New CalPERS rules impact new hires, leaving cities to struggle with current employee costs –
Last week the California State legislature adopted AB340, a pension reform measure
that will apply to the City of Piedmont. The reforms impact CalPERS pensions, primarily for new hires. Pension costs for current employees and existing unfunded liabilities are not addressed. (See Pensions 44% and Rising.) For Piedmont and other local entities, no significant cost savings will be seen in the near future.
Wall Street Journal: “The reforms reduce benefit formulas for new workers and require employees to pay half of the “normal cost” of their pensions. However, that doesn’t include the cost of paying down unfunded liabilities, which is what’s really sending local pension bills through the roof. Municipalities also won’t realize material savings until new employees retire in another two to three decades . . . .”
Legislative Analyst: “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.” . . . “
Calpension.com – For cities using CalPERS, AB340 “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 [for new 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.
The Wall Street Journal asserts the reforms were designed to help pass Governor Brown’s new tax measure, Proposition 30, in November, but “retirement costs will soon consume all $8 billion that politicians hope the ballot measure will raise” rather than helping school budgets.
Collective bargaining by public employees
has been allowed in California since 1978.
The League of California Cities supports a “hybrid” pension plan that would cap defined benefit PERS pensions at 70 percent of base pay and supplement with a professionally-managed defined contribution plan. See details.
AB 340 changes primarily affect new hires
- prohibits retroactive retirement benefit increases
(Note: In 2004, the City of Piedmont increased all employees pensions by 50% retroactively. See PCA pension article. These past increases are not reduced by the reform measure.)
- for new hires, 50-50 contribution cost-sharing between employer and employee
- for new hires, caps maximum pension benefit at $132,000 plus annual Consumer Price Index (CPI) increases ($110,000 cap if participating in Social Security)
- for new hires, raises the retirement age and limits plans to:
- miscellaneous employees: 2% at 62, with adjustments to a maximum of 2.5% at age 67 (to encourage longevity)
- safety employees: 2% at 57 OR 2.5% at 57 OR 2.7% at 57
- for new hires, use highest 36-month period rather than highest year to calculate pension (to avoid spiking)
- for new hires, generally requires 180 day sit-out period for retired persons to return to work in the same retirement system in which they receive a pension; EXCEPT a public safety officer or firefighteror if agency certifies a “critical need”
- For new hires, limits the definition of “pension compensation” to base pay (without including unused sick/vacation, cash conversion of in-kind pay, overtime (generally), uniforms or car allowances, etc.)
- prohibits purchase of time not actually worked; prohibits contribution “holidays”
- Legislative Analyst Review (a good summary of California pension issues)
- CalPERS analysis of new reforms