Group Touts New Pension Initiative

Steven Greenhut
Vice President of journalism, Franklin Center for Government and Public Integrity

Cross-posted at CalWatchdog.

A pension reform organization has released a draft initiative plan for the 2012 ballot that would require public employees to pay half their retirement benefit costs, mandate defined contribution plans for new employees, significantly limit public pension benefits and require public employers to fully fund all pension and retiree medical benefit plans by 2020. The initiative will impose stringent new rules on the governance structure of public pension plans.

Sponsored by Californian Pension Reform, the initiative would apply to all public agencies in the state of California. “The last time we tried to reform pensions, the unions convinced everyone that the benefit changes we sought could best be negotiated at the bargaining table,” explained CPR President Marcia Fritz, the head of a Citrus Heights accounting firm. “We’ve seen a little  movement in this direction, but mostly it’s been done to avoid public scrutiny. The unions have offered few changes that would begin to fix a half-trillion-dollar unfunded pension liability problem.  In fact, they’ve actively tried to stop even modest pension reform efforts at the local level. So it’s time to take this matter to the state’s voters.”

Here are the details of the proposal, provided to CalWatchdog from CPR:

The Fair and Sensible Public Employee Retirement Plan Reform Act

The people of the State of California find and declare that:

I.        It is the intent of the people of California to provide retirement benefits to public employees that are comparable to benefits provided to employees in the private sector at a comparable cost to taxpayers.

II.      Public retirement benefit plans have become financially unsustainable, threatening future benefit payments, diverting resources from essential public programs, increasing pressure for higher taxes and burdening future generations with debt from unfunded pension liabilities.

III.    Retirement benefits granted to many public employees now exceed the comparable benefits available to most citizens and taxpayers.

The California Constitution is amended to provide that:

1.       Public employees pay half their retirement benefit costs.

(a)    All public employees shall pay at least one-half of the normal actuarial cost of their retirement plan benefits, including retiree medical benefits.

(b)   Effective July 1, 2013, public employers may not contribute an employee’s share of retirement plan benefit costs.

2.       Defined contribution plans for new employees.

(a)    All public employees hired on or after July 1, 2013 shall be eligible to participate in a competitive defined contribution retirement plan.

(b)   Disability benefits for public employees hired on or after July 1, 2013 shall be provided through insurance policies, self-insurance or joint powers authorities and not by pension plans with the exception of accelerated vesting.

(c)    Public employers shall provide such employees with competitive life insurance and disability benefits that are integrated with federal, state, pension and insurance benefits otherwise provided.

(d)   No public employee hired on or after July 1, 2013 may receive lifetime or formulaic retirement medical benefits prior to age 65.

i.      Before each decennial anniversary of the July 1, 2013 transition date, the Legislature shall adjust this age requirement to reflect changes in longevity.

ii.      Public employers may provide competitive defined contribution medical benefit plans with matching employee contributions and earlier age eligibility.

(e)   Nothing in this amendment shall affect employees’ medical benefits before retirement.

3.       Limited public pension benefits.

(a)    The defined retirement income benefits for employees hired on or after July 1, 2013 shall not exceed the median statewide household income ($56,344 in 2009).

(b)   All benefits from Social Security and California public pension plans shall be integrated for the purpose of determining such employees’ retirement income benefits, not including income from defined contribution plans.

(c)    Pension benefits for employees hired after July 1, 2013, shall be based on an average of three or more years of qualifying compensation excluding overtime, accrued sick and vacation pay, bonuses, severance payments, and all other non-recurring compensation.

(d)   Incumbent employees may remain in their current retirement plans.

4.       Full funding and implementation by 2020.

(a)    The Legislature shall enact a mandatory implementation plan before July 1, 2013, to require the full actuarial funding of all public pension and retiree medical benefits plans no later than January 1, 2020 without increasing taxes for this purpose.

i.      The implementation plan shall require employee contributions of at least one-half the normal actuarial costs of all such plans in 2020 and thereafter, with substantially equal incremental increases during the implementation period.

ii.      The implementation plan shall allow public employees to decline or discontinue participation in any retirement plan and select a lower-cost option, if permitted by federal laws and tax regulations.

(b)   Until 2020, public employers contributing less than full actuarial funding shall adopt and publish annually their strategic financial plan to achieve full funding without increasing taxes for this purpose.

(c)    The implementation plan shall honor conflicting provisions of employment-related agreements executed prior to the qualification date of this initiative until their earliest possible expiration, extension, renewal or amendment.

(d)   Until 2020, no public employer shall be required to increase its plan contributions by more than its incremental revenue growth in any fiscal year.

5.       Governance.

(a)    After January 1, 2014, at least two-thirds of the members of a public pension plan’s governing trustees shall be independent of that retirement system and its participating employers.

(b)   At least two-thirds of independent trustees shall be qualified for service as certified or licensed financial, actuarial, accounting, legal, benefits or investment professionals at the time they are selected