Author: Ed Mendel

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

California Gov. Jerry Brown’s plan to reduce state worker retiree health care costs got only a small nod in a tentative CSU faculty contract agreement last week. But three unions have agreed to begin paying down one of the state’s fastest-growing costs and largest debts.

Part of the plan Brown proposed last year hit a wall of opposition in the Legislature. An optional low-cost health plan would have taken less from the paycheck, but more from the pocket before insurance begins paying medical expenses.

The new state budget Brown proposed in January still expects major long-term savings from the retireee health care plan requiring state workers to begin paying some of the cost while on the job, work longer to become eligible, and pay higher premiums after retiring.

“Even though the private sector is eliminating these types of benefits, the state can preserve retiree health benefits for career workers,” said the governor’s Finance department budget summary.

How fast are costs growing?

The state paid $458 million in 2001 (0.6 percent of the general fund) for state worker retiree health care and is expected to pay $2 billion (1.7 percent of the general fund) next fiscal year — up 80 percent in just the last decade. (see Finance chart below)

The debt or “unfunded liability” for retiree health care promised state workers has grown to $74.1 billion, state controller Betty Yee reported in January — much larger than the unfunded liability reported by CalPERS for state worker pensions, $43.3 billion.

As the budget summary noted, employer paid retiree health care is rare in the private sector. And in what Brown has called an “anomaly,” the state pays a larger share of retiree health care costs for retirees than for active workers.

The state usually pays 100 percent of the health care insurance premium for retirees and 90 percent of the premium for dependents. For active workers, the state pays 80 to 85 percent of the premium and for their dependents 80 percent, depending on bargaining.

State workers, who can retire as early as age 50 though few do, are expected to switch to federal Medicare when they become eligible at age 65. A state supplement continues to cover costs not paid by Medicare.

Brown’s plan, meanwhile, could take decades to cut costs. But without action, said the budget summary, the state worker retiree health care debt could grow to $100 billion in five years and to $300 billion in three decades.

The big change puts money into a pension-like investment fund to yield earnings that can help pay retiree health care in the future. CalPERS expects its investment fund, valued at $288 billion last week, to pay two-thirds of future pension costs.

The state has only been paying annual retiree health care premiums, setting no money aside to “prefund” or pay for the retiree health care earned by active workers each year.

This “pay-as-you-go” policy forces future generations to help pay for the cost of current workers. By passing on the debt, lawmakers have more money to spend on other programs.

In the early 1990s, legislation by former Assemblyman Dave Elder, D-Long Beach, created an investment fund for state worker retiree health care. But lawmakers chose not to put money into the fund.

Brown’s plan, as in his previous pension reform, calls for the state and its current employees to pay equal shares of the “normal cost,” a contribution to the investment fund to cover the estimated cost of the retiree health care earned during a year.

But as with pensions, only the state, not the employee, has to pay for the debt from previous years often caused by investments failing to earn the expected amount, a big risk at the center of the public pension debate.

Brown’s plan also requires five more years of service to become eligible for retiree health care. Current workers are eligible for 50 percent coverage after 10 years on the job, increasing to 100 percent after 20 years. The new thresholds are 15 and 25 years.

A third part of the plan eventually ends the anomaly of employer-paid health coverage increasing on retirement, regarded by some as an incentive for early retirement. For new hires, retiree health coverage is capped at the level of active workers.

“Over the next 50 years, this approach will save $240 billion statewide,” said the state budget summary. “The Budget sets aside $300 million General Fund to pay for potential increases in employee compensation as part of these good faith negotiations.”

Pay raises are part of three new state worker contracts bargained by the Brown administration that begin prefunding retiree health care under the governor’s plan.

A tentative contract with the California Correctional Peace Officers Association last month, which members are being asked to ratify now, phases in a retiree health contribution of 4 percent of pay by 2019 along with three annual 3 percent pay raises.

A contract with a scientists union phases in a 2.8 percent retiree health contribution by 2019 with three 5 percent annual pay raises. An engineers contract phases in a 2 percent contribution by 2019 with a 5 percent pay raise next year and a 2 percent raise the following year.

The state has not reached an agreement on another contract that expired last July, crafts and maintenance. It’s one of three bargaining units that began prefunding retiree health care prior to the governor’s plan, contributing 0.5 percent of pay.

