Back in November, the organization California Pension Reform filed two controversial initiative proposals with the goal of qualifying one for the ballot. Both are currently pending before they enter circulation for signature-gathering and their aim is to implement major reforms, such as requiring employees to increase their pension contributions, termination of abuses such as career ending spiking and retroactive benefit increases, and greater transparency. The Bee points out that “One measure would put future employees in hundreds of state and local pension funds into 401(k)-style plans instead of the current defined-benefit retirements guaranteed by employers. The other proposal puts future workers into "hybrid" plans blending the two types of accounts.” You can read fuller details about both proposals here.
The LAO recently released its analysis of both measures and noted that either one is likely to result in a legal battle if it’s passed by voters because of alterations that would be imposed on pension guarantees to current workers. The LAO’s analysis is somewhat muddled in that it points out clear effects are difficult to determine, but the analysis does argue that either initiative could potentially increase costs and force local governments to pay higher salaries to stay competitive. The LAO states the following about costs and investment returns:
“Under this measure, future employees’ hybrid plans would contain defined benefit pension components that are considerably smaller than those offered to current employees. Total contributions to pension systems for future employees’ defined benefits, therefore, will be much smaller than the total current contributions related to current and past employees. Defined benefit pension plans would experience a reduction in their incoming cash flow that would become more substantial over the coming few decades, as future employees grow to a larger share of the public workforce. These reductions in cash flow could cause many California pension plans to shift their allocation of investments to ensure they can meet existing benefit obligations, thereby reducing their average annual future investment returns. In general, when pension plans have to assume lower investment returns in this manner, their estimated normal costs increase, as do estimates of their unfunded liabilities. For these reasons, in the short and medium term (perhaps over the next two or three decades), these changes could result in public employers having to contribute over $1 billion more per year (in current dollars) to cover pension costs of current and past employees.”