Proposed Law Would Put California’s Public Pensions on Private-Sector Footing

Published February 1, 2005

A California assemblyman has proposed scrapping the state’s public employee pension system for new employees, instead putting them under the same type of 401(k) pension system offered to most private-sector employees. Current employees and retirees would see no change in their retirement plans.

“Every week we read more stories about state, local, and school budgets being decimated by defined benefit pension costs,” said Assemblyman Keith Richman (R-Northridge), in introducing Assembly Constitutional Amendment 5 (ACA 5) on December 6.

“The City of San Diego, Orange and Contra Costa Counties all have [current total] pension deficits of more than $1 billion,” Richman said. “CalPERS [California Public Employees Retirement System] owes more than $1.9 billion than it has on hand, and just last week state teacher pension fund officials said they may cut benefits for future retirees by $500 a month to eliminate their $23 billion deficit.”

Richman said ACA 5 “will stop state government and local public agencies from making expensive promises they can’t keep and will restore accountability to public pensions.”

Voters would have to approve the proposal in a ballot initiative, and state legislators would have to design the 401(k) plan before it could be implemented.

Union Reps Object

Public employee unions began voicing opposition to the proposal even before it was formally introduced, after Richman began publicly floating the idea last fall.

Terry Brennand, a lobbyist for the Service Employees International Union, which represents about 300,000 government workers in California, told reporter Peter Felsenfeld of the Contra Costa Times that 401(k)-type plans could force employees to retire into poverty.

“I don’t think anyone has an interest in putting a bunch of aging former public employees back on the public dole,” he told Felsenfeld for an October 19 article.

Ron Cottingham, president of the Police Officers Research Association of California, also objected that a few years of investment losses could wipe out a 401(k) retirement account.

He told Felsenfeld that ACA 5 “puts California at great risk of losing more officers” because 401(k)-type plans offer no guarantees, “and people need to know they’re going to get something definite when they put their lives on the line.”

Move Emulates Private Sector

Richman, however, noted that during the past 20 years most private-sector companies have dropped guaranteed pension plans like those offered to California’s public employees. Guaranteed pension plans provide retirement benefits based upon a formula of years employed and salary at retirement.

Instead, most private-sector employers have begun offering 401(k) plans, which allow employees to decide how much of their income to contribute to their individual account and how to invest the money. Contributions are tax-deferred and in most cases matched by the employer.

A number of states, including Colorado, Florida, Michigan, Montana, and South Carolina, have adopted some form of 401(k)-type plan for public employees in recent years, according to Richman.

Pension Costs Soaring

“Retirement costs for [California] state employees alone have grown from $200 million in 2000 to $2.6 billion this year [2004], heading to $3.5 billion in 2009,” Richman said. “ACA 5 will begin to stabilize and reduce these retirement costs as the legislature and Governor Schwarzenegger struggle to eliminate California’s $10 billion structural budget deficit.”

Anthony P. Archie, a policy fellow in business and economic studies at the Pacific Research Institute (PRI) in San Francisco, said in an article on the PRI Web site, “With a looming budget deficit of $7.3 billion, California needs to adopt more cost-saving measures. Changing the state’s pension system would be an excellent place to start.”

Archie said a state employee with 30 years on the job and earning $50,000 a year can retire at age 55 and receive an annual pension of $30,000, 60 percent of his or her previous salary. The guaranteed pension for public safety employees is more generous: They can retire at age 50 with 90 percent of their income.

“While these benefits are very attractive to state employees, the taxpayers are left with the bill,” Archie said.

Investments Under-Performing

Employees make contributions to CalPERS, as does the state. Those funds are then invested by a 13-member board. Archie notes their investments have performed poorly in recent years.

“From 2001 to 2003, the investments under-performed, and CalPERS suffered severe shortfalls, forcing taxpayers to pick up the tab,” he said. “In 2004, CalPERS ran a deficit of $1.9 billion. The governor and the legislature are attempting to defer a portion of this by selling $800 million in bonds, a move that the Pacific Legal Foundation claims is unconstitutional.”

The pension problem is even worse for some of California’s counties and cities.

“The city of San Diego’s pension system has only enough funds to cover 68 percent of its obligations,” Archie said. “Contra Costa County allocates 11 percent of its budget to pensions, while the city of Bakersfield is at 14 percent. There are literally dozens of localities that face bankruptcy if something isn’t done.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.