Author: Ed Mendel

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 California superior court judge has awarded judges back pay and a pension increase, ruling that a five-year freeze on their salary did not keep pace with average increases in state worker pay, a requirement under state law.

But the state has not agreed to the amount owed judges in the class-action suit filed by a former court of appeals presiding justice, Robert Mallano, shortly before he retired two years ago.

In a filing last week by Mallano’s attorney, Raoul Kennedy of Skadden Arps in Palo Alto, a consultant calculated that superior court judges are owed $14,664, appeals justices $16,782, associate justices $17,898, and chief justices $18,763.

Total back pay for the 1,700 active judges listed last year would be roughly $25 million, which includes 10 percent annual interest awarded by Los Angeles Superior Court Judge Elihu Berle in a decision last December.

The state disagreed with the judgment, arguing that the award of specific salaries and pension amounts is “akin to an award of damages” and that ordering the state to pay Mallano’s attorney fees is “procedurally improper” and “unwarranted.”

“The salary amounts cannot be accurate because the salary adjustments, if any, that would be made to judges in accordance with the court’s judgment will vary among individual members of the plaintiff class,” the state said as quoted in Kennedy’s filing. “It is impossible at this point to calculate what those individual figures would be.”

The state filed objections to the court’s draft judgment, and a hearing has been set for March 9.

Changes in pay can affect not only employer and employee contributions to the California Public Employees Retirement System, but also the amount of the pension paid to retirees.

The Mallano decision is briefly mentioned in the annual CalPERS valuations of the two judges retirement systems issued this month for the fiscal year ending last June 30.

“The increases and amounts owed have not been calculated yet,” said CalPERS. “We anticipate the impact of this lawsuit to be reflected in the June 30, 2016 valuation (issued next year).”

An old retirement system for judges hired before Nov. 9, 1994, has an unusual provision. Annual pension increases for retirees are based on pay increases for active judges, not inflation up to 3 percent a year as in the new system.

But it’s another unusual provision in the old retirement system that is a continuing conflict between CalPERS, acting on behalf of the judges, and the Legislature and the governor.

The old system is pay-as-you-go, operating mainly with a state contribution large enough to pay retiree pensions each year and a much smaller amount from active judges (8 percent of pay). No additional money is invested to “pre-fund” future pension costs.

“Although it is unlikely the State would fail to pay ongoing benefit payments, as they are due, the lack of pre-funding means there is no benefit security for members of this plan,” said a CalPERS staff report with the new Judges Retirement System valuation.

“It also means the total cost is higher to the State since there is no accumulation of assets and, consequently, little to no investment earnings can be used to defray costs.”

CalPERS expects investment earnings to pay 65 percent of future pension costs, the rest coming from the annual contributions of employers, 22 percent, and employees, 13 percent.

In a routine annual letter to the governor and Legislature this month urging pre-funding of the old judges system, Rob Feckner, the CalPERS president, said “the board has considered the System’s funding deficiency to be a serious matter for many years.”

CalPERS estimates that doubling the state $227.3 million pay-as-you-go contribution next fiscal year to $448.6 million would save $1.3 billion over the remaining life of the plan, dropping the projected $5.6 billion pay-as-you-go cost to $4.3 billion.

In one of the minor instances of the mismanagement of state pension funds (see major examples in a previous post), the legislation that created the new judges system repealed a requirement that the old system be fully funded.

A legislative analysis of SB 65 in 1993 gave no explanation for the repeal of a requirement that the old system be pre-funded with a target of eliminating its pension debt or “unfunded liability” by 2002.

But a likely explanation for leaving the old system with pay-as-you-go pensions that deliberately pass debt to future generations would seem to be avoiding the cost of pre-funding: an estimated $100 million a year to reach full funding by 2002.

Now the old Judges Retirement System has a debt or unfunded liability of $3.3 billion. The dwindling number of active judges in the system, 231 in the new valuation, are outnumbered by the 1,924 retirees and beneficiaries receiving pensions.

In contrast, The new Judges Retirement System II for those appointed or elected after Nov. 9, 1994, has no debt or unfunded liability. It’s 100 percent funded in the new valuation, down from a surplus of 107 percent the previous year.

The 1,470 active judges in the new system outnumber the 96 retirees and beneficiaries. The employer contributions is 23.2 percent of pay. Judges hired before a reform on Jan. 1, 2013, contribute 8 percent of pay, those hired later 15.25 percent of pay.

Two years ago, pre-funding the old judges retirement system was on Gov. Brown’s to-do list when he proposed a funding solution, later enacted, for the California State Teachers Retirement System.

“We still have retiree health,” he said then, before following up last year with a plan to bargain changes with state worker unions. “We still have the judges retirement system. We have got lots of other stuff here, and we will handle it.”

Another continuing conflict is judges ruling on issues that affect their own pensions. In the Mallano decision, Judge Berle presumably is included in his decision awarding back pay and a pension increase.

What some pension reformers think is a key way to reduce unaffordable pension costs, cutting pension amounts current workers earn in the future, is prevented not by legislation but by a series of state court decisions often called the “California rule.”

California judges have rarely if ever recused themselves from ruling on pension issues that might benefit them. In Arizona, four supreme court justices recused themselves from a current case to overturn a pension contribution increase for judges and others.

The case is being heard by other Arizona justices in a new pension plan not affected by the outcome. Some recent California retiree health care cases have been heard in federal court. But whether that is an option for pension cases is not clear.

