 hours or 120 days per year for a public employer – about two-thirds of a school year.
- Bans on retroactive pension increases and the purchase of additional retirement service credit for time not actually worked., known as “airtime.” Districts had offered this as a way of encouraging early retirement.
Hurdles, resistance in Legislature
Brown wants to put the uniform changes on the November 2012 ballot as a constitutional amendment. That would require a two-thirds vote of the Legislature – a formidable hurdle, given expected union opposition to the biggest changes, like raising the retirement age, and to circumventing negotiations via the ballot.
“We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining,” Dave Low, representing a coalition of public employee unions, said. The California Teachers Association, still examining the plan, didn’t issue a statement Thursday.
But Sen. Joe Simitian, D-Palo Alto, one of three senators chosen to serve on a new conference committee to deal with pension reforms, called Brown’s plan “substantive and significant” and credited him with making it comprehensive.
Simitian worked for two years, without success, to get an anti-spiking bill passed, and that should have been the easy piece. Now, he said, “with more moving parts, it will be more difficult to develop consensus.” The two-thirds requirement to get it out of the Legislature will be difficult but doable, he said.
Brown will have to thread the needle to win over Democrats who will side with labor and Republicans who will charge he didn’t go far enough with his reforms. Reacting to the proposed hybrid plan, Senate President pro Tem Darrell Steinberg told the Sacramento Bee, “I believe in defined benefit, because I don’t think that retirement should be based on the ups and downs of what occurs on Wall Street.” (Never mind that when Wall Street tanks, and public pension plans don’t make 7.75 percent returns, taxpayers are left holding the bag.)
But Brown cautioned that voters want pension reform, and implied that a failure to put it on the ballot will hurt chances to pass higher taxes. “Legislators would be well advised to take (pensions) seriously, get it all enacted and get it on the ballot when there are things they will be particularly interested in,” he said.
