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May 10, 2005 > Pension reform in California - What is it all about?

Pension reform in California - What is it all about?

The governor's position

Battle lines were drawn when Governor Arnold Schwarzenegger gave his "State of the State" speech on January 5, 2005. A portion of his reform package included a section titled, "Bringing State Pensions into the 21st Century." He said:

"In 2000, our pension obligation was $160 million. Today, it has ballooned to $2.6 billion of the people's money. Taxpayers cannot afford to continue paying for the archaic and enormously expensive state pension plan. Both the private sector and the federal government moved away from this out-dated pension system years ago. It is unfair to taxpayers to expect them to pay for pension plans better than the ones most of them have."

Currently, the state provides defined benefit retirement plans for its employees and for those of public schools. The Public Employees' Retirement System (PERS) administers the retirement plans for state employees, California State University faculty and staff, and non-teaching school employees. The University of California (UC) administers its own retirement plan for its faculty and staff. The State Teachers' Retirement System (STRS) administers plans for teachers.
Local governments also provide these types of plans for their employees. Some cities and counties have their own retirement boards to administer their plans. Other cities, counties, and special districts contract with PERS or their county retirement systems to administer their plans.
The governor proposed a new pension system offering almost all new state employees a "defined contribution" plan rather than the present "defined benefit" plan. It is useful to have a basic understanding of what these terms mean.

Defined benefit plans provide a guaranteed annual pension based upon age at retirement, years of service, and some period of highest salary (typically the last one or three years of work). These plans generally provide an annual cost-of-living adjustment and additional inflation protection that maintains purchasing power over time at a specified minimum level.
Defined benefit plans have three main sources of funding-employee contributions, employer contributions, and returns on assets invested by the retirement boards that administer the plans. Investment returns are the biggest component of defined benefit funding.

Defined contribution plans provide fixed annual employer contributions (typically as a percent of pay) to employee accounts. These assets, along with employee contributions, are invested and the employee has whatever these assets have generated for retirement income. Unlike defined benefit plans, the employee has no guaranteed pension benefit and employers never incur any unfunded liabilities. i

In his weekly message of March 7, 2005, the governor again raised the topic of pension reform referring to "lavish retirement plans for public employees" and raising the issue of retirement pay of "100 percent of their final years' salary, plus yearly cost of living increases." He called this "unfair and out-dated," proposing to change new employee pension plans beginning in 2007.

A storm of controversy erupted as public employees rallied to protect benefits and set a public relations campaign in motion. While the governor's proposals, if approved, would directly affect state employees, it is clear that other public entities would follow suit. In a speech on April 7, 2005, he defended his proposal, saying he was "troubled" by misconceptions of his plan. A threatened ballot initiative will be delayed while the plan is modified to protect death and disability benefits, especially for firefighters and public safety officers. The governor said:

"Over the last few weeks, I've spoken with Assemblyman Keith Richman, the author of our pension reform proposal in the legislature. Keith and I have decided to work together with leaders in local government and public safety to craft new initiative language that makes it absolutely clear that the families of every cop, firefighter and public safety professional lost in the line of duty are protected in our pension reform plan. Even though our signature drive has been very successful and we have gathered 400,000 signatures, I think it is better to improve the language and put our plan on the June 2006 ballot."

Hoping for agreement by the legislature, the governor has presented a challenge - "The legislators must act soon for if they don't, the people will. And I will lead them to reform at the ballot in November."

In remarks to the Newspaper Association of America on April 19, 2005, Governor Schwarzenegger emphasized that change is necessary to reform a "government pension system that is out-of-control and on a track to disaster." He continued, "Here in California the government's pension obligation has gone from $160 million in the year 2000 to $2.6 billion today. That is an increase of 1,600 percent in just 5 years. This is a huge, open-ended liability for taxpayers and squeezing out important services at both the state and local levels."

i The California Public Employee Pension Reform Act; Initiative submitted March 21, 2005

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