Meanwhile, the conflict of interest continues. When Orange County unsuccessfully tried in 2011 to overturn a retroactive pension increase for deputy sheriffs, an attorney arguing the case for the deputies emphasized the point.

“Miriam A. Vogel, a retired Court of Appeal justice, clearly told her former colleagues that the court’s decision would affect every pension in the state of California: ‘(I)t would affect yours, it would affect mine,’” former Orange County Supervisor John Moorlach (now a state senator) wrote in the Orange County Register.

Photo by Joe Gratz 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.

With the vote tied 6-to-6 last week, CalPERS President Rob Feckner cast the tie-breaker that rejected term limits for top pension board posts, allowing him to run again and exposing a structural split between members backed by unions and the governor.

The board president and committee chairs would have been limited to four consecutive one-year terms beginning next Jan. 1. Prior service in the office would have been counted, and eligibility to run again restored after two years out of office.

As one of the most powerful state agencies, the 13-member CalPERS board sets annual pension rates that must be paid by state and local governments, while managing a huge pension fund (worth $278 billion last week) and the nation’s second largest purchaser of health care.

Most of the public debate last week was about term limits — refreshing leadership and giving board members an opportunity for growth, for example, versus reducing voter choice and avoiding the inexperience that led to lengthening legislative term limits.

But some said the underlying issues were the ambition of one board member, Henry Jones, to become president without a disruptive battle and union worry about giving governors an opening to control the board presidency.

Jones chairs the most powerful board committee, investments, and was re-elected vice president last month when Feckner was re-elected president, his 12th one-year term in the top board post.

Previous governors have clashed with the CalPERS board and public employee unions with a “raid” on pension funds, backing a candidate for the board presidency, and switching new hires from pensions to 401(k)-style retirement plans.

Gov. Brown has made unsuccessful proposals to add two “independent” board members ineligible for CalPERS pensions, speed up employer rate hikes needed to pay down pension debt, and give state workers a high-deductible retiree health plan to cut costs.

Public employee unions opposed the term limits proposal. The issue of current and retired employees retaining control of key CalPERS board posts surfaced in the CalPERS governance committee.

George Linn, president of the Retired Public Employees Association, told the committee the “chair of the organization” should always come from the six board members elected by current and former CalPERS members.

“That way we members always have a direct link to the president of the board,” Linn said.

Earlier, a CalPERS board member speaking in support of term limits, Richard Gillihan, Brown’s human resources director, told the committee a board member seeking a chairmanship is likely to have experience, such as serving as vice chair.

“The fact is some of us would never have a chance to get some of these positions if it were not for some forced opportunity to reconsider leadership,” said Gillihan.

Responding to Linn’s suggestion, Bill Slaton, a Brown appointee representing local elected officials, told the full board it’s a “bad idea” because the board should have “equal participants,” not “senior” and “junior” members.

“The concern about maintaining leadership by elected members I think is a false issue,” Slaton said, noting that term limits would not change the requirement that seven votes are needed to elect board presidents and chairs.

Six of the 13 CalPERS board members are elected by all or parts of active and retired employees, two appointed by the governor, one appointed by the Legislature, and four are officeholders: treasurer, controller, human resources, and personnel board.

Term limits moved out of the governance committee and deadlocked 6-to-6 at the full board with the support of two of the six board members elected by active and retired employees, Jones and J.J. Jelincic.

Jones made an unsuccessful motion at the full board to lengthen term limits to six years, an apparent bid to get the vote of board member Theresa Taylor. She had mentioned that four-year limits seemed short during the governance committee meeting.

Jelincic, often at odds with the leadership, is an on-leave CalPERS employee barred from some board discussions and decisions, particularly about executives who may later supervise him. The board censured him in 2011 for sexual harassment of co-workers.

CalPERS presidents and committee chairs customarily vote only to break a tie. When the governance committee deadlocked at 3-to-3, the chair, Slaton, cast the tiebreaker vote that sent the term limits proposal to the full board.

Voting “yes” were Jones, Jelincic, and Richard Costigan, the personnel board member. Voting “no” were Feckner, elected by school members, Michael Bilbrey, elected by all members, and Ron Lind, legislative appointee.

When the full board rejected term limits the following day, the president, Feckner, broke another tie vote.

Others voting “no” were Bilbrey, Lind, Priya Mathur, elected by local government members, Taylor, elected by state workers, Treasurer John Chiang, and Controller Betty Yee’s representative, Lynn Paquin.

Voting “yes” were Jones, Jelincic, Slaton, Costigan, Gillihan, and Dana Hollinger, a Brown appointee representing the insurance industry.

In an unusual departure from CalPERS custom, Sean Harrigan became CalPERS president in February 2003 by decisively defeating Willie Brown in an 8-to-4 vote by their fellow board members.

“As long as I’ve been on the board, the custom is an elected member serves as president,” Robert Carlson, who had served on the CalPERS board 31 years, told the San Francisco Chronicle four months before the vote.

Harrigan was not an elected member, serving instead in the personnel board seat since 1999. But he was a private-sector labor leader, regional director of the United Food and Commercial Workers union.

Brown was appointed by former Gov. Gray Davis, who supported his bid for the CalPERS presidency. He was mayor of San Francisco then, after gaining national fame while serving 14 years as speaker of the state Assembly.

Harrigan was ousted in December 2004 when the Personnel Board did not elect him to the CalPERS board. He said it was retaliation for shareholder drives to change behavior at companies like Disney, Safeway, and the New York Stock Exchange.

