Renewed call for pension reform

Someone watching State Sen. Joe Simitian’s annual education presentation in Palo Alto from an adjoining room last week passed along a comment. “I’m for more money for schools; I support the governor’s tax initiative,” the person wrote, “but I won’t vote for it unless the Legislature passes pension reform.”

How representative is this not-so-silent minority? Gov. Jerry Brown no doubt has been wondering, too, and increasingly calling on lawmakers to pass his 12-point pension reform plan.

“Please take up the issue and do something real,” he told the Legislature in his annual State of the State address. And Brown has come back to the issue repeatedly during speeches and media appearances around the state.

“The numbers just don’t add up,” Brown told the Los Angeles Area Chamber of Commerce. “Benefits, contributions, and the age of retirement don’t reflect today’s realities, putting taxpayers on the hook for huge costs in the future. The cracks are showing and this dam will burst unless the Legislature gets serious and takes urgent and decisive action.”

Simitian, a Palo Alto Democrat who’s one of six legislators on a conference committee charged with coming up with a solution, didn’t offer much assurance. “It’s not clear to me what the Legislature or the conference committee is prepared to do,” he said.

Then, predicting that voters would take the issue into their own hands if lawmakers don’t act, he said, “We’d better find a common sense answer that is fair, affordable, and sustainable or this gets done for us by those not interested in those three (qualities).” Simitian compared pension reform with Proposition 13, in which “the state was slow to act,” and so voters did. It could happen again, with a result that “would not serve us well.”

That probably won’t happen this year. Two initiatives filed by Californians for Pension Reform haven’t attracted big donors. The proposals would go farther than Brown’s 12-point pension reform plan in cutting costs to taxpayers and shifting the burden to public employees. If the initiatives can’t draw enough signatures in the next two months to make the November ballot, some of the pressure will be off the Legislature to act this year. (I followed up with Simitian after the meeting, asking him why the Legislature might not act. See his answer in the accompanying video. )

But reports last week from the California Public Employees Retirement System (CalPERS), the nation’s largest public pension plan, and the California State Teachers Retirement System (CalSTRS), number two behind CalPERS, should serve as a sober warning to legislators not to run from the issue. CalPERS reported a meager 1.1 percent return on investments in 2011, while CalSTRS reported a tad better at 2.3 percent – far below the 7.75 percent rate of return that both pension funds need to meet payouts to retirees. Though CalSTRS had a spectacular fiscal year that ended June 30, its investment portfolio then fell $7.9 billion in the six months ending Dec. 31, to $144.8 billion.

CalSTRS’ 10-year return was 5.4 percent, and, as writer Ed Mendel noted in his latest post in Calpensions, many financial analysts are predicting another decade of low returns. A failure to make the rate of return will add to both pension systems’ unfunded liability, which is the taxpayers’ burden.  For CalSTRS, currently only 71 percent funded, the unfunded liability is $56 billion. Lowering the expected rate of return in line with what experts are predicting would immediately result in higher contributions from the state and school districts, in the case of CalSTRS. Either way, districts and the state face laying out billions more per year in coming decades to keep CalSTRS solvent – money that will be diverted from the classroom. On Thursday, the CalSTRS board will consider a staff recommendation to drop the investment forecast 1/4 percent, to 7.5 percent; the impact would raise contributions by the state and districts by $500 million per year.

Higher retirement age, lower benefits

Brown’s plan would significantly decrease benefits for new public employees, and lower the risk for governments, by raising the retirement age from as early as 55 to 67 for all new public employees except safety workers. It would cap the amount of salary qualifying for a defined benefit, affecting mostly higher paid administrators in the case of CalSTRS, and it would end spiking, the practice of raising salaries and benefits in the last few years to jack up an employee’s pension.

In the biggest change, it would replace  a significant portion of a defined benefit plan for new employees with a defined contribution plan similar to a 401(k). At the last hearing of the conference committee this month, CalSTRS’ deputy chief executive officer, Ed Derman, offered a variation of the defined contribution plan that would offer security to employees, while reducing costs and risk for employers. Under a “cash balance plan,” workers would contribute a portion of their earnings, matched by the employer. CalSTRS, not the individual, would manage the investment, and would guarantee only the rate of return equal to a long-term Treasury note, plus the principal. If the rate of return by the time of retirement turns out to be greater, the employee wins. CalSTRS already offers this option as a retirement supplement to members.

A cash balance plan may be more palatable to employees than a straight 401(k), but unions are expected to resist the higher retirement age and switch to a defined benefit program. And this is an election year, when Brown is counting on union support to underwrite the campaign for his tax increase. So far, the conference committee has gotten little done, and three months after introducing his 12-point plan, Brown has yet to flesh out details. That’s expected to come this month.

Compounding the challenge, two-thirds of the Legislature must approve putting an initiative before voters, because it will amend the state Constitution. And, as Simitian noted in the video clip, five out of six members of the conference committee must agree on a package to present to the Legislature.

That’s a tall order for any proposal, and this one will require bipartisan support. Will voters withhold their support for a  tax increase for failure of action on  pension reform? Legislators may not want to put that question to a test.

Author: John Fensterwald - Educated Guess

John Fensterwald, a journalist at the Silicon Valley Education Foundation, edits and co-writes "Thoughts on Public Education in California" (, one of the leading sources of California education policy reporting and opinion, which he founded in 2009. For 11 years before that, John wrote editorials for the Mercury News in San Jose, with a focus on education. He worked as a reporter, news editor and opinion editor for three newspapers in New Hampshire for two decades before receiving a Knight Fellowship at Stanford University in 1997 and heading West shortly thereafter. His wife is an elementary school teacher and his daughter attends the University California at Davis.

Leave a Reply

Your email address will not be published. Required fields are marked *