Pension Reform

Unfunded Pension Obligations Threaten Budget Funding for Core Priorities

Independent experts agree that California's unfunded public employee pension obligations are becoming more and more of a budget problem - both for state and local governments.

Many recent, nonpartisan studies have illustrated just a how big a problem unfunded public employee pension obligations have become, though estimates of the scope of the problem vary. 

As of June 30, 2009, the California Public Employees Retirement System (CalPERS) reported that its unfunded actuarial accrued liabilities in its main pension fund for state and local governments was over $49 billion-consisting of about $23 billion for the state and $26 billion for other public agenciesi

Showing a bigger problem, a report by the bipartisan Little Hoover Commission found that the top 10 public employee pension systems in California - including plans for both state and local government workers - faced a combined $240 billion shortfall as of 2010.

A study by the Stanford Institute for Economic Policy Research more recently pegged the combined total unfunded pension liabilities of CalPERS, the California State Teachers Retirement System (CalSTRS) and the University of California retirement plan at $485 billion. 

A growing problem for state and local governments

When pension costs rise, benefits are increased, or investments in pension portfolios perform below expectations, it is taxpayers that have to make up the difference as pensions are a legal obligation of state and local governments. 

The current growing problem threatens General Fund support for K-12 education, higher education and law enforcement, and has put many local governments on the path the bankruptcy.

State pension General Fund costs for CalPERS has risen from $370 million in 2001-02 to $2.1 billion in 2011-12, a $1.7 billion increase.   To put this in perspective, the state spends $2 billion annually to fund the 23 campus California State University System. 

Adding in retiree health care costs makes the problem even worse.  Combined General Fund costs for state retirement programs, including CalPERS retiree benefits and health care costs and State Teachers Retirement System (STRS) retiree benefits have grown over the years, and are projected to grow to nearly $7 billion by the 2014-15 budget year.

Governor Proposes 12-Point Pension Reform Plan

Governor Brown has proposed a 12-point pension reform plan, which has been called the first steps of what must be done to address California's growing pension obligation crisis.

Key points in the Governor's plan include:

  • Changing to a "hybrid" plan (401(k) plan, defined benefit, and Social Security) for newly-hired public employees
  • Raising the retirement age for newly-hired state employees to 67
  • Putting an end to pension spiking by changing the method by which retirement benefits are calculated for new employees from the highest single year salary to the highest three years
  • Prohibiting "pension holidays," where employee or employer contributions to pay for pension benefits are suspended
  • Ending the practice of allowing state workers to purchase air time, or additional service credit for time they did not actually work
  • Requiring new state employees to work longer to qualify for retiree health benefits.

Governor's Plan Attracts Bipartisan Support

The Governor's plan has attracted strong bipartisan support.  Senate and Assembly Republicans this week introduced the Governor's proposal in the Legislature.  The measures, Senate Constitutional Amendment 18 (Huff), Senate Bill 1176 (Huff), Assembly Constitutional Amendment 22 (Smyth and Conway), and Assembly Bill 2224 (Smyth and Conway), would enact the identical legislative language as crafted by the Brown Administration.

Democrat leaders have publicly stated their intent to make pension reform an urgent priority.  The Senate President Pro Tem stated that he hopes to enact pension reform this spring, before the adoption of the 2012-13 budget.ii  Meanwhile, a joint legislative conference committee continues to make slow progress in evaluating pension reform proposals.

It has been estimated that delays in the Legislature enacting pension reform will cost taxpayers further, $1.2 billion over the coming year or $3.4 million per day.iii  This further puts a strain on General Fund dollars for priorities like education and public safety.

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