At the Capitol, some thought it might be payback from Brown for a rare defeat. In a 3-to-2 Personnel Board vote to drop Harrigan, two Republican members were joined by Maeley Tom, a top Democratic legislative aide during Brown’s speakership.

The ouster of Harrigan made Feckner acting CalPERS president. He had replaced Carlson as CalPERS vice president at the same time that Harrigan defeated Brown for president.

Photo by jypsygen 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.

As its pension debt soared after the financial crisis, CalSTRS struggled for years to get legislation needed to raise rates — meeting with legislators, looking at suing the state, and even issuing a $600,000 public relations contract to help sway lawmakers.

“Pay now or pay more later” was the refrain.

Actuaries calculated that during each year of delay, the total cost of the rate hike needed to project full funding in 30 years was growing at a rate of roughly half of one percent of pay.

But the century-old California State Teachers Retirement System was helpless for historical reasons, lacking a key power held by most California public pension systems. It could not set annual rates that must be paid by employers.

Then two years ago, after nearly a decade of CalSTRS pleading, the Legislature and Gov. Brown enacted a record rate increase. School district rates will more than double by the end of the decade, while teachers and the state have smaller increases.

Little noticed at the time, the legislation (AB 1469) also gave CalSTRS some long-sought power to raise employer and state rates — a big step toward normalizing the teachers’ pension system and a rare loosening of legislative control over the state budget.

“We were quite happy with the outcome,” Ed Derman, CalSTRS deputy chief executive officer, said last week as the new rate-setting power got a double dose of public attention.

The CalSTRS board approved a one-year delay in the “experience” study done every four years to help actuaries keep projections on track. The extra time will allow improved estimates of life spans before new rate-setting power begins.

The nonpartisan Legislative Analyst’s Office issued a review of the CalSTRS funding legislation suggesting tweaks may be needed to reduce the complexity, correct how debt is shared between employers and the state, and improve oversight.

In what could be a major change, the legislation lifted a cap that limited the basic CalSTRS state rate to 3.5 percent of pay. Now the CalSTRS board has the new power, beginning next year, to raise the state rate up to 0.50 percent of pay each year.

Another change gives CalSTRS the power, beginning in 2021, to raise the rate paid by school districts and other employers up to 1 percent of pay a year. But these rates are limited to a range of no less than 8.25 percent of pay and no more than 20.25 percent.

The Legislative Analyst thinks there is a “good chance” the state will not pay more under the new funding plan than it would have paid to CalSTRS under the previous funding law.

But like other California public pension systems, CalSTRS expects earnings from its large investment fund (valued at $186 billion last Dec. 31) to provide about two-thirds of the money needed to pay pensions in the future.

So, there also is a possibility that if the critics are right and investment earnings fall well short of the 7.5 percent annual long-term average expected by CalSTRS, new rate increases will be needed to fill the funding gap.

The uncapped state rates soon to be set by CalSTRS would have to cover most of a big new funding gap. Not only are school district rates capped at 20.25 percent of pay, but the legislation pushes them near the cap, going from 8.25 percent to 19.1 percent by 2020.

Depending on whether investment earnings exceed or fall below the CalSTRS forecast, said the Legislative Analyst’s report, the basic state rate in about 30 years could drop to zero or soar to 18 percent of pay.

“In the context of current statewide teacher payroll, the difference between these two extremes is roughly $5 billion — more than three times the state’s current contribution to CalSTRS’ main pension program,” said the analyst’s report by Ryan Miller.

“We note that the state’s share of CalSTRS’ unfunded liability would be higher than reflected in the figure (chart below) if CalSTRS lowers its assumption concerning future investment returns.”

The basic state CalSTRS rate increases to about 6 percent of pay in the new fiscal year beginning in July. It’s the last of three annual increases under the legislation, which tripled the state rate that was about 2 percent of pay three years ago.

The new power CalSTRS gets next year to raise the basic state rate does not include a separate state payment, frozen at 2.5 percent of pay, for a fund that keeps teacher pensions from falling below 85 percent of their original purchasing power.

As reported in a recent post, the Supplemental Benefit Maintenance Account had an $11.5 billion reserve last fiscal year for an annual payment of $193 million. There has been no analysis of whether the huge reserve is an efficient use of taxpayer funds.

The California Public Employees Retirement System provides similar inflation protection through a single employer-employee contribution rate that also covers the cost of pensions and annual cost-of-living adjustments.

And if the 85 percent guarantee is a “vested right” under state court decisions widely believed to mean that public pension benefits cannot be cut, there may be no need for a huge reserve to ensure inflation protection for many decades into the future.

Teachers got the smallest rate increase under the legislation two years ago because their contribution to CalSTRS was said to be a “vested right” that could only be cut if offset by a new benefit of comparable value.

For teachers hired before a pension reform in 2013, the rate went from 8 percent of pay to 10.25 percent. The offsetting new benefit was a provision in the rate legislation explicitly making a routine cost-of-living adjustment a vested right.

CalSTRS pensions get an annual 2 percent cost-of-living adjustment, a fixed amount based on the original pension. In the past this “improvement factor” has not kept pace with inflation, creating a need for the fund to protect original purchasing power.

Last week, the CalSTRS board was told that the life spans of retirees have been increasing faster than anticipated. Two years ago CalPERS increased employer rates to cover longer life spans expected for its retirees.

Rick Reed, CalSTRS chief actuary, said the same mortality table has been used for persons age 20 and age 60. A weighted average tends to estimate a life span that is too long for the 60-year-old and too short for the 20-year-old.

