HomeMy WebLinkAbout52-Council Office
CITY OF SAN BERNARDINO REQUEST FOR COUNCIL ACTION
From: Tobin Brinker
3rd Ward Council Member
Subject:
Pension Presentation
Dept: Council Office
Date: June 16,2011
File:
MCC Date:
June 20, 2011
Synopsis of Previous Council Action:
None
Recommended Motion: Direct City Manager to schedule a workshop/presentation regarding
costs of pension possibilities.
~~~
Tobin Brinker
3rd Ward Council Member
Contact Person: Tobin Brinker
3rd Ward Council Member
Phone: 5333
Supporting data attached: RFCA, Staff Report
Ward(s):
All
FUNDING REQUIREMENTS:
Amount:
Source:
Acct. Description:
Finance:
Council Notes:
Agenda Item No.
52
{XR-~-(}O{(
Entered Into Rec, at MCC/CDC Mfg;
Agenda Item No:
Pension Reform Propos4 4Clk/ �
erCD Secretary
City of San Bernardino
Purpose: To rehire laid-off city workers.
History: Last year's budget was originally proposed as half cuts (concessions from
the unions) and half new taxes. Like Governor Brown we were unable to get the
votes to put a tax measure on the ballot and had to do a cuts only budget. I
supported the tax proposal then because I thought the cuts would be too deep.
Now that the cuts have been implemented we can see that they are too deep. If
we cannot raise taxes then we must find the revenue somewhere else. We need
to re-hire laid off employees.
Pension Reform is the right place to start the discussion about where the revenue
will come from. Last year San Bernardino had 122 employees that earned over
$100,000 dollars and paid zero towards their own pension because past mayors
and councils approved paying the employee portion of the pension. If those 122
employees paid their portion it would save the city $1 million dollars. There was
another 284 employees that earned over $100,000 when overtime was added in.
If all 406 paid the employee share of the pension costs the city could save over $3
million dollars which could be used to re-hire laid off positions and return service
levels.
My proposal would divide employees into three categories. (This is my framework
for discussing how to reform pensions)
Salary level %of employee portion of How and when to implement
pension they will pay
$100,000 and up 100% immediately
Between$50,000 and $100,000 Start at 50% Over 5 year period increase to
100% paid
Below$50,000 Start at 0% Over a 10 year period increase to
100% paid
Important Facts
• lout 3 city employees earned over $100,000 dollars last year.
• Most earned that amount by overtime which resulted from lay-offs which
meant fewer people to do the work.
• When the recession ends-
• Our negotiations got many short term savings but...we will have big
expenses when the union contracts end and pay and benefits shoot
up again.
• We will be competing with surrounding cities like Colton, who have
already achieved long term pension reform.
• San Bernardino will have to meet rising the payroll demands of our
union contracts first instead of rehiring employees or re-establishing
cut programs.
• Younger employees were hurt the most in the recession. Seniority
rules meant new hires were the ones laid off. Pension costs of older
employees will reduce pay and benefits for younger employees when
the recession is over.
Data on San Bernardino Emplovees in the $100,000 club
• 122 earned over $100,000 as their base salary
• 284 earned over $100,000 when overtime pay is included
• 406 total employees earned over $100,000 (1/3 of city workforce)
• Median family income in San Bernardino according to US Census bureau is
$42,173
SUB GROUPS
• 49 Management employees earned over $100,000
• 357 Non-Management (police and firefighters) employees earned over
$100,000
• 28 Non-Safety (includes Department managers and City Attorneys)
• 226 Police (includes Police management and Police Association members)
• 146 Fire (includes Fire management and Fire Union members)
• 20 employees earned $50,000-$80,000 in overtime last year (hopefully if
laid off employees were re-hired we could also reduce overtime costs).
0 19 were fire safety employees
0 1 police
Pension Reform Scorecard
Little Gov. Senate City
Item Hoover Brown GOP Mgrs.
Reduce formulas for Yes No Yes Yes
current employees
Impose cap on pension Yes Yes Yes
benefits %? $107K $119K No
No double-dipping Yes Yes Yes No
PP� 9 .