Physicians are contributing 0.5 percent of pay under a contract that expires this July. State worker retiree health care prefunding began in 2010 with the Highway Patrol contributing 0.5 percent of pay, which is now 2 percent until 2018.

The big round of state worker retire health care bargaining begins when 15 contracts expire this July, nine of them in bargaining units represented by the largest state worker union, SEIU Local 1000.

California State University employees have been paying less for the same pension received by most state workers, 5 percent of pay instead of 8 percent. To shift the shortfall in employee funding to CSU, the Brown administration reduced its funding.

The tentative contract announced last week, negotiated by CSU not the Brown administration, averted a strike by giving a 10.5 percent pay raise over two years to a CSU faculty that contended its pay has lagged UC and community colleges for a decade.

A CSU faculty association summary of the agreement shows no change in the pension contribution. But for faculty hired after July 1, 2017, ten years of service will be needed to be eligible for retiree health care, up from five years for current employees.

The nonpartisan Legislative Analyst’s Office suggested last year that there is “some ambiguity” about whether retiree health care is, like pensions, a “vested right” widely believed to be protected against cuts by a series of state court decisions.

Possibly strengthening the right to retiree health care was not mentioned as an incentive in the negotiations that led to the first contract that the state budget summary said “lays out the approach” for the Brown retiree health care plan.

“Vesting didn’t come up in bargaining,” said Bruce Blanning, executive director of Professional Engineers in California Government. “It wasn’t implied or suggested at all.”

 

Photo by Steve Rhodes via Flickr CC License

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

A new California state board, Secure Choice, last week recommended that the automatic enrollment of millions of private-sector workers in a new state-run retirement savings plan begin with a safe investment: U.S. Treasury bonds for the first three years.

The board would then have time to develop options for riskier higher-yielding investments that could be protected against losses, possibly though insurance or pooling investments and eventually building a large reserve that could offset market downturns.

Several states are working on savings plans for private-sector workers with employers that do not offer a retirement plan — an estimated 6.8 million in California, who are 55 percent of workers ages 18 to 64 and earn a median wage of $23,000.

A payroll deduction is said to be a proven way to sharply increase savings. Deductions would begin at 3 or 5 percent of pay, perhaps escalating to 10 percent as years on the job increase. Workers automatically enrolled in the new state-run plan could opt out.

Employers with five or more employees but no retirement plan (typically a tax-deferred 401(k) investment plan available from many firms) would be required to offer the state savings plan. Business groups are worried about potential costs and liability.

Senate President Pro Tempore Kevin de Leon, D-Los Angeles, after four years of trying, obtained legislation (SB 1234 in 2012) authorizing a study of a state-run savings plan for private-sector workers with tight constraints:

A legal and market analysis not paid for by the state, exemption from federal retirement law, IRS tax deferral, and a self-sustaining plan with no employer liability or state liability for benefit payments.

Half of the $1 million raised by the nine-member Secure Choice board chaired by state Treasurer John Chiang came from the Laura and John Arnold Foundation, often vilified by public employee unions for promoting public pension reform.

De Leon credits President Obama for Labor department guidelines that create a “safe harbor” for state-run plans from the federal retirement law, ERISA, which would be a burden for employers.

The board approved extending the legal contract of K&L Gates to work with two other state savings plans, Oregon and Illinois, on obtaining a Securities and Exchange Commission exemption from registering under federal securities laws.

The estimated Secure Choice startup cost is $129 million if the payroll deduction is 3 percent of pay. Consultants say a startup loan from the state could be paid off without exceeding the cap on administrative expenses: 1 percent of total assets.

Last week, as the Secure Choice board voted unanimously to recommend legislation approving a cautious start with bonds and the flexibility to add more sophisticated options later, one of the issues was protection against investment losses.

State Controller Betty Yee, a board member, asked about De Leon’s vision with his original legislation for an insurance-like “cash balance” plan, a minimum guaranteed investment return that prevents losses.

The Overture Financial consultants who did the feasibility study, Nari Rhee and Mohammed Baki, told her a guaranteed return during the early years of savings could take half of the potential return, but might work in the years before retirement.