With new computer technology, Reed said, it’s possible to have a mortality table for each individual for each year. For a person age 20, there would be 70 mortality tables by age 90.

“Conceptually, it’s not new,” Reed said. “It’s just more doable now.”

By delaying the experience study until next year, the CalSTRS board hopes to have more accurate and stable mortality data, audited by an outside actuary, when its new rate-setting power begins.

Photo by Stephen Curtin 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.

The latest financial statements of California’s fifth largest school district, Elk Grove Unified, list a pension debt of $414.6 million, up from no pension debt in the statement for the previous year.

How did the debt go from zero to hundreds of millions in a year?

As you might guess, it didn’t. The change is how the pension debt is reported under a new rule of the Governmental Accounting Standards board that took effect last fiscal year.

School districts are required to begin reporting their share of a pension debt that previously had been reported only by the two big statewide retirement systems for teachers and non-teaching employees.

Elk Grove reported $335.7 million as its share of the “net pension liability” of the California State Teachers Retirement System and $78.8 million for the California Public Employees Retirement System.

Most employees in the 65 schools of the district in Elk Grove, a city of 160,000 near Sacramento incorporated in 2000 during rapid growth, are teachers eligible for CalSTRS. Non-teaching employees are in CalPERS.

The potential impact of the new accounting rule, GASB 68, may have played a role in the endgame for legislation that gave CalSTRS a long-delayed major rate increase signed by Gov. Brown in June 2014, only a week before the last fiscal year began.

Without a rate increase, actuaries said, the new accounting rule could require CalSTRS to report the nation’s largest pension debt, $167 billion, an amount so large some feared it might increase the cost of issuing school bonds.

Jack Ehnes, CalSTRS chief executive officer, told the board in September 2014 that while talking to school officials he found a mixed view about the impact of reporting a huge pension debt.

“Some arguing it would have no effect if people understood the basis for this,” he said, “others arguing that it would have a significant effect on the bond market for schools. So, the question was out there.”

After the rate increase was passed in the nick of time, the debt or net pension liability CalSTRS reported for the first year under the new accounting rule dropped to $58.4 billion.

But the new GASB reports (different from the way actuaries will continue to calculate funding requirements) are intended to not only put a spotlight on pension debt with a more prominent display, but also to more quickly show changes.

That’s already happened for CalSTRS. The first reports required under the new accounting rule were for fiscal 2014-15, when the CalSTRS net pension liability, $58.4 billion, was based on the fiscal year that ended June 30, 2014.

The next annual reports will be based on the CalSTRS net pension liability for the fiscal year that ended June 30 2015, which jumped to $67.3 billion mainly because pension fund earnings dropped from 18.7 percent in 2013-14 to 4.8 percent in 2014-15.

The new accounting rule was adopted during a time when estimates of state and local government pension debt nationwide ballooned to alarming levels, notably $2.2 trillion by Moody’s, a Wall Street credit rating firm.

Pension fund investments had huge losses during the financial crisis. The CalPERS portfolio plunged from $260 billion in 2007 to $160 billion in 2009 and now, nearly a decade later, is $280 billion as some see warnings of a new recession.

Moody’s and others contended that public pension funds have overly optimistic earnings forecasts (7.5 percent a year for CalPERS and CalSTRS) that conceal massive debt and the need for higher employer-employee contributions, benefit cuts or both.

The new GASB rule is a compromise between the status quo and lower earnings forecasts used by Moody’s, 5.5 percent, or an even lower risk-free bond rate that some economists think should be used for risk-free guaranteed payments like pensions.

Under the new rule adopted by GASB in 2012 after a lengthy process that began in 2006, pension systems are allowed to continue to use their own earnings forecasts to offset or discount the cost of pensions promised in the future.

But if their projected assets fall short, the rule requires pension systems to “crossover” to a lower bond-based earnings forecast to discount the remainder of their future pension costs.

“I’m seeing a lot of media basically saying there is going to be sticker shock when these things come out,” Alan Milligan, CalPERS chief actuary, said in 2011 of financial reports under the new GASB rule. “I’m not so sure about that.”

One reason for new CalPERS actuarial methods adopted in 2013 was better alignment with the new GASB rule. More importantly, like most California pension systems, CalPERS can raise employer rates and stay on the path to full funding.

The great exception, CalSTRS, lacks the power to raise most employer rates. But as noted, the Legislature, after years of urging, approved a large CalSTRS rate increase (AB 1469 in 2014) shortly before the new GASB rule took effect.

So, the Elk Grove Unified financial statement for last fiscal year said that its CalPERS and CalSTRS debt were both calculated without a crossover to the lower bond-based earnings forecast.

CalSTRS has a single plan and does not provide a net pension liability for school districts and other employers. Guidance on a website shows them how to calculate their share of the CalSTRS debt under the new rule.

CalPERS has more than 2,000 state and local government plans and has calculated a net pension liability for each, charging $2,500 per plan. The big system passed its first test to avoid a crossover to a lower bond rate and expects that to continue.

A look at two CalPERS plans shows little difference between the old “unfunded liability” debt, reported under the actuarial rules used to set annual employer contribution rates, and the new “net pension liability” debt reported under the GASB rule.

As of June 30, 2014, the San Bernardino police and firefighter unfunded liability was $162 million and the net pension liability $167.7 million; the Sacramento police and firefighter unfunded liability $375.2 million and the net pension liability $373.9 million.

