Money needed to fund government employee pensions comes from three sources: contributions by the employees themselves, contributions by the government, and investment returns. Historically 60-75% of the funds have come from investment earnings. As Wall Street profits soared to unrealistic levels, state pension earnings grew abnormally and many California jurisdictions took advantage of what turned out to be a temporary windfall and adopted pension programs that could not be sustained.
These problems grew out of policies established by legislation, regulation and collective bargaining and will need to be reformed through the same processes.
Losses in PERS, STRS and the UC pension funds were caused primarily by the melt down on Wall Street and but also by some bad decisions made by the respective pension boards. Accordingly, the practices of public officials and pension fund managers must be carefully scrutinized to control costs and risks. Everything from retirement benefits and appropriate retirement ages to pension contributions and their relations to salary will be on the table in a Brown administration.
For 70 years our public pension system worked well. Reforms are needed now to return California to a fair but affordable pension system.
As Governor in 1982, I signed into law SB 1326 that called for a Two-Tiered Retirement System to reduce overall pension costs. Pension spiking was not permitted.
1. Stop Pension Spiking and Abuse:
Pensions are meant to be a percentage of regular salary. Unfortunately, there are a number of reported instances (most often at the local level) where special bonuses, last minute promotions, excessive overtime, or other gimmicks are used to artificially inflate final compensation and consequently the favored employee’s pension. These abuses must be stopped.
Pension benefits should be based on normal, recurring salary only.
When I was Governor, “final compensation” was based on the average of the last 3 years of salary. The next governor changed it to just 1 year. This one year rule encourages games and gimmicks in the last year of employment. We should return to a rule where “final compensation” is based on the average of the last 3 years of salary, not just the final year.
The average CalPERS pension is $2,100 per month. There are, however, instances of highly compensated government employees earning excessively large pensions, and a reasonable “cap” on these excessive retirement benefits should be imposed.
2. Two Tiered System. Renegotiate Retirement Benefit amounts for new employees:
Over time, formulas have been negotiated that have allowed employees to retire at earlier ages for higher pension amounts.
I intend to renegotiate current pension formulas. We should require employees to work longer and to a later age for full retirement benefits.
For example, when I was Governor, a miscellaneous employee could retire at 2% per year at age 60. In recent years, this was changed to 2% at age 55. For new employees, these ages must be brought back to the more appropriate levels in place when I was Governor.
3. Stop Retroactive Application of Benefit Enhancements
To date, when new retirement benefits have been approved/negotiated, those new benefits have applied retroactively to years already worked. That practice should be ended.
4. Increase Employee Contributions for all employees
Pension benefits are funded through a combination of employer contributions, employee contributions, and investment returns. Currently, state employees contribute between 5-9% of their salaries to their pensions; at the local level, contributions vary widely among different jurisdictions.
Recently, a number of unions have agreed to increase their current employee contributions to 10% of salary. This will save California as much as $100 million in the upcoming fiscal year.
We need to obtain similar increases in the employee contribution rate for the other government employees.
We must consider extending vesting periods to qualify for retiree health care and also negotiate greater employee contributions to retirement health plans.
5. Prohibit Pension “Holidays”
In recent years, with high investment returns ensuring well funded pension plans, employers (State or Local Governments) decided to reduce or temporarily cease (take a “holiday” from) contributions into pension plans.
We must require consistent contributions to public pension funds over time - no more “contribution holidays” by employers or employees.
This will ensure that we maintain funds adequate to pay promised benefits and that the state’s annual pension obligations are steady, adequate and predictable.
6. Establish Independent Oversight of Pension Funds
We must ensure that public pension decisions are actuarially sound and free of improper outside influence by requiring absolute transparency of all investment policies and decisions. We also need to ensure that investment decisions are prudent.
The Director of Finance, reporting to the Governor, should monitor actuarial assumptions, anticipated annual rate of investment return, and investment activities of the pension boards to create more openness and opportunity for public accountability.
7. Heighten Pension Board Standards and Accountability
We must hold Board members accountable as fiduciaries/trustees to ensure prudent investment decisions and to guard against undue influence of reckless Wall Street practices and special interests.
Board members must be required to undergo specialized training to ensure that they can fulfill their duties as knowledgeable and effective pension fund trustees.
8. Curb or Prohibit Placement Agents
Fees paid to placement agents have increased the costs of our state pension systems. Recently, three private equity firms agreed to cut management fees to CalPERS by $165 million by eliminating placement agents. Going forward, we need to carefully control or eliminate the use of placement agents to generate savings for the pension systems and increase the integrity of the CalPERS investment process.