“Legislation should allow flexibility to the board to add insurance,” said Baki. “It’s really a matter of how much is accumulated on the average account in that last 15 years.”

Overture had recommended that the board choose one of two options: a traditional tax-deferred IRA like a 401(k) individual investment plan or an innovative pooled IRA that could build a reserve to offset investment losses.

At board hearings on the two options in Los Angeles and Oakland, a large union with members in the public and private sectors, SEIU, used news conferences and emotional personal testimony to urge the board to choose the pooled IRA.

Workers would have a “variable-rate savings bond,” going up or down with investment earnings. Annual earnings over 10 percent would go into a reserve, which in two decades might be large enough to offset losses like those in the recent financial crisis.

A powerful political force at the Capitol, the Labor Coalition of public employee unions including SEIU that represents more than one million members, sent the Secure Choice board a letter opposing the traditional IRA option.

The coalition said it’s too much like the 401(k)-style plans “anti-pension advocates propose for new public employees.” The coalition prefers the more pension-like pooled IRA, but notes difficulties with cost, implementation and SEC clearance.

A third option mentioned by the coalition is roughly similar to the recommendation adopted by the Secure Choice board: pooled investments, risk sharing with the smoothing of gains and losses, and some investment options for workers.

De Leon’s bill drew on proposals from academic research and the National Conference on Public Employee Retirement Systems, said a report last month by the Center for Retirement Research at Boston College.

“The NCPERS plan reflected the recognition by public employees that the quality of their own retirement coverage could be at risk if their counterparts in the private sector lack access to a retirement system,” said the report by Alicia Munnell and others.

A letter to the Secure Choice board from the Securities Industry and Financial Markets Association said the Overture study found that “71 percent of uncovered workers” are already saving for retirement.

The association said a state-run plan would be “simply adding a new savings vehicle to an already robust market,” not filling a coverage gap that mainly results from the severe economic stresses on workers.

A coalition of 21 business groups, including the California Chamber of Commerce and the California restaurant and retailers associations, said in a letter that it lifted its opposition to the De Leon bill to allow a feasibility study.

But the business coalition still has a long list of detailed concerns, among them potential employer liability, hidden employer costs, employer and employee education about the plan, enforcement, recordkeeping, and changes in employee payroll deductions.

“The coalition also notes that simple, cost effective private market solutions may be available and yet have not been explored,” said the business coalition. “Perhaps there is a better path to addressing the ‘retirement crisis.’”

At a news conference last week, De Leon said he was interested in the reserve fund, but does not want to “let the perfect get in the way of the good.” He said the Secure Choice board’s financial background will help it collaborate with the Legislature and the governor’s office.

“What we come up with today may not be the product that we will have in two to four years,” De Leon said.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Following new accounting rules, California’s annual state financial report issued this month shows a “net pension liability” of $63.7 billion, a dramatic increase from the $3.2 billion “net pension obligation” reported last year.

It’s mainly the result of including, for the first time, the large debt or “unfunded liability” of the two big statewide pension systems: the California Public Employees Retirement System and the California State Teachers Retirement System.

New rules from the Governmental Accounting Standards Board are directing state and local governments to report more of their pension debt, a “hidden” and “unsustainable” long-term drain on basic services in the view of some critics.

“The GASB accounting rules will help to increase transparency, which will in turn focus local and state governments on ensuring they adequately plan for these important long-term obligations,” state Controller Betty Yee said in a news release.

Following the old rules, the Comprehensive Annual Financial Report last year only reported the pension debt for single-employer state plans, a $3.2 billion obligation for judges and a closed plan for legislators.

The new report this month for the fiscal year ending last June 30 includes the debt for the five plans in the main CalPERS fund, $39.4 billion, and the state share of more than a third of the CalSTRS debt, $22 billion.

“During the 2014-15 fiscal year, the State implemented GASB statements No. 68 and 71, which resulted in the elimination of the June 30, 2014 net pension obligation of $3.2 billion and the recognition of a net pension liability of $63.7 billion at June 30, 2015 — a net increase of $60.5 billion in long-term obligations,” said the report.

Next year the new accounting rules will be used to report the debt for retiree health care promised state workers, estimated to be $74.1 billion in an update issued by Yee in January.