A GASB rule adopted in 2004 told state and local governments to begin reporting the cost of retiree health care promised workers, a major long-term debt that often had not been calculated.

The new focus under the accounting rule was followed by a trend toward pension-like “prefunding” of retiree health care, making annual payments to an investment fund to help pay for benefits promised in the future.

A CalPERS retiree health care fund established in 2007 had investments from 471 local governments valued at $4.6 billion at the end of last year. The Brown administration is negotiating retiree health care prefunding with state worker unions.

Last year, GASB followed up by directing government employers to begin reporting their retiree health care debt in 2018 much like pension debt is reported under the new accounting rule.

Photo by www.SeniorLiving.Org

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 bipartisan group announced the end last week of an attempt to put a public pension reform initiative on the California ballot this fall, aiming instead for the November 2018 ballot. Its refiled initiative also may be put into a bill in the state Legislature.

A bill that would cut the growing costs of state and local government pensions by reducing retirement benefits for new hires presumably would be dead on arrival.

Cuts in retirement benefits are opposed by powerful unions and their Democratic allies, unless agreed to in bargaining. Gov. Brown had the leverage of gaining public support for a tax increase to get legislation in 2012 that yields modest pension savings.

But for the reform group, a bill could result in a legislative hearing publicizing a proposed initiative, expose flaws or errors that need correction, and provide a minor campaign talking point: We tried to get the Legislature to do it.

And in theory, a hearing could provide a public service with a four-year checkup on the previous reform, a forum for local governments to report the impact of rising pension costs, and an updated debate on whether pensions are affordable or unsustainable.

Chuck Reed, a Democrat and former San Jose Jose mayor, said the group he leads with Carl DeMaio, a Republican and former San Diego councilman, is considering legislation for the proposed initiative they plan to file late this year.

“We have thought about that, and talked to some members of the Legislature about it, and we may,” Reed said last week. “That’s not off the possibility list.”

There is no guarantee that a bill containing the proposed initiative would get a legislative hearing. If the initiative is a state constitutional amendment, Reed said, the bill would go to the rules committee and may not get a hearing in a policy committee.

“That wouldn’t stop us from doing it,” Reed said. “So, it is something we are considering.”

The group has struggled with choosing a type of reform, getting an initiative title and summary from state attorney Kamala Harris they think won’t repel voters, and raising money needed to put an initiative on the ballot and counter an opposition campaign.

“We are skeptical that donors will have any confidence in these two failed politicians who have repeatedly bungled efforts to put their poorly-written efforts to gut retirement security for millions of Californians on the ballot,” Dave Low, spokesman for a union coalition, said in a news release last week.

“They can be assured that any scheme they cook up for 2018 will meet the same fate of their previous efforts because we will fight it with our full arsenal,” said Low.

Three years ago, Reed was joined by the mayors of four other cities (only one a Republican) in filing an initiative for a state constitutional amendment allowing what the watchdog Little Hoover Commission and others think is a key pension reform.

The pensions current state and local government workers have already earned through service on the job would be protected. But the pension amounts they earn in the future could be cut.

“The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees,” the Little Hoover Commission said in a 2011 report.

Private-sector pensions can make cuts in future pension earnings to control costs. But in California, decades of state court rulings are believed to mean the public pension offered on the date of hire can’t be cut, unless offset by a comparable new benefit.

As a result, most cost-cutting pension reforms are 1) limited increases in what employees pay for their pensions, mainly by eliminating employer pickups of the workers’ share, and 2) lower pensions and retiree health care benefits for new hires.

These reforms can take decades to yield significant cost savings, as employees with “vested” rights to the previous retirement benefits offered when they were hired are gradually replaced by workers with the new lower benefits.

San Jose voters approved a Reed-led measure in 2012 allowing the city to cut the future earnings of current workers. That part of a broader pension reform was blocked by a superior court, a ruling that will not be appealed under a city settlement with unions.

The similar statewide initiative filed by Reed and the mayors received a title and summary from Attorney General Harris Reed said was “inaccurate and misleading.” A court disagreed, declining to order a rewrite, and the initiative was dropped.

A poll conducted in 2013 for the union coalition found that “eliminating public employees’ vested benefits” is viewed “very unfavorable” by most voters and the word “eliminating” fosters a “visceral negative response,” the Sacramento Bee reported.

Pensions for new hires, not the vested rights of current workers, were the stated focus of an initiative filed last June by the coalition led by Reed and DeMaio, one of the leaders of a 2012 San Diego initiative giving new hires (except police) 401(k) plans instead of a pension.

But the title and summary issued by the attorney general, agreeing with unions that the initiative was being misrepresented, said it “eliminates” the “vested pension and retiree health care benefits” of current employees for work done in the future.

Last October, the coalition filed a simplified version of the initiative likely to give new hires a 401(k) plan, unless voters approve a pension, and a second initiative capping spending on retirement benefits at 11 percent of pay, 13 percent for police and firefighters.

The title and summary issued for the two initiatives by the attorney general in December said they affect new employees, with no mention of “eliminates” or the “vested rights” of current workers.

A poll circulated by the union coalition, done for Capital & Main by Binder in December, found 42 percent in support of the likely 401(k) plan and 40 percent in support of the spending cap.

Reed said the coalition’s own polling found higher support, the most for the cap, that is enough to win — but not without a well-funded campaign to counter the “full arsenal” of union opposition.

