Lawmakers Pass Broadest Public Pension Cuts in California History

California lawmakers approved the broadest rollback of public-employee pension benefits in the state’s history after Governor Jerry Brown and Democrats who control the Legislature struck a last-minute deal.

The overhaul, which may save taxpayers as much as $55 billion over 30 years, would require new employees to pay half the cost of their benefits and work longer before they can retire. It also reduces formulas for calculating benefits and caps pension payments.

Brown, a 74-year-old Democrat, pressed for a revamp to show progress in curbing soaring retiree costs before he asks voters for higher income and sales taxes in November. Public resentment of government employees has grown as taxpayers saw their own job prospects and benefits shrink in the longest recession since the 1930s.

“This sweeping pension-reform package will save tens of billions of taxpayer dollars and make the system more sustainable for the long term,” the governor said in a statement.

The bill, which passed the Assembly 48-8, was approved 36-1 in the Senate on the last day of the legislative session. The governor has until Sept. 30 to sign or veto the legislation, or it becomes law without his signature.

The measure would require new state and local government employees under the California Public Employees’ Retirement System, or Calpers, the largest public pension in the U.S., to pay for half of their benefits. The same savings will be sought from current employees through bargaining with their unions.

Smaller Checks

Retirement checks for new workers would be based on wages capped at about $110,000 a year, or $132,000 for those not covered by the federal Social Security system, adjusted for inflation. For most new civil servants who aren’t police officers or firefighters, the minimum retirement age for full benefits would increase to 67 from 55.

The bill also takes aim at so-called pension spiking, a practice that inflates future retirement payments by manipulating overtime, unused vacation and special compensation. It also would limit “double dipping,” involving retirees who collect benefits and also take another government job. And it would ban workers from buying service credit to boost their payouts.

Charter counties or cities with their own pension plans, such as San Jose, Los Angeles and San Diego, would be exempt from the new rules.

Republican Critics

Republican lawmakers panned the overhaul, saying it didn’t go far enough.

“It doesn’t even scratch the surface of what’s needed in this state before we ask to raise taxes,” said Assemblyman Allan Mansoor, a Republican from Costa Mesa.

Public-employee unions said the bill was overreaching and undermined collective bargaining.

“Ripping billions of dollars of pension benefits from public workers without collective bargaining is unfair and wrong,” said Dave Low, chairman of Californians for Retirement Security, a coalition of unions representing 1.5 million public employees and retirees.

Calpers said today the changes may save the state and local governments $42 billion to $55 billion over the next 30 years. It wouldn’t immediately improve the system’s unfunded liability, its actuary said.

Unfunded Liability

Calpers, with assets of $237.3 billion, had 72 percent of the assets needed to cover obligations to its 1.6 million beneficiaries as of June 30, 2011, according to a report.

The fund earned 1 percent in the fiscal year that ended June 30, below its target of 7.5 percent. When Calpers underperforms, the state and municipalities must make up the difference to meet its obligations.

Brown and Republicans last year called for a new type of pension, combining elements of a 401(k) savings plan common among nongovernment employers with conventional defined-benefit systems that guarantee payments for life.

Such a so-called hybrid plan would have spread to workers some of the market risk now borne by taxpayers, who must make up for pension-investment shortfalls. The hybrid was opposed by labor unions.

“This is not the end-all, be-all, but it brings us considerably down the road to public-pension reform,” said Assemblyman Warren Furutani, the Long Beach Democrat who headed a conference committee that drafted the legislation.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net;