Increase retirement ages Yes No No Yes
Employees to pay Require No Require Allow G
part of employer portion (50/50 (focus = R.
of PERS split of unfunded y
normal liability)
costs) V
Create hybrid defined Require Allow Require Allow E
benefit/contribution plan N
No spiking --change Yes Yes Yes Yes T
PERSable base to multiple 5 yrs. 3 yrs. 5 yrs. 3 yrs.
ears
Only voters can increase Yes No Yes No
pension formulas
No pensions for elected Yes No No No
officials
Reduce formulas for Yes Yes Yes Yes
new employees
No"pick up"of employee Yes Yes Yes Yes
portion of PERS A
No spiking -- limit pay Yes Yes Yes Yes G
that is PERSable R
No purchase of airtime Yes Yes Yes Yes E
E
No PERS holiday Yes Yes Yes Yes M
E
No retroactive increase Yes Yes Yes Yes N
T
No pensions to felons Yes Yes Yes Yes
Changes to membership Yes Yes Yes Yes
of PERS board
Other items mentioned: Sensitivity OPEB OPEB
analysis reform reform
of invest. Longer Disability
returns employee reform
required vesting No PERS
Must on PERS O
obey Defined T
indep. benefit H
actuaries for PTers E
not re g. R
No chg.
to 2nd-tier
for 20 yrs.
1 formula
for Safety,
1 formula
for Misc?
2011 City Manager Pension Survey
The League of California Cities (League) City Mangers Department in January 2011 sent a
survey to the 481 cities in California and asked that they respond to questions that
would help in determining the latest trends in pension changes across the state. This is
the first in what will be an annual survey conducted by the League. For other pension
resources and information please visit the League's Pension Information Center at
www.cacities.org/pensions.
DEMOGRAPHIC INFORMATION
Survey Respondents: 296 out of 449 cities that contract with CalPERS
Regional Division Representation:
Every regional division in the League was represented
Divisions with more than 20 cities responding include:
Central Valley(23)
East Bay(26)
Los Angeles County (49)
North Bay(26)
Orange County(22)
Peninsula (23)
Sacramento Valley(33)
Divisions with fewer than 10 cities responding include:
Imperial County(1)
Redwood Empire (5)
Riverside County(9)
TIERING
Cities were asked to indicate whether they adopted a new tier of benefits and when the
new tier was adopted. They were also asked to indicate both the previously offered
benefit level as well as the new level of benefits.
• 22%or cities responding have adopted a new pension tier and it appears that
most of the new tiers were adopted in the last two years.
• 73%of the new tiers adopted are for miscellaneous employees.
Page 1 1 March, 2011
Trends in Fire Plans
Most cities that negotiated changes to their fire plans reduced benefit levels. Most
cities that provided the 3%at 50 plan adopted a lower benefit of 3%at 55 plan. The 2%
at 50 plan is the second most commonly adopted new formula.
Trends in Police Plans
Most cities that negotiated changes to their fire plans reduced benefit levels. Most
cities that provided the 3%at 50 plan adopted a lower benefit of 3%at 55 plan. The 2%
at 50 plan is the second most commonly adopted new formula.
Trends in Miscellaneous Plans
The survey indicates that there is no commonly offered benefit level to miscellaneous
employees. The 2%at 55, 2.5%at 55, and the 2.7%at 55 plans were equally provided
by cities that responded. However, what is common among miscellaneous employees is
that they are being offered a lower benefit level of 2%at 60.
COST SHARING
Cities were asked to provide information on whether they had negotiated an increase in
employee cost sharing of pension costs.
• 38%of cities responding have adopted some form of cost sharing with many of
those changes occurring over the last two years.
Trends in Fire Plans
57%of cities that said they negotiated an increase in employee cost sharing indicated
that their fire units will be picking up more of the pension costs. Formerly the common
trend among these employees was to contribute 0%toward pension costs and now they
are contributing 9%.
It also appears that 10%of these agencies have asked their fire units to pick up a portion
of the employer contribution rate. Agencies have negotiated a 2-4% pick up of the
employer contribution.
Trends in Police Plans
73%of cities that said they negotiated an increase in employee cost sharing indicated
that their police units will be picking up more of the pension costs. Formerly the
common trend among these employees was to contribute 0%toward pension costs and
now they are contributing 9%.
