Calpensions

Pension reform allows cities to bypass bargaining

Posted on September 4, 2012

Pension reform approved by the Legislature last week gives many cities new cost-cutting power that some have been unable to win from public employee unions at the bargaining table.

The legislation does not cover several of the state’s biggest cities that have independent retirement systems, some with well-publicized pension problems: Los Angeles, San Diego and San Jose.

But for most cities the legislation extends retirement ages, caps pensions and gives new hires a lower pension by imposing a single formula (rolling back increases after SB 400) instead of allowing bargaining on a menu of different formulas.

The legislation calls for a 50-50 split of “normal” pension costs between employers and employees. As current contracts expire, if unions do not agree to equal cost sharing in bargaining by 2018, cities can impose an employee contribution increase.

A survey of city managers earlier this year by the League of California Cities found that 47 percent of the responding cities had bargained lower pensions for new hires and 64 percent had bargained increased employee pension contributions.

“While not perfect, the League views this legislation as a substantial step forward in implementing pension reform largely in keeping with the League’s own comprehensive pension reform principles,” the League directors said in a statement last week.

The League agrees with eight of the 10 points in the legislation, AB 304, prepared in private by Democratic legislators and Gov. Brown. He asked that two of his original 12 points be omitted for possible action later: retiree health care and pension boards.

The cities dislike a cap on high-end pensions for new hires, preferring a “hybrid” plan with a pension providing at least 70 percent of final pay. And cities think pension forfeitures should be limited to felonies for pension fraud, not broader activities.

League of Cities policy aligns with eight of 10 reforms

The legislation limiting bargaining for pensions moves California closer to the mainstream.

About 30 states allow collective bargaining by public employees. But only a few allow bargaining for retirement benefits — notably California, Vermont and New Jersey in a survey by the National Association of State Retirement Administrators in 1998.

Critics say bargaining resulted in “bidding wars” that drove local government pensions to unaffordable levels. New benchmarks were set when tCalPERS sponsored SB 400 in 1999 giving state workers a major pension increase.

Three formulas for pensions, a ladder for step-by-step increases, were added for local governments by AB 616 in 2001. Although not a sponsor of the bill, CalPERS offered local governments an incentive for boosting pensions with the new formulas.

The California Public Employees Retirement System said it would reward higher benefits by inflating the value of the local government’s pension investment fund, making it easier for the employer to pay for the more generous pensions.

The pension formulas specify an employee contribution, usually 5 to 8 percent of pay, that can be changed through bargaining. The employer contribution, often at least twice what employees pay, is adjusted annually as pension fund levels rise and fall.

During bargaining, many employers agree to pay part or all of the employee contribution, sometimes in lieu of a pay increase. The practice is common enough to have its own bureaucratic term, EPMC or “employer paid member contribution.”

The president of a pension reform group said AB 340, though an “important step to reform,” should have had a “hybrid” plan making employees share the risk of investment losses and a constitutional safeguard against a rollback by future Legislatures.

“The provision requiring that almost all public sector employees pay half the cost of their pensions is the most significant of the reforms and will provide both immediate and long-term savings,” Marcia Fritz of the California Foundation for Fiscal Responsibility said in a news release.

If employees increase their pension contribution, employers can reduce their contributions by a similar amount

Prodded by a record 100-day state budget deadlock, the largest state worker union agreed two years ago to raise employee contributions from 5 to 8 percent of pay, helping to reduce the annual state payment to CalPERS by about $400 million a year.

On the other hand, the city of Sacramento laid off 16 police officers in July because the police union would not begin paying the employee share, 9 percent of pay. Sacramento firefighters agreed to phase in full payment of their employee contribution.

AB 304 calls for an equal employer-employee split of the “normal cost” for pensions earned during the current year. But most retirement systems have an “unfunded liability” from shortfalls in previous years caused by below-target investment earnings.

For example, last year state miscellaneous workers contributed 8 percent of pay, more than half the 14.4 percent normal cost. But state employers contributed 18.2 percent, an amount that includes a payment for a large unfunded liability.

In a review of the governor’s plan last November, the nonpartisan Legislative Analyst’s Office said employees should share in the cost of the unfunded liability, but doubted that higher employee contributions can be legally imposed on many workers.

“Since increasing current employees’ contributions is one of the only ways to substantially decrease employer pension costs in the short run, the legal and practical challenges that we describe mean that the governor’s plan may fail in its goal to deliver noticeable short-term cost savings for many employers,” said the analyst.

The legislation apparently is designed to clear legal hurdles by changing bargaining law to give employers more flexibility to increase employee contributions. Impasse procedures can be used to impose contribution increases.

A legislative analysis of AB 340 said impasse cannot be used for contribution increases that exceed statutorily required contributions for current employees or half the normal cost for employees hired on or after Jan. 31, 2013.

Local governments have until 2018 to bargain employee contributions that share half of the normal cost. Then imposed increases are limited: 8 percent of pay for miscellaneous workers, 12 percent of pay for police and firefighters.

Importantly, the self-described guardian of pension “vested” rights under contract law, CalPERS, is not warning that requiring employees to pay half the normal cost is likely to be challenged in court.

A CalPERS analysis said only two parts of the plan may raise vested rights issues: barring current employees from purchasing “air time” service credits to boost their pensions, and requiring some members convicted of felonies to forfeit their pensions.

Narrowing an earlier preliminary estimate, CalPERS told legislators the legislation should save employers using its plans between $42 billion to $55 billion over the next 30 years.