This year a much lower state worker retiree health care debt is reported, a “net OPEB obligation” of $22.3 billion under old rules based on the contribution shortfall. (Retiree health care is labeled “other post-employment benefits” in the financial reports.)

Half of the state’s reported overall “negative unrestricted net position” of $175.1 billion, which includes long-term obligations paid over decades, is debt owed employees. Well over a third of the total is outstanding bond debt, $67.1 billion.

The debt owed employees, totaling $89.9 billion, is the $63.7 billion net pension liability, the $22.3 billion retiree health care obligation, and $3.9 billion owed for compensated absences. The chart below shows net position growth under the new rules.

A decade ago, the accounting board had a major impact with new rules directing state and local governments to begin calculating and reporting the debt or “unfunded liability” for retiree health care.

In 2007 former state Controller John Chiang, now state treasurer, issued the first actuarial estimate of the debt owed for retiree health care promised state workers, $47.8 billion over the next 30 years.

The retiree health care debt grew to $74.1 billion, much larger than the $43.3 billion state worker pension debt, because it’s been mainly pay-as-you-go, costing $1.6 billion this year. Gov. Brown announced a plan last year to begin trimming the debt.

During bargaining with unions for new labor contracts, the state wants employees to begin contributing to their retiree health care in a pension-like prefunding expected to cut costs with investment earnings over time.

State workers have an unusually generous retiree health care plan that can pay 100 percent of the insurance premium for retirees and 90 percent for their dependents. For active workers, the state pays 80 to 85 percent of the premium, depending on bargaining.

Legislation in the early 1990s created a state worker retiree health care fund. But no money was put in the fund. Employer-paid retiree health care is rare in the private sector.

To help local governments prefund retiree health care, CalPERS created the California Employers Retirement Benefit Trust Fund in 2007 that has grown to $4.4 billion and 474 employers.

Now, the impact of the new pension accounting rules remains to be seen. The rules are intended to put a public spotlight on pension debt, but will not be used by actuaries to set annual rates paid by employers.

A central issue in the debate over public pensions is the earnings of their investment funds. CalPERS expects its fund, valued at $301 billion last week, to provide about two-thirds of the money needed to pay future pensions.

Critics say the CalPERS earnings forecast of a 7.5 percent average is too optimistic, concealing massive debt and the need for a large and painful rate increase to pay for future pensions, which reformers think might trigger action to control costs.

Moody’s, a Wall Street rating agency, has used a 5.5 percent earnings forecast for pension debt. Some economists advocate an even lower risk-free bond rate because pension payments are guaranteed.

In a compromise, the new accounting rules allow pension funds to continue to use their earnings forecasts to discount future pension debt. But if their projected assets fall short, they must “crossover” to a risk-free bond rate to discount the remainder of the debt.

The CalPERS state plans passed the crossover test. A risk-free bond rate was not used for their share of the new $63.7 billion net pension liability. Under the old rules, the “unfunded liability” of the CalPERS state plans was $43.3 billion on June 30, 2014.

CalSTRS feared the new rules would require reporting the nation’s largest pension debt, $167 billion, perhaps increasing the cost of school bonds. But a major legislative rate increase in 2014 dropped its net pension liability to $58.4 billion.

The new rules required school districts to begin reporting their share of CalSTRS pension debt. For example, the pension debt of the state’s fifth largest district, Elk Grove Unified, went from zero to $414.6 million.

Among the county pension systems, Sen. John Moorlach, R-Costa Mesa, reported this month that the new rules result in a debt adjustment totaling $20 billion in nine counties. John Dickerson is tracking new county debt reports at Yourpublicmoney.com.

Last week, U.S. Rep. Devin Nunes, R-Tulare, announced the reintroduction of a bill requiring public pension funds to report debt using a “fair market valuation,” like a risk-free bond rate, or the plan sponsor would lose the federal tax exemption on its new bonds.

A Nunes news release said a Stanford finance professor, Joshua Rauh, “estimates that the fiscal hole for state and municipal public employee public pension plans is an astounding $3.4 trillion,” far more than the $1.2 trillion reported under GASB rules.

 

Photo by www.SeniorLiving.Org via Flickr CC License

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Social Security recipients get no raise this year because inflation last year was near zero. But more than half of CalPERS pensions will get a raise in May of 1.5 to 4 percent.

