Two New Pension Reform Initiative Proposals Submitted

Citing the need to “provide fiscally responsible and adequately funded pension benefits for all past, current and future government employees and retirees,” the group “California Pension Reform” this week submitted requests to the Attorney General’s Office for titles and summaries for two pension reform proposals. The Attorney General now has 15 days to provide the titles and summaries before signature-gathering may begin.

Government Employee Pension Reform Act of 2012, Version #1

This proposal will require future government agency employees (hired after July 1, 2013) to contribute an amount at least equal to the amount contributed by an employer to a public retirement plan and does not permit the employer to cover any part of the employee contribution. For miscellaneous employees, the employer would be prohibited from contributing in aggregate any more than six percent of the employee’s base wage; for public safety employees, this figure is nine percent. The employer, if employees are not covered by Social Security, must provide to the employees a replacement benefit that matches the Social Security benefit they would receive, the cost of which would be shared equally by the employer and the employee. All death and disability benefits provided by the employer must be provided outside of the retirement plan.

The proposal also includes provisions which would apply to current employees (those hired prior to July 1, 2013) who are part of a government agency retirement plan. 

• To prevent pension “spiking,” employees’ retirement benefits would be calculated using the average of their highest three years base wage.
• Retroactive increases in retirement plan contributions or benefits are prohibited.
• Retirement benefits would not be provided to employees convicted of a felony arising out of their service as a government employee.
• The purchase of service credit would be prohibited.

Additionally, if the retirement plan doesn’t meet the minimum funding level (80 percent as provided in the proposal), the fund would be determined at risk and an appropriate amount to fund the plan at or above the minimum level must be provided or it must be declared that such an appropriation cannot be done without impairing the governmental agency’s ability to provide essential services. If it is determined that funds cannot be appropriated in such a manner, the employer must limit for current employees any contributions to the normal cost of the retirement plan to six percent for miscellaneous employees and nine percent for public safety employees. Any additional funding needed to fund the plan at or above 80 percent would be covered by the employees and any retirement benefit costs savings must be used to reduce the plan’s unfunded liability.

The proposal also requires that every board of a government agency retirement system must have at least a majority of members who have demonstrated financial, legal, accounting, healthcare, actuarial or benefits consulting expertise and that they not be current members of the system or have family members who are. The Director of the Department of Finance would be a voting member of any state or local government pension fund with $5 billion or more in total liabilities and the Legislature would establish the criteria and process for the eligibility and selection of board members.

Government Employee Pension Reform Act of 2012, Version #2

This proposal permits the Legislature to, by a two-thirds vote, enact a hybrid retirement system for all government employees hired after July 1, 2013 that is designed to provide replacement income upon full retirement. 

The proposal defines “full career in government service” as 30 years for public safety employees at 58 years of age and 35 years at the age of 67 for miscellaneous employees. When combined with anticipated defined contribution plan benefits and any benefit payments through Social Security, the defined benefit portion of the employee’s retirement may not exceed 75 percent of their base wage and is limited to 25 percent of the employee’s pensionable pay after a full career in government service (50 percent if the employee is not in Social Security). Further, the defined benefit part of the hybrid plan cannot exceed $100,000 per year and must be calculated based on the average of their highest three years base wage; the employer and employee is also required to equally share the cost of the defined benefit portion of the retirement benefit.

Retirement plan trustees would be required to adopt accounting standards and actuarial assumptions ensuring that the cost of the defined benefit portion of the retirement benefit is fully paid in the year it’s earned. The employer would select the defined contribution plan administration and offer retirees (upon retirement) the option to convert the defined contribution benefits into annuities. The proposal would allow employees to retire five years before their full retirement age with a full actuarial deduction for earlier retirement applied to the employee’s pension benefits.

Version #2 includes the following from Version #1: minimum funding requirements, three-year averaging provision to prevent spiking, prohibition of service credit purchases and retroactive increases in retirement plan contributions or benefits (or benefit formulas), the forfeiture of retirement benefits in the case of a felony conviction and requirements for an independent and expert pension board.

The California Pension Reform group is spearheaded by Dan Pelissier and includes former Assembly Member Roger Niello and former Department of Finance Director Mike Genest. We will keep you apprised regarding the status of these two proposals.