It also appears that less than one-percent of these agencies have asked their police units
to pick up a portion of the employer contribution rate. Agencies have negotiated a 1-
4%pick up of the employer contribution.
Page 12 March, 2011
Trends in Miscellaneous Plans
89%of cities that said they negotiated an increase in employee cost sharing indicated
that their miscellaneous employees will be picking up more of the pension costs.
Formerly the common trend among these employees was to contribute 0%toward
pension costs and now they are contributing 8%.
It also appears that just about one-percent of these agencies have asked their
miscellaneous employees to pick up a portion of the employer contribution rate.
Agencies have negotiated a 2-6%pick up of the employer contribution.
FINAL AVERAGE EARNINGS (FAE)
Cities were asked to provide information on changes they negotiated to the FAE formula
(also referred to as the final compensation calculation).
• 12%of cities responding have negotiated changes to their final compensation
calculations. It appears that an overwhelming majority of these cities negotiated
a change in formula from the highest one-year to an average of the highest three
years for future fire, police, and miscellaneous employees.
CONCLUSION
There is strong indication that we will continue to see changes adopted at the local
collective bargaining table. The survey results show that 62%of responding cities are
currently considering negotiating changes to their pension offerings.
CONTACT
For questions regarding this survey please contact Natasha Karl, legislative
representative, at nkarl @cacities.org.
Page 13 March, 2011
1400 K Street, Suite 400 • Sacramento, California 95814
LEAGUE
Phone: 916.658.8200 Fax: 916.658.8240
LI :
OF CALIFORNIA www.cacities.org
CITIES
TO: League Employee Relations Policy Committee
League Revenue and Taxation Policy Committee
FROM: League Board Executive Committee
Jim Ridenour,President and Mayor, Modesto
Mike Kasperzak,First Vice President and Vice Mayor,Mountain View
Bill Bogaard, Second Vice President and Mayor, Pasadena
Judy Mitchell, Past President and Council Member, Rolling Hills Estates
Chris McKenzie, Executive Director
DATE: June 15, 2011
SUBJECT: Update—Review of Draft Pension Reform Action Plan
NOTE: The City Managers'Department made several non-substantive changes to the Pension
Reform Action Plan that you previously received. Attached is the new version of their
proposab This memo has only been updated to reflect the changes in page numbers.
We are pleased to forward for review and recommendation the attached Draft Pension Reform
Action Plan that was prepared by the League's City Managers Department, and initially
reviewed by the League board at the May 19-20 board meeting. The board has requested
feedback from the committees on certain issues as discussed below:
1. Do Cities Need More or Less PERS Benefit Plan Choices? (pp. 3 and 5)
Background: The yellow highlighted proposals in the Draft Action Plan would support reducing
the benefits plan choices of city councils and employee groups. The first proposal would support
the repeal the 1999 PERS benefit enhancements, and would return to the PERS benefit formulas of
2% @ 60 for miscellaneous employees and 2% @ 55 for safety employees. The second proposal would
support a standard public employee pension system where one benefit level is offered to every employee,
as is the case for the current teachers' retirement system. The board had an extensive discussion about
whether we should be moving toward fewer options or, instead, additional flexibility. Speaking for more
options, one board member mentioned that she would like to negotiate a 2.5% @ 55 formula with her
public safety employees (reduced from 3% @ 50) but the PERS law currently only allows a change to a
2% @ 50 benefit level (a level which has proven to be unattainable in the negotiations). Other board
members expressed interest in a roll back to the 1999 benefit packages. and some members preferred a
one-size-fits-all plan(with possibly a higher benefits level for public safety).
Executive Committee Action: In addition to a recommendation to the board on these issues,the Executive
Committee would appreciate the policy committees also discussing, and then outlining for the board,
what you see to be the pros and cons of constraining local control and choices when it comes to PERS
retirement plan benefits. Since the League normally advocates for maximum local flexibility and control,
the extent to which we support limiting local options needs to be reviewed carefully.