His rough estimate is that $3 million is needed to gather the voter signatures required to place a constitutional amendment on the ballot and $25 million for the campaign. Reed has raised money for San Jose pension measures in 2010 and 2012.

He thinks donors can be found among good-government fiscal advocates in high-tech, wealthy conservatives concerned about pension debt and tax increases, and Democrats who do not want pension costs to crowd out funding for government services.

A Reed-DeMaio statement last week said that after discussion with coalition members and key donors, the decision was made to “re-file at least one of our pension reform measures later this year for the November 2018 ballot.”

A better reform environment is expected then as “rising pension costs further squeeze” government budgets, they said, and a pending U.S. Supreme Court decision (Friedrichs v. California Teachers Association) may reduce union money available for an opposition campaign.

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.

A new California board, Secure Choice, is looking at two options for a plan that would require most employers to offer workers the option of an “automatic IRA,” a payroll deduction for a tax-deferred retirement savings plan.

One option has no protection against investment losses, unless expensively insured. The other has a reserve, built with peak earnings in good investment years, that could over time be used to reduce losses in bad years.

After 2½ years of work, crunch time is here. Last week, the nine-member Secure Choice board scheduled a meeting on March 23 to pick the retirement savings plan that will be sent to the Legislature for approval.

It’s part of a national trend among states to attempt to supplement federal Social Security as average life spans lengthen, health care costs grow, and an annual survey finds only a fifth of workers expect to have enough money to retire comfortably.

More than half of the states have legislation that could implement (five states), study (18), or has considered (four) retirement savings plans, according to the Georgetown University Center for Retirement Initiatives.

In an important boost, the Obama administration’s labor department, as urged by California and other states, issued guidelines last fall exempting state-sponsored savings plans from a federal pension law (ERISA) that imposes burdens on employers.

California was an early leader in the trend when Senate President Pro Tempore Kevin de Leon, D-Los Angeles, introduced legislation in 2008 for a state-sponsored savings plan while he was still in the Senate.

De Leon finally obtained legislation (SB 1234 in 2012), despite opposition from business groups worried about another employer burden, taxpayer groups fearing more pension-like debt, and Republicans who prefer private-sector solutions.

But approval only only came after he agreed to a heavy lift: a legal and market analysis not paid for by the state, approval for IRA-like tax treatment, exemption from ERISA, a self-sustaining plan, and final legislative approval giving opponents another chance to block it.

Meanwhile, other states are moving faster. California was not the model in New Jersey last week as the Legislature clashed with Gov. Chris Christie, one of the Republicans running for president this year.

A Democratic proposal for a state-sponsored retirement plan similar to a payroll-deduction in Illinois, which is expected to start enrollment next year, was approved by the New Jersey Legislature with the backing of AARP, a powerful retirement group.

Christie vetoed the plan, saying it would burden small businesses and duplicate private-sector plans. Then the Legislature approved his proposal for a marketplace, similar to one in Washington state, where small employers can shop for retirement plans.

Another sign of the national trend was a report issued last week by the Pew National Trusts: “Who’s in, Who’s out: A Look at Employer-Based Retirement Plans and Participation in the States.”

In California access to and participation in a job-based retirement plan are both below the national average among states, the Pew report found, an echo of the data on the Secure Choice website in the office of state Treasurer John Chiang.

About 6.3 million California private-sector workers do not have an employer that sponsors an retirement plan, said the Secure Choice website, nearly two-thirds of them people of color.

“Nearly half (47 percent) of California workers — public and private — are currently on track to retire with incomes below 200 percent of federal poverty level (i.e., about $22,000 a year),” said the website.

A payroll deduction is said to be a proven way to increase retirement savings. A decision to set money aside to invest for retirement is made only once, not repeatedly amid daily budget pressures as paychecks arrive.

Under Secure Choice, workers with employers that have five or more employees, but offer no retirement plan, would be automatically enrolled in the new state savings plan, unless they opt out.

One of the plan options being considered by the Secure Choice board is like an IRA with no loss protection. The board would have to make a decision about the type of investment funds and whether they would be insured to provide loss protection.

The other option is an innovative pooled IRA that gives the employee something like a variable-rate savings bond. But it has a reserve fund, built up over time by taking some of the peak investment returns, that could be used to offset investment losses.

The Secure Choice board, depending on annual investment returns, would decide how much to credit the savings bond and whether to dip into the reserve. Models project the reserve could reach 40 percent of the total trust fund in 20 to 25 years.

That’s said to be large enough to offset an investment loss like the one in the recent financial crisis. Some think this option would have potential problems with generational equity, liability for board decisions, and pressure to spend large reserves.

But without using taxpayer money, the pooled IRA may be nearest De Leon’s original vision of a “cash balance” plan that provides a guaranteed minimum return, like the California State Teachers Retirement System’s Defined Benefit Supplement.

Secure Choice raised $1 million in donations, half from the Laura and John Foundation, to hire Overture Financial for a market analysis and K&L Gates for legal analysis.

Last week, the Secure Choice board increased the $498,366 Overture contract by $25,000, mainly for travel from its New York office, and the $275,000 K&L Gates contract by $80,000 to pursue a precautionary SEC exemption from securities law.

The final Overture report, which will not recommend a plan option, is expected to be delivered by the end of this month. After public display during February, hearings on the report are scheduled in Los Angeles on March 1 and in Oakland on March 3.

Then the board staff, acting Secure Choice director Christina Elliot and David Morse of K&L Gates, are expected to use public input from the hearings and the Overture report to make a plan recommendation to the board for action on March 23.

