Calif. Legislator Gives Pension Reform Another Try

Published April 1, 2006

Despite strong opposition from unions and lukewarm support from Gov. Arnold Schwarzenegger (R), California State Assemblyman Keith Richman (R-Northridge) hasn’t given up on reforming the state’s public employee pension systems. This year he has introduced Assembly Constitutional Amendment 23 (ACA 23), another measure that would secure 401(k)-like investment accounts for all state and local employees.

The first reform attempt came in early 2005 when Richman, concerned over the state’s mounting pension costs, introduced Assembly Constitutional Amendment 1 (ACA 1). That plan would have required all state and local employees hired after July 1, 2007 to be enrolled in a defined contribution (DC) pension plan.

“This is a fair proposal for employees and taxpayers,” Richman said of his new plan.

A DC pension plan operates much like many companies’ 401(k) plans, with the employer making scheduled contributions into an individual worker’s investment account. This differs from a defined benefit (DB) structure, currently in place in the state, where a beneficiary receives a defined monthly pension amount after retirement.

The problem with DB plans is that pension costs are volatile and unpredictable, leaving governments at risk of defaulting on their obligations. California’s state and local budgets are increasingly burdened by pension deficits, forcing taxpayers to shell out more money to keep the system running.

Hurts Mobile Workers

The state’s pension system also is unsuited to the needs of mobile twenty-first century workers who value the ability to take their retirement money with them when they change jobs. That is currently forbidden to public-sector workers, but it would be possible under a DC plan.

Chances for reform looked promising in early 2005 as Schwarzenegger championed ACA 1. But the plan proved unpopular with public-sector union bosses, who claimed it could eliminate on-the-job death and disability benefits. In fact the proposal was silent on that issue, and neither Richman nor the governor had any intention of tinkering with those benefits.

Despite repeated efforts to dispel union fears, the governor eventually chose to pull the plan, putting the issue on hold.

Schwarzenegger’s 2006 State of the State Address quashed any hopes he would make pension reform a cornerstone of this year’s agenda, although he did say he was “already talking to the legislative leaders about … pension reform.”

Measure Offers Options

ACA 23 would require all state and local public employees hired after July 1, 2007 to choose between a comprehensive DC pension plan and a hybrid pension plan. The hybrid combines features of both DB and DC plans.

An employee who chose the comprehensive DC plan would obtain a 401(k)-like investment account. Employers would be obligated to match any employee contributions up to 4 percent of the employee’s annual salary.

The hybrid plan would likewise give employees a 401(k), but with a smaller employer contribution. The difference would be made up from the DB portion of the hybrid plan, which would give the employee, at retirement, 1 percent of his or her highest average salary for each year employed. Public-safety employees would receive, at retirement, 2 percent of highest average salary for each year employed. Highest average salary would be determined by an average of the highest salaries in three consecutive years.

Death, Disability Protected

Unlike the 2005 pension reform proposal, death and disability benefits are specifically addressed in Richman’s new proposal. They will continue to be provided to all beneficiaries based on a formula using age, salary, and years of service.

Despite that provision, the state’s public employee unions are still calling the measure a threat to working Californians. The California Professional Firefighters, for example, described it on their Web site as “another flawed pension privatization proposal,” saying the plan “lacks a common sense approach to the issue of retirement stability.”

Richman disagrees. California’s public employees deserve a pension system that provides them with more flexibility and choice, he said, and the state’s taxpayers deserve a system that is more stable, predictable, and fiscally prudent.

Anthony P. Archie ([email protected]) is a public policy fellow in Business and Economic Studies at the California-based Pacific Research Institute and is coauthor of the forthcoming report, Pension Intervention: Reforming California’s Public Employee Retirement Systems.