2. Revisions to Benefits for Existing Employees(p.4)
Background: Like the California Little Hoover Commission, the City Managers' Department
Draft Action Plan recommends considering a change to benefit formulas for the future benefits
of existing employees. Unlike the Little Hoover Commission, the Managers' Draft Action Plan
acknowledges the need for a detailed legal analysis of this recommendation's legality since it is
widely believed that it raises substantial legal questions about the "vested rights" of existing
employees. As a result, the League has retained the law firm of Liebert Cassidy Whitmore, a
well-known advisor to local public agencies on labor and employment issues, to prepare a legal
opinion on this issue, which we expect to have by late June. As a result, the Executive
Committee, acting on the recommendation of the officers of the City Attorneys' Department, is
not requesting review and consideration of this recommendation by the committees until the
legal opinion is completed, and can be shared with both the committees at your next meetings (at
the Annual Conference in all likelihood)and the board of directors.
Executive Committee Action: At this time, the Executive Committee is not asking for a
recommendation on this matter until the legal opinion on vested rights issue is complete and
shared with the committees.
Thank you very much for your consideration of these requests and for your service to the
League.
PENSION REFORM ACTION PLAN
City Manager's Department
June 10, 2011
This report to the League of California Cities Employee Relations and Revenue and
Taxation Policy Committees and the Board of Directors is designed to address the
League's 2011 Strategic Goal related to Pension Sustainability by providing
information and recommendations that may be of as ' tance toward meeting the
competing challenges of maintaining high-quality c services while providing
fair and reasonable pensions for employees.
THE PROBLEM
Pension costs for many California munities continue to i ase, threatening
the delivery of basic public services, cow T mis general budgets, and
indeed, posing along-term fis-
t hallenge -tate itself. A rmer CalPERS
actuary warned that by 2014 if_'Aj kp.common o local governments to budget
50% of a police officer's salary; 0fa firefir's salary and 25% of a
miscellaneous employee's salary fof -heir pent mss; cc r butions that are fiscally
unsustainable. ace 259 es in pension contribution
costs in the next ttee yearssd thosees are likely to remain high for a decade
or more.
Causes� ble
V
1. TWrge Iois§N- pen ,o inves r tt due to the Great Recession.
2 fthanced be'03, or' 5 granted after 1999 (SB400/AB616).
3. IrTWsed life sp f retired„employees.
�.
A PRINCIPLED AP�WACF
All
Public retirement systt3hould provide fair benefits for career employees, and:
1. Recognize the value of attracting and retaining high performing public
employees to design and deliver vital public services to local communities.
2. Recognize and support the value of a dependable, sustainable, employer
provided Defined Benefits Plan (DBP) for career employees; supplemented
with other retirement options including personal savings (e.g. 457 Plan).
1
3. Public pension costs should be shared by employees and employers
(taxpayers).
4. Be portable across all public agencies to sustain a competent cadre of
California public servants.
STAGES OF A SOLUTION
Many of the steps below can, are, and should betake locally and immediately, as
part of the collective bargaining process to mov pension costs in a more
sustainable direction. Further, State action is sary to return the PERS (or
other state-authorized pension systems) to a e inable framework. Many
of the actions below are and will be printed to State Legislature for
enactment. We believe the League of __9 rnia Cities sh cl engage the unions,
Legislature, and Governor in the leggy-wive process to focally change the
structure of PERS thus protecting the fisca gr cities and==PERS retirement
for public employees. This N_,;W include sponsoring ah� initiative if
legislative change is insufficien
zqg
ACTIONS CITIES AND E T A K I AT COLLECTIVE BARGAINING
TABLE TO REDUC TS
1. H �ees _'. loy share of PERS costs: 7-8% for
JCellaneo plo and safety employees.
2. 'Rif.6-vide a two re ent system with new hires being placed in a
red ti
3. Allow loyees tack-up a portion of the employer's PERS costs up to
PERS lirr
Whrougl egotiation to better share the normal costs of
pensions
4. Base final retirees salary on the three highest years worked.
5. Eliminate the PERS contract option of including Employer Paid Member
Contribution (EPMC) in the calculation of an employee's base pay for
retirement purposes.
A City Managers Department survey in February 2011 indicates one in five cities
responding to the survey have implemented a second tier for new hires. Further,
the majority of cities surveyed (61%) are currently negotiating pension reforms.