How does this happen, when both Social Security and the California Public Employees Retirement System have annual cost-of-living adjustments based on the rate of inflation?

“The law does not permit an increase in benefits when there is no increase in the cost of living,” Social Security recipients were told of the federal program‘s rules. “So your benefit will stay the same in 2016.”

That seems simple and straight forward. In contrast, the CalPERS method for a cost-of-living adjustment, even though its inflation index shows little or no inflation this year, seems almost comically convoluted.

A CalPERS report last week said its cost-of-living index (CPI-U for all urban consumers) increased only 0.12 percent last year, far below the one percent threshold needed to trigger a cost-of-living adjustment for the year.

CalPERS plans also have a cap on the amount of the annual cost-of-living adjustment, 2 percent for about 95 percent of retirees. When inflation is below the threshold or above the cap, the inflation not used for an adjustment can be “banked” and applied in future years.

The report gave an example of what happens when inflation is below the threshold: “In the future, when the inflation rate exceeds one percent, the 0.12 percent increase retirees did not receive in 2016 will be factored in to that year’s adjustment.”

When asked to clarify the cost-of-living adjustment policy at a board meeting last week, Anthony Suine of the CalPERS staff gave an example of what happens when inflation is above the cap.

“In the early 2000s when inflation was much higher than the 2 percent, for instance, that banked up,” Suine said. “So when it has been lower, the retirees who have been retired for longer were still seeing the benefits of that banked up cost-of-living adjustment.”

Now after several years of low inflation, he said, anyone that retired after 2005 does not have enough in the bank to reach the 1 percent threshold needed for a cost-of-living adjustment.

As a result, about 45 percent of CalPERS retirees will not receive a cost-of-living adjustment this year. But 55 percent of the retirees will begin to receive a cost-of-living adjustment in their monthly payment in May, most getting a 2 percent increase. (see chart)

State and school workers are among the 95 percent of retirees in plans with a 2 percent cap on the annual cost-of-living adjustment. The rest are local governments: 67 plans with a 3 percent cap, 12 plans with a 4 percent cap, and 38 with a 5 percent cap.

To get a cost-of-living adjustment in one year that is as high as the plan’s cap, inflation in the previous year would have to be as high as the cap.

“The cost-of-living adjustment is limited to the lesser of two compounded numbers — the rate of inflation or the cost-of-living adjustment contracted by the employer,” said the report.

Using a different method, the cost-of-living adjustments received this year by members of most large independent county retirement systems, which operate under a 1937 act, will include recent retirees.

The Los Angeles County Employees Retirement Association approved a 2 percent cost-of-living adjustment beginning April 1, citing a 2.03 percent increase last year in the federal urban consumer index for the Los Angeles-Orange-Riverside County area.

The San Diego County Employees Retirement Association approved a 1.5 percent cost-of-living adjustment beginning March 31, citing a 1.62 percent increase in the consumer price index for the San Diego area.

The San Mateo County Employees Retirement Association approved a 2 percent or 2.5 percent cost-of-living adjustment (depending on the plan) beginning April 1, citing a 2.61 percent increase in the index for the San Francisco-Oakland-San Jose area.

The San Mateo system website has a reminder for members considering retirement this year: “If you want to take advantage of this year’s COLA rate, you must retire on or before April 1.”

The Sacramento County Employees Retirement System, in what some might consider a stretch, bases its cost-of-living adjust on the Sacramento-Oakland-San Jose consumer price index.

The Sacramento County system, citing the 2.61 percent increase in the Bay Area, approved cost-of-living adjustments (depending on the plan) of zero, 2 percent, 2.5 percent or 4 percent beginning April 1.

At the CalPERS Pension and Health Benefits Committee meeting last week, board member Henry Jones and the staff member, Suine, had a brief exchange about the inflation index.

“Some questions have been raised about why we don’t use some inflation factor from California as opposed to the U.S.,” Jones said. “Can you comment on that?”

Suine said the national CPI-U used by CalPERS is required by state law. He said the federal government uses a “clerical wage earner” index that produced a similar near zero result last year.

“We could consider other ones through legislation,” Suine said. “Not that I’m advocating,” Jones said. “I just wanted to get an explanation.”