Whether De Leon prefers one of the plan options being considered by the board, or an alternative, was an unanswered question last week. Legislation approving a Secure Choice plan would create a new state program touching millions.

It could begin modestly, then evolve over time.

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.

San Bernardino’s plan to exit bankruptcy, possibly next year, cuts the pensions of 23 retired police officers who receive an unusual supplement to their regular CalPERS pension.

The supplement paid through a private-sector firm, the Public Agency Retirement System, boosts pensions to the same amount now common among police and firefighters, a standard set by the Highway Patrol in a CalPERS-sponsored bill, SB 400 in 1999.

San Bernardino provided the PARS supplement from 2004 to 2008, when the 23 police officers retired, as a lower-cost way to be competitive in the job market before adopting the more expensive CalPERS formula that critics say is “unsustainable.”

“PARS plan retirees will be the only retired employees in the state of California to have their retirement compensation reduced through bankruptcy proceeding,” a member of the PARS retiree subcommittee, Robert Curtis, said in a court filing this month.

Curtis said unfairly reducing pensions up to 12 percent could result in personal bankruptcy, the loss of homes and health coverage, and other hardships. He asked for a city-provided attorney to represent the PARS retirees.

San Bernardino’s plan to exit bankruptcy would reject the PARS contracts, distribute a $1.8 million trust fund to the 23 retirees, and make no more payments to the supplement, which is said to be underfunded by about $3 million.

The city thought it had an agreement with the PARS retirees last month. But in a court filing last week, the city suggested the emergence of opposition since then could result in even less generous treatment of the PARS retirees.

New public pension supplements, like the one given the 23 San Bernardino police officers, are now banned under a pension reform pushed through Legislature by Gov. Brown three years ago.

San Bernardino can argue that phasing out the PARS supplement leaves the 23 retirees with the pension offered when they were hired, like other officers who retired before the supplement began in 2004.

But the same cannot be said of pensions from the California Public Employees Retirement System and other public retirement systems covered by the “California rule,” a series of state court decisions.

Public pensions can go up but not down — even if, as with SB 400, a pension increase is retroactive, immediately creating debt because the increase was not paid for by previous employer-employee contributions.

A San Bernardino disclosure statement filed Nov. 25 said the city had roughly $323 million in CalPERS pension unfunded liabilities when filing for bankruptcy in 2012.

“These unfunded actuarial liabilties were created primarily by the common council’s decisions to approve enhanced pension benefits to city employees in 2001 and 2007,” said the city filing.

Contributing factors, said the filing, were unfunded retroactive pension increases, heavy CalPERS investment losses during the financial crisis, and an increasing number of retirees with larger pensions and fewer active workers to help pay for them.

Without cutting pensions, the San Bernardino plan is expected to produce a healthy general fund reserve of 15 percent or more through 2034, according to an update issued by city consultants early this month.

U.S. Bankruptcy Judge Meredith Jury said in October she wanted more discussion of rising pension costs, given the “media perception” that Stockton and Vallejo are in trouble (strongly denied by the city managers) because they failed to cut pensions in bankruptcy.

San Bernardino has deeper problems than the other two cities: a lower average income and weak local economy, years of factional political infighting, and mismanagement that led to a new finance director discovering the city was on the brink of not making payroll.

After an emergency bankruptcy filing in 2012, San Bernardino took the unprecedented step of skipping its payment to CalPERS for most of a fiscal year, running up a debt of $13.5 million and risking termination of its CalPERS contract.

Hoping at first to get aid from CalPERS by stretching out payments, what San Bernardino got was a legal battle and a mediated agreement to repay CalPERS with interest by June 2016, followed by a penalty bringing the total to $18 million.

Regular San Bernardino general fund payments to CalPERS increased from $6 million in fiscal 2000-1 to a projected $22.6 million this fiscal year, said the November city filing.

CalPERS employer rates for San Bernardino police and firefighters were 14 percent of pay in fiscal 2000-1, 39 percent of pay in fiscal 2012-13, and are projected to be 60 percent in fiscal 2019-20.

In other developments, City Manager Alan Parker, who clashed with Mayor Carey Davis, resigned effective Dec. 31. Last week Police Chief Jarrod Berguan was appointed interim manager until Mark Scott, Burbank city manager, takes the post Feb. 8.

Burrtec was selected in November to take over city waste management and retain full-time city employees, part of a strategy to cut costs by contracting for services. The city expects a one-time $5 million payment and annual savings of $2.8 million.

A federal appeals court last week upheld Judge Jury’s ruling that the city charter does not prevent contracting for fire services. Annexation of San Bernardino by the county fire district is expected to yield a $143 parcel tax and lower pension costs, netting $11 million a year.

At a hearing last week, Jury moved on from pensions and asked for an explanation of why the San Bernardino plan only gives some creditors 1 percent of what they are owed and does not raise taxes to pay more debt, the San Bernardino Sun reported.

Voters approved a 1-cent sales tax increase in Vallejo and a ¾-cent sales tax increase in Stockton. The San Bernardino plan would pay only about 1 percent of the amount owed on a $50 million pension obligation bond.

Among the major remaining opponents of the plan are the holder of the unsecured pension bond, EEPK, which is a subsidiary of Commerzbank of Germany, and the insurer of the bond, Ambac.

A request from the San Bernardino bondholders to be treated the same as pensions was rejected by Jury last May, and the ruling is being appealed. Mediation on Nov. 18 and 19 failed to produce a settlement.