2
ACTIONS NEEDED FROM THE STATE TO RESTORE THE SUSTAINABILITY OF
PENSION PROGRAMS
Courts have held that current and former local government employees have
rights to the pensions promised them at hiring. As such, the following
recommendations most likely would not pertain to former employees or the
prospective benefits of current employees.
A Defined Benefit Plan is the most effective ve o accumulate and distribute
pension benefits and is the preferred retirem ys for municipal employees.
According to staff of the National Insti't of Retir t Security, dollar for
dollar, a Defined Benefit Plan yields c5d'erably more ( retirement savings
than a Defined Contribution Plan. `
The subsequent action items a consideredividually or in combination to
improve the sustainability of PEA. F re-desiM a system that will contribute
�.
to safeguarding public pensions. - eing re emendations, with support
from labor, would I v = field o N,,state asis� ad lead to a maintain
e�w r b able
PERS for public ernee
1. Repeal SB400/AB616 returning to more sustainable PERS benefit formulas
of 2% at 60 for miscellaneous employees and 2% at 55 for safety
.employees. [See the attached memorandum for a special request on this
and a related item from the Executive Committee]
2. Haves RS providore fsla choices with lower benefit local options.
3. Base fii���retiremen�lary o `three highest paid years worked.
4. Prohibit ncing t second tier pension formulas for twenty years.
5. Calculate its-fly on base salary eliminating all "spiking." No
overtime, v a sick leave included in the pension calculation.
6. Eliminating the purchase of "air time" (purchase of time not served).
7. Eliminate the availability of Employer Paid Member Contribution (EPMC).
8. Require employees to pay the employees share of PERS (e.g. 7-8% for
miscellaneous employees and 8-9% for safety employees.)
9. Remove caps on the percentages employees can pay for the total cost of
PERS programs.
3
10.Give Government agencies through the collective bargaining process the
option to extend retirement ages for miscellaneous employees up to social
security retirement ages. Seek minimum (floor) retirement age of 60 for
miscellaneous employees and 55 for safety employees before earning full
retirement benefits.
11.Prohibit retroactive pension increases.
12.Meet any retirement needs for part-time employees with alternatives to a
Defined Benefit Plan. .
AM
13.Delete the 1,000 hours rule for part-time,4ffltaoyee mandatory enrollment
in CalPERS.
14.Prohibit employees and employersf taking cotbution "holidays."
15.Provide employers with a hybdension systems tion that caps the
Defined Benefit PERS pension atnnual maximum r ee benefit equal
to 70% of the retiring employees eligi �;base pa &-termined by
averaging the 3 highes r s pay) a plement the D` ' with a risk
managed PERS defined ion pla DCP should integrate with a
DBP not, as some pension sio s sug substitute for it.
E
Cie ,k
ADDITIONAL STEM- :'--. THAT��4PPEARCESSARY TO RESTORE PERS TO
SUSTAINABILITY AND��DVJ � RANSPdU�NCY
1. Pension sustainability cannot be fully achieved without addressing the
"benefits of both current and future employees. After a detailed legal review
and to the extent permitted by federal and state law, a well-designed State
Constitutional Amendment is needed for prospective retirement formula
reductions and incremental retirement age increases for current employees
to guarantee their already accrued earned benefits, while making the plan
sustainable, affordable and market competitive on a going-forward basis.
The amendment should also include a risk-managed PERS Defined
Contribution Plan for public agencies. [See the attached memorandum for
a special request on this and a related item from the Executive
Committee]
2. The PERS Board needs to be restructured with a substantial increase in
independent public members (preferably with financial expertise) to ensure
4
greater representation of tax payer interests with regard to public pension
decisions.
3. Set uniform standards and definitions for disability benefits and evaluate
the level of benefit that is considered as tax exempt. The tax exempt
portion should either be eliminated or allowed on a proportional basis to
the severity of the disability.
4. If the above reforms prove unfeasible or ineffective, consider a standard
public employee pension system where one benefit level is offered to every
employee as a further option to restore sustainability to PERS. [See the
attached memorandum for a special request on this and a related item
from the Executive Committee]
5. While not addressed in this paper, -Post-ErMt�,yment Benefits (OPEB),
such as retiree health care, repro V another unfclld liability for many
local agencies and must be ate sed through cor%hensive reform
measures.