If over time CalPERS pensions lag far behind inflation, a Purchasing Power Protection Allowance keeps them from falling below 75 percent of original purchasing power for state and school retirees and 80 percent for local government retirees.

The California State Teachers Retirement System has similar purchasing power protection for its pensions that get an annual cost-of-living adjustment of 2 percent, a fixed amount based on the original pension.

But the CalSTRS purchasing protection program, called the Supplemental Benefit Maintenance Account, keeps pensions from falling below 85 percent of original purchasing power and has an unusual and very costly funding source.

The state annually contributes 2.5 percent of the teacher payroll to the CalSTRS supplemental program, $607 million this fiscal year. Last year, the program had a giant reserve, $11.5 billion, and paid only $193 million to 52,474 retirees.

CalSTRS apparently has done no analysis to determine whether funding purchasing protection through the regular employer-employee contribution rate, like CalPERS, would be more cost-efficient than creating a giant reserve that has grown from $5.3 billion in 2008.

Meanwhile, finding a fair and rational method for cost-of-living adjustments is not a problem for most of the pensions remaining in the private sector, which has been switching to 401(k) individual investment plans.

A federal Bureau of Labor Statistics survey in 2000 found that only 9 percent of blue collar and service industry employees who are in traditional pension plans received an automatic cost-of-living adjustment.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

University of California President Janet Napolitano’s proposal last week to cap pensions for new hires, part of a deal with Gov. Brown, has a less generous 401(k)-style supplement than a task force proposal to help attract top faculty.

But by lowering employer contributions to the tax-deferred individual investment plans, Napolitano’s revision of the task force proposal increases UC savings, which can be used to pay down pension debt and increase the effort to recruit and retain faculty.

A faculty-staff task force formed by Napolitano last summer to recommend a pension cap plan issued a report in December that said a recent study found UC faculty salaries were 12 percent below market.

Retirement benefits are an important way that the University of California can remain competitive for top faculty, the report said, particularly in competition with some leading universities that only offer 401(k)-style plans without pensions.

Napolitano said in a letter to colleagues Friday her proposal (scheduled to be considered by the UC Regents on March 23) builds on the work of the task force and reflects comments she received in January and February.

“Many of you expressed concern that a new set of retirement benefits could harm the University’s ability to attract and retain top-tier faculty,” she said. “Improving overall employee compensation and the stability of the UC pension plan were also common concerns.”

Napolitano said her proposal will, among other things, allow regular pay increases for faculty and staff and make “merit-based pay a regular component of system wide salary programs to reward employees based on their contributions to the university.”

Under the agreement with the governor, she said, UC is “receiving nearly $1 billion in new annual revenue and one-time funding over the next several years” that includes extending a 4 percent annual budget increase.

In exchange, UC is freezing tuition through fiscal 2016-17 and will begin enrolling 5,000 new California students this fall. The linchpin of the deal is $436 million from the state over three years to help UC pay down its pension debt.

For the big pension payment Brown wants a cap on UC pensions similar to the one his pension reform imposed on most new hires of state and local government three years ago.

UC Regents, who have some independence, approved lower pensions for new hires in 2013, much like Brown’s Public Employees Pension Reform Act. But they did not adopt the PEPRA pension cap based on the wage amount taxed for Social Security.

The task force example used for the proposed UC cap would base the calculation of pensions for new hires on pay up to a cap that would be $117,020 this year, sharply reducing pensionable pay that now goes up to $265,000, the current IRS limit.

To offset the reduced pension, the task force proposed giving the new hires a 401(k)-style plan for pay between the new cap and the IRS limit. UC employers would contribute 10 percent of pay to the 401(k) plan, employees 7 percent of pay.

In addition, new hires would be given the option of choosing to receive no pension, but instead a 401(k) plan covering all pay from the first dollar up to the IRS limit with similar contributions: employers 10 percent of pay, employees 7 percent.

Napolitano’s proposal follows the basic task force model, but reduces the employer contribution to the 401(k) individual investment plan. The employee contribution remains at 7 percent of pay.

For the gap between the pension cap and the IRS limit, the employer contribution is not 10 percent of pay but 5 percent for faculty and 3 percent for staff. For the 401(k)-only option the employer contribution is 8 percent of pay for all employees.

