How California Gov. Jerry Brown Blocked CalPERS Extra-Pay Regulation

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.

When CalPERS approved regulations to carry out Gov. Brown’s pension reform legislation two years ago, critics said they allowed “99 ways to boost pensions” that undermine the cost-cutting plan for new employees.

The critics had a field day going through the list of 99 types of regular extra pay that boost pensions, pointing out what seemed to be absurd bonuses for doing part of the basic job.

A Wall Street Journal editorial mentioned law enforcement incentive pay for staying physically fit, longevity pay for staying on the job more than five years, and pay for maintaining a government-issued license required to perform job duties.

An in-depth story by the Los Angeles Times mentioned bonus pay for “librarians who help the public find books, secretaries who take dictation, groundskeepers who repair sprinklers, and school workers who supervise recess.”

CalPERS said that because the reform listed a half dozen types of pay that can’t be counted toward pensions for new hires, such as overtime and unused sick leave and vacation, the 99 types of previously allowed extra pay not listed continue to count toward pensions.

Critics said CalPERS made a pro-labor interpretation of reform legislation intended to cut pension costs. The Times noted that CalPERS sponsored legislation in 1993 authorizing it to determine what bonuses count toward pensions, then created a list.

“The long-term cost of pensions calculated with bonuses is billions of dollars more than with base pay only,” said the Times. “But the exact price tag remains a mystery. The labor-dominated CalPERS board voted without estimating the potential tab.”

An illustration by Thomas Fuchs accompanying the Times story appears to show a pensioner at leisure on the backs of taxpayers.

Now the California Public Employees Retirement System board may have to revisit the controversial issue sharply criticized by major media. An update on the pension reform given to the board last week said the regulations never took effect.

Although much of the media criticism focused on the 99 types of extra pay, Brown’s Finance department had objected to a CalPERS decision to allow a pension boost from a “temporary upgrade” to a higher-paying position.

“Today CalPERS got it wrong,” Brown said in an August 2014 news release after the CalPERS board approved the regulations, referring to counting “temporary salary supplements” toward pensions.

“This vote undermines the pension reforms enacted just two years ago (AB 340 in 2012),” Brown said. “I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees Pension Reform Act.”

What the governor could do was not clear. A union-backed state constitutional amendment, Proposition 162 in 1992, gives CalPERS and other public pension boards sole control of their funds and administration.

As it turned out, Brown’s Finance department simply did not sign the regulations, a necessary step in the process. So, the regulations expired a year later, never taking effect. CalPERS proposed, the governor disposed.

The Brown administration thinks that allowing a temporary upgrade to a higher-paying position to count toward pensions would enable “spiking,” a boost in pensions from improperly increasing the final pay used to determine pension amounts.

“If someone is put into a higher-paying position at the end of their career, not on merit, that seems to present the potential for pension spiking,” Richard Gillihan, a Brown administration official, told his fellow CalPERS board members in April 2014.

The CalPERS staff reversed its position on temporary upgrade pay, excluding it from “pensionable compensation” in a circular sent to employers in December 2012, then including it in draft regulations.

Staff said the change reflected a reform cleanup bill, SB 13. If items other than base pay can be excluded from “pensionable compensation,” the staff reasoned, then there are items beyond base pay that are pensionable, like normal pay for temporary upgrades.

Whether temporary upgrade pay should count toward pensions split the 13-member CalPERS board: the governor’s three appointees opposed, the six members elected by active and retired employees in support.

In April 2014, a board committee removed temporary upgrade pay from the draft regulations, then it was replaced by the full board. In August 2014, Brown appointees tried and failed to remove temporary upgrade pay before the regulations were approved on a 7-to-5 vote.

Spiking is a recurring problem for pension systems. CalPERS and the California State Teachers Retirement System have anti-spiking units. To reduce spiking, the reform based new-employee pensions on a three-year pay average, a change from one year.

In addition to the pay regulations, the reform update given the board last week said two other unresolved issues will be addressed by “reconvening a team of stakeholders” that includes the Brown administration, employers, and labor unions.

A need to prevent the transfer of “excessive liability” was revealed when a former Glendale police chief, Randy Adams, took a high-paying job in Bell, more than doubling his pension to $510,000 and sticking Glendale and other former employers with the tab.

Transit workers got a two-year pension reform exemption after the federal government threatened to withhold $1.6 billion in transit grants, saying transit bargaining rights are protected. A court appeal and legislation (AB 1640) are pending.

The reform that took effect for new employees in CalPERS and county systems hired after Jan. 1, 2013, is expected to save CalPERS employers $29 billion to $38 billion over the next 30 years.

Brown could not get legislation for parts of his reform plan: adding two governor appointees to the CalPERS board and switching new employees to a “hybrid” plan combining a smaller pension and a 401(k)-style individual investment plan.

But the reform gives new hires a lower pension formula, caps the pay used to calculate pensions, requires employees to pay half the “normal” pension cost (excluding debt from previous years), and bars employer payment of the employee share of costs.

The reform only applies to new hires because a series of state court decisions, often called the “California rule,” are widely believed to prevent cuts in the pension offered at hire unless offset by a new benefit of comparable value.

In a surprise to some, the update said 29 percent of active CalPERS members, about 200,000 workers, are already covered by the reform, apparently due to filling positions vacated during the recession and other factors.

State savings are 1.2 percent of pay for miscellaneous workers and 5.1 percent of pay for peace officers, non-teaching school employee savings 1.7 percent of pay, and savings for other local government workers vary with their pension formulas.

“PEPRA is beginning to bend the cost curve and will continue to do so for many years,” Alan Milligan, CalPERS chief actuary, told the board last week.