6. Develop a program wit State to efsts . . lat pension programs offered
by localities are fully %s Arent, a that professional actuarial
evaluations of unfunded coo(ppbn is of OP`E,'s and Pension Plans are
completed.
7. To the ext d by fie. t law prohibit payment of
pension be` :ts to blic a wee cony ted of a felony related to
fraudulently a cin se bene
Whil nsion re is imaryc l µchallenge facing local agencies, it
repres . but one " sev M financial challenges that, when combined,
represent "Perfect St tha leading to the insidious erosion of fiscal
solvency of govern ts. While some changes may take years, delay in
dealing with the lem, makes the situation worse.
5
B-own seeks `hybrid' pension/401(k)reform plan«Calpensions Page 1 of 22
Calpensions
Ca1PERS,Ca1STRS and other government pensions
«Pensions take more state pay,but not at CSU
Pension reform:bargaining table or ballot box?»
Brown seeks `hybrid' pension/401(k) reform plan
By Ed Mendel
Gov. Brown is proposing that the state give Ca1PERS$1.5 million to identify and study alternatives for a"hybrid"
retirement plan,a cost-cutting combination of pensions and 401(k)-style individual investment plans.
The item in the governor's revised state budget plan last week is a reminder that the"12-point pension reform plan"he
proposed last March listed a"hybrid option"as one of five points still under development.
Brown issued the reform plan after a breakdown in talks with a handful of Republican legislators,who must provide at
least four of the votes needed to extend an expiring tax increase.
The Republicans are said to be seeking pension reform along with a state spending limit and business-friendly
regulatory changes.A news release in March said Brown intends to"introduce these pension reforms with or without
Republican support."
At a news conference last week,the governor said he is willing to put a spending limit on the ballot as part of a budget
deal.He was asked if he also would put a pension reform on the ballot.
"We are going to propose pension reform,"Brown said."That's more contentious,and I'm told there is going to be a
lot of pension reform on next year's ballot,anyway. So,one way or the other,I think we are going to get whatever
pension reform we need."
Polls show voter support for cost-cutting pension reforms.Among the proposals for local pension ballot measures are
switching new hires to 401(k)-style plans in San Diego and cutting pensions earned by current workers in the future in
San Jose.
Several statewide pension reform initiatives have been proposed in recent years.But they lacked the funding needed to
gather enough voter signatures to place the measures on the ballot.
Now former Assemblyman Roger Niello,R-Fair Oaks,has filed an initiative that would extend retirement ages,cap
pension amounts and require employees to pay more toward their pensions.
Dan Pellissier,president of California Pension Reform,is working on an initiative aimed at the ballot next year.He has
talked about several possibilities,including a cap on employer contributions and a switch to a 401(k)-style plan.
The watchdog Little Hoover Commission,warning that pension costs could"crush"government,suggested a court test
of whether pensions not yet earned by vested current workers can be cut,which likely would result from the San Jose
plan.
httn://Calnencinnc rnm/x0 1 1/01;19d/hrnllrn_aAAlro_11 1. ;A A1111, __AI_ -1
Brown seeks `hybrid' pension/401(k)reform plan o Calpensions Page 2 of 22
The commission report in Februarx also recommended afederal-like hybrid plan,calling it"a breakthrough model for
pension reform that is gaining renewed attention as states struggle to address rapidly increasing pension costs."
The three-part federal plan adopted in 1985 for new hires combines a lower pension,a 401(k)-style plan with a federal
match and Social Security.As of 2009,the hybrid was said to be fully funded,while the old pension plan was 39
percent funded.
In Orange County,unions agreed to a plan authorized by legislation last year that gives new and current workers the
option of choosing a hybrid plan.But the plan is on hold awaiting federal approve of pre-tax employee contributions to
the 401(k)plan.
A Utah hybrid plan,opposed by unions but approved by voters in an initiative drive last year led by a Republican state
senator,Daniel Liljenquist,is getting some national attention.
All full-time state and local government workers in Utah hired after July 1 will be able to choose between a hybrid and
a 401(k)-style plan.The state contributes 10 percent of pay(12 percent for police and firefighters)to the plan the
worker chooses.