Over the next 15 years, the task force estimated that its proposal for new hires would save UC employers $15 million a year. The Napolitano proposal is expected to save an average of $99 million a year over the next 15 years.

“Since we compete in a global market for faculty, often against elite private institutions that can typically pay more than UC, maintaining a pension benefit along with a 401(k)-style supplement is important to attracting and retaining the caliber of personnel we need to maintain UC’s excellence,” Napolitano said in the letter.

For a diverse workforce, she said, the option of a stand-alone 401(k) plan is attractive for short-term UC employees who want a portable retirement plan and for those who prefer to personally manage their retirement savings.

A retirement plan that combines a smaller pension with a 401(k)-style plan, like the one for federal employees, is often called a “hybrid.” Brown’s original 12-point pension reform included a proposal to switch new hires to hybrid plans.

But a hybrid, strongly opposed by unions, was rejected by the Legislature. A public pension is a lifetime monthly payment backed by taxpayers. A 401(k) plan can rise and fall with investment earnings, shifting risk from the employer to the employee.

UC will need to bargain union agreement to impose a pension cap on new hires. The 401(k)-style supplement, said to be part of the deal with Brown, is an exception for UC not included with the PEPRA cap for other state and local government employees.

Estimating how many employees hired after July 1 this year will retire decades from now with final pay exceeding the new pension cap is difficult. The task force report said it’s likely to be well over 8 percent, perhaps as high as 24 percent for some groups.

When the governor proposed a hybrid plan, a CalPERS analysis said closing pension plans to new hires could destabilize them. Brown said it reminded him of a “Ponzi scheme,” where money from new investors pays the earnings for earlier investors.

Napolitano’s proposal deals with this problem by adding an additional 6 percent of pay to the employer contribution for the hybrid plan to pay down pension debt or the “unfunded liability” and an additional 4 percent to the stand-alone 401(k) plan.

Compared to other California public pension systems, the UC employer contribution of 14 percent of pay is low. The employer contribution for some police and firefighter pensions is more than 50 percent of pay.

Napolitano’s proposal would use 57 percent of the expected $99 million annual saving to pay down pension debt. The UC plan, using market value assets, is 83 percent funded with a $9.8 billion unfunded liability, the task force report said.

About 5 percent of the funding level is the result of $2.7 billion in loans, mainly from an internal short-term investment fund, that are being repaid through a payroll assessment.

The loans from the short-term fund earning 1.5 percent are expected to earn a long-term 7.25 percent in the UC pension fund, yielding an arbitrage profit over the 20 to 25 year terms of the loans.

The UC pension system is known for a rare two-decade contribution “holiday,” when employers and employees did not put money into the pension fund. Contributions that stopped in 1990 were restarted in 2010.

Another task force report said that if annual normal cost contributions had been made during the 20-year holiday, UC pensions in 2010 would have been 120 percent funded instead of 73 percent funded.

Reporter Ed Mendel covered the California Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

As a new California board, Secure Choice, gets ready to recommend a state-run savings plan later this month that could automatically enroll most small business employees, a large union is pushing an option that would eventually offset investment losses.

Last week Service Employees International Union, which includes government and private-sector employees, used news conferences and testimony from workers at board hearings in Los Angeles and Oakland to push for a “pooled IRA with a reserve.”

On March 28 the Secure Choice board is scheduled to choose either the pooled IRA or a more traditional tax-deferred IRA that, like most 401(k) plans in the private sector, has little or no protection against investment losses unless expensively insured.

The innovative pooled IRA, described by some as a “variable-rate savings bond,” would in years with high investment yields put some of the money into a reserve, which could be used to offset losses in years with low yields or losses.

“In addition to mitigating risk for future retirees, a report commissioned by the board found the Pooled IRA with Reserve would also generate the best returns for all participants,” said an SEIU news release.

Models project the reserve could reach 40 percent of the total fund in 20 to 25 years, enough to offset an investment loss like the one in the recent financial crisis. Each year the Secure Choice board would decide whether to build or dip into the reserve.

Some potential problems: liability for board decisions on crediting the “savings bond” and managing the reserve, generational equity (contributing to the reserve before its large enough to offset losses), and pressure to spend large reserves.

