LAO Raises Concerns in Analysis of Initiative Proposals Reforming Pensions; Legal Questions?

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.”

You can read the LAO’s full analysis here and here. In response to the LAO’s take, Dan Pellissier, President of California Pension Reform, commented the following:

“We are pleased that the LAO recognizes that both versions of our initiative would end pension system abuses, reduce the long term cost of government employee pensions by billions of dollars each year, and require that independent experts make up majorities on state pension boards. Californians are ready to vote for this type of pension reform to help get our fiscal affairs back on track.”

Anne Stausboll, CalPERS Chief Executive Officer, released the following statement about the initiative proposals and the LAO’s analysis:

“The Legislative Analyst's Office raises legitimate and serious concerns about both initiatives and the legality of the proposed changes which would have the most severe impact on existing employees. Additionally, the LAO rightly identified the 'large uncertainty about (these measures') possible fiscal effects' and how they 'would apply to the variety of public employees in California … We will continue to be closely involved in the current legislative process concerning pension reform, and look forward to working on these issues in a productive manner with all Californians. As an honest broker of factual information about pensions, CalPERS won’t shy away from truthful discussions about pension structure and reform as we work to maintain a sustainable, sound and secure system that protects our members and benefits the State. When it comes to the retirement security of our public servants, all Californians deserve more realistic solutions now and less lawsuits and uncertainty for the next 'several decades.'"

Comments

[Local elected official]

Unfortunately, many of us do not see CalPERS as an "honest broker of factual information," nor as an organization that truly wants to participate in "truthful discussion about pension structure and reform." (Quotes from Anne Stausboll, CalPERS Chief Executive Officer)

Beyond that, my personal belief is that the CalPERS board should be making these public relations statements, not CalPERS staff, since the primary focus of the statements is politics and policy, not administration.