In a new wrinkle,if the cost of the pension part of the Utah hybrid goes above 10 percent,because of investment losses
or other problems,the employee has to cover the increased cost.
But if the actuarially required contribution to the pension part is less than 10 percent(it's set to begin at about 7.5
percent)the excess goes into the 401(k)part of the employee's hybrid plan.
Liljenquist expects most employees planning a long career on the job to choose the hybrid plan.He thinks many short-
term employees will choose the 401(k)-style plan,which is portable and can be transferred to another job.
Most private-sector employers offering a retirement plan have switched to 401(k)plans.For the employer,a 401(k)
has the advantage of an annual"defined contribution"with no long-term debt.
A pension is a lifetime monthly payment or"defined benefit,"which can result in massive debt if investment earnings
or contributions fall short.Brown said last week the state has a$181 billion"unfunded liability"for pensions and
retiree health care.
Critics say the 401(k),originally a pension supplement,can be a bad deal for employees due to poor investment
decisions,high management fees and little time to recover losses if the stock market plunges shortly before retirement.
Perhaps most importantly,the risk borne by the employer in a pension plan is shifted to the employee in a 401(k)plan.
Advocates say a hybrid plan can protect employers against crushing debt and employees against an impoverished
retirement.
"The debate between a defined-benefit and a defined-contribution system,however,does not need to be an either-or
choice,"said the Little Hoover Commission report.
A hybrid plan was one of two cost-cutting pension options recommended in February by the nonpartisan Legislative
Analyst.The other"cost-sharing"option would increase employee and employer contributions when pensions are
under-funded.
Last week,the Legislative Analyst"strongly"urged rejection of the governor's proposal to have the California Public
Employees Retirement System conduct a hybrid study,calling the$1.5 million budget item"uncommonly amorphous
and inscrutable."
The analyst said Ca1PERS,with its hard-won independence and legal duty to give priority to the interests of retirees,
must be able to raise employer contribution rates in response to reforms and,if necessary,go to court.
In addition,said the analyst,a Wall Street Journal story on May 19 said Ca1PERS officials"now see the fund playing a
leadership role in the national debate over whether to overhaul public pensions and replace them with 401(k)-style
http://calpensions.com/2011/05/24/brown-seeks-hvbrid-nension4Ol k-reform-nlan/ 6n s/I)nl 1
Brown seeks `hybrid' pension/401(k)reform plan o Calpensions Page 3 of 22
plans popular in the private sector,a change CalPERS opposes."
The Ca1PERS chief actuary,Alan Milligan,wrote in an article published in Capitol Weekly on April 28 that an
analysis,"The Impact of Closing the Defined Benefit Plan at CalPERS,"found that phasing out pensions may not
yield the expected savings.
For example,the pension system would have management costs for at least 60 years,the life expectancy of young
members,and investments would be more conservative to provide liquidity,requiring higher employer contributions.
About a third of CalPERS members are not in Social Security.Putting them in Social Security,as under the federal
hybrid plan,would require government employers to pay an additional federal tax amounting to 6.2 percent of worker
pay.
"The topic of pensions and retirement benefits is complex,"Milligan concluded. "If done wrong,pension changes
could result in higher costs to taxpayers while providing lower benefits to employees.
"If done right,pension changes could result in a system that better meets the needs of both taxpayers and employees.
Policymakers should conduct a thorough analysis before embarking on any changes."
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego
Union-Tribune.More stories are at http://calpensions.com/Posted 24 May 11
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49 Responses to "Brown seeks 'hybrid' pension/401(k) reform plan"
1. spension Says:
May 24.2011 at 1:53 pm
Strange how inaccurate information has gotten caught in the echo chamber and is now accepted as fact...
Defined Benefit Pensions are simply more economical than Defined Contribution Pensions,for the same benefit.
The reason is simple... when 100,000 people's pensions are pooled together,you don't have to plan for
everyone living to age 95,because statistically you'll get people who die early compensating for those who live
a long time.However,every single solitary person has to prepare for their Defined Contribution fund to support
them to age 95... raises the necessary principal accumulation by 50%! But the investment bankers *love*that,
50%more transaction fees!
The real problem is that the Defined Benefit Pensions have been woefully mismanaged,due to a'this time is
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