The nine-member Secure Choice board chaired by state Treasurer John Chiang has been working for 2½ years on an “automatic IRA” payroll deduction for the more than 6 million California private-sector workers not offered a retirement plan on the job.

Employees of employers, who have five or more employees but do not offer a retirement plan, would be automatically enrolled in the state plan, unless they opt out. A payroll deduction is said to be a proven way to sharply increase retirement savings.

In 2007 while still in the Assembly, Senate President Pro Tempore Kevin de Leon, D-Los Angeles, first introduced legislation for a state-run retirement savings plan, finally getting approval of a modified version five years later, SB 1234 in 2012.

But there were tight restrictions: a legal and market analysis not paid for by the state, exemption from federal retirement law, IRS tax deferral, and a self-sustaining plan with no employer liability or state liability for benefit payments.

A big step toward raising $1 million for the legal and market analyses was a $500,000 matching grant from the Laura and John Arnold Foundation. Another big step was Obama administration guidelines last fall for avoiding federal ERISA retirement law.

Now the Secure Choice board is preparing to choose the retirement savings plan to send to the Legislature, where it could be modified, rejected or approved as proposed and sent to the governor for enactment.

De Leon’s bill was the first successful legislation among state attempts to provide retirement plans for private-sector workers, said a report issued last week by the Center for Retirement Research at Boston College (see chart).

The report said the De Leon bill drew on proposals from academic research and the National Conference on Public Employee Retirement Systems, the largest trade association for public pensions in the United States and Canada.

“The NCPERS plan reflected the recognition by public employees that the quality of their own retirement coverage could be at risk if their counterparts in the private sector lack access to a retirement system,” said the CRR report by Alicia Munnell and others.

Last January, Connecticut said it became “the first state in the nation to complete a market feasibility study” of a state-run retirement savings plan for private-sector workers.

The new Connecticut Retirement Security Board, established in 2014, is now working on legislation for a traditional or Roth IRA with no reserve. The study said the plan could become self-sustaining after receiving $1 billion in assets in two years.

Illinois has not completed a feasibility for its “automatic IRA” plan, but does not need to go back to the Legislature for approval, said the CRR report. Oregon aims to complete a study by this fall and have an operating “automatic IRA” plan in 2017.

Washington and New Jersey have “marketplace” plans to give employers information and a website listing pre-screened retirement plans. Massachusetts is considering an “automatic IRA” and a multiple employer plan to share 401(k) costs.

In New York, Gov. Andrew Cuomo appointed a commission to study the issue. New York Mayor Bill de Blasio announced last month his city is the first to work on an “automatic IRA” plan for employers with 10 or more employees.

“This is the latest announcement by the Mayor aimed at lifting up working families — from paid sick and parental leave, to living and minimum wages, this has been a focus of the de Blasio administration,” said the mayor’s news release.

At the Secure Choice hearing in Oakland last week, representatives of two large business groups said the California market and feasibility study by Overture Financial did not answer key questions given to the board last fall.

“As we stated before when we were dealing with this in the legislative arena, we were able to come to an agreement due to the wise counsel of the governor’s office to be able to have a study of this program prior to going forward,” said Nicole Rice of the California Manufacturers and Technology Association.

The CMTA and the California Chamber of Commerce lifted their opposition to the De Leon bill to allow a feasibility study. Among their unanswered concerns: employer costs, a lasting ERISA exemption, and whether adequate record keepers can be found.

Board member Yvonne Walker, SEIU local 1000 president, asked the business groups for their recommendations. Board member William Sokol, a benefits lawyer, said he was reminded of past encounters with “paralysis by analysis.”

Marti Fisher of the Chamber of Commerce said the groups lack the economists and labor law experts to answer some of the questions. She said the intent is to “give you thoughtful input and questions,” not to stall the launch of the program.

“We do want to make sure we remain on the record as not opposing the program,” Fisher told Walker.

More than two dozen workers spoke at the hearing about growing old without adequate retirement benefits. Two said they were raising families while working at fast-food restaurants, McDonald’s and Burger King, that offer no retirement plan.

“We are just asking right now to get something in place so that the employees can put in their money so that they can have something for themselves,” Connie Chew of SEIU Local 521 told the hearing. “But I think in the long run we need to bring pensions back.”