Early this month in the Stockton bankruptcy, a federal appeals court rejected an appeal of a 1 percent payment on $30 million in unsecured bonds held by Franklin Templeton, which argued creditors were treated unfairly because pensions are untouched.

Jury predicted last week that the confirmation trial on the San Bernardino plan to exit bankruptcy will begin this spring or summer, the Sun reported. The fourth anniversary of the bankruptcy is Aug. 1.

Photo by  Pete Zarria 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 tentative CalPERS proposal would limit the board president and committee chairs to four consecutive one-year terms, a policy that could end the long-running presidency of Rob Feckner in 2017.

Feckner was elected to an 11th one-year term as president last January. The degree to which he is a figurehead or wields power, soft or hard, is not clear. But he has presided over times good and bad at the nation’s largest state public pension system.

The California Public Employees Retirement System was briefly 101 percent funded in 2007. Then a deep recession and a stock market crash resulted in a breathtaking $100 billion CalPERS investment loss, dropping the funding level to 61 percent in 2009.

The CalPERS investment portfolio, $260 billion in 2007, was valued at $290.4 billion last week, a modest recovery despite a major bull stock market since 2009. The current estimated funding level is 73 percent, down from 77 percent as the market sags.

CalPERS pension costs were mentioned as a factor in three city bankruptcies: Vallejo in 2008 and Stockton and San Bernardino in 2012. Since the recession CalPERS has been phasing in a total employer rate increase of roughly 50 percent.

A new plan to reduce the risk of investment losses is expected to raise employer rates over two decades, a gradual change to ease budget strain on local governments. Gov. Brown wanted a five-year rate increase to more quickly bolster the pension fund.

Last week, there was no sign of a course correction, or discontent with the current leadership, as the CalPERS governance committee discussed a proposal to limit the terms of board presidents and committee chairs.

“This should not be taken as any reflection on the great work being done by our current president or our current committee chairs,” said Bill Slaton, the governance committee chairman.

Several board members suggested that the committee take up the issue, Slaton said, noting that CalPERS expects “similar type conversations” for the boards of companies in which it has invested.

“A better way to phrase it is rotation of president and committee chairs, rather than using the term ‘term limits,’” said Slaton. “We are not really talking about term limits, more so the ability to rotate and have other people have a chance to experience this.”

Slaton said the current CalPERS policy is silent on the presidency, but does say consideration should be given to “the periodic rotation of committee and subcommittee chairs.”

Henry Jones, the board vice president, said he supports rotation because it would give each board member a chance to grow: “I have been chair of two committees, and each one I have learned so much more than just as a committee member.”

Straw votes of the committee showed support for a limit of four consecutive terms in the top board posts and for a succession that has the vice president and vice chair next in line for the top post.

There also was apparent support for counting terms already served, if for example rotation begins in 2017, and for allowing a board member termed out after four years in a top post to return, but only after at least two years out of the office.

Slaton and the CalPERS general counsel, Matthew Jacobs, are expected to use the guidance of the discussion to develop a formal rotation proposal to bring to the committee in February for a vote.

The only reservation about a rotation policy expressed at the meeting last week, which was attended by several board members not on the committee, came from board member J.J. Jelincic.

He said he likes the “idea of rotation,” but its cost should be noted: a loss of the expertise developed during years of service, as happened when voters imposed term limits on the Legislature in 1990.

CalPERS has what some call a 13-member “stakeholder” board, advocated by those who think the retirement system is best served if most of the board members receive its pensions.

Six are elected by active and retired state and local government workers. Two are appointed by the governor, and one by the Legislature. Four are state office holders: the treasurer, controller, Human Resources director, and a designee of the Personnel Board.

Reformers argue that stakeholder boards are an outdated model that should be replaced by independent financial experts, who can oversee complicated new strategies and have no conflict of interest that might favor risky investments to lower contributions.

“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” Gov. Brown said in a 12-point pension reform plan issued in October 2011.

The governor probably referred to a CalPERS-sponsored bill (SB 400 in 1999) that gave state workers and the Highway Patrol a large retroactive pension increase. The generous Highway Patrol formula was widely adopted by local police and firefighters.

“As a starting point, my plan will add two independent, public members with financial expertise to the CalPERS board,” Brown said, and also replace the Personnel Board designee with the governor’s Finance director.

“And while my plan starts with changes to the CalPERS board, government entities that control other public retirement boards should make similar changes to those boards to achieve greater independence and greater sophistication.”

The pension reform Brown pushed through the Legislature the following year (AB 340 in 2012) did not change the CalPERS board, which some think would require voter approval of a state constitutional amendment.

A bill containing Brown’s proposal (AB 1163 in 2013) was introduced by Assemblyman Marc Levine, D-San Rafael. A watered-down version signed by Brown requires CalPERS board members to receive 24 hours of education every two years.

One of Feckner’s most public roles was as the stern face of reform when CalPERS had a pay-to-play scandal.

In 2009, CalPERS’ own internal probe (a query to private equity firms about whether they paid fees to “placement agents” to get CalPERS investments) eventually led to bribery-related charges against two former CalPERS board members.

Alfred Villalobos, who collected $50 million in fees, died last January, an apparent suicide a month before his trial. Fred Buenrostro, a board member who became CalPERS chief executive officer, pleaded guilty in July last year and still awaits sentencing.

“He is a 64-year-old man who is ready to tell all,” Buenrostro’s attorney, William Portanova, told reporters after the guilty plea.

Photo by  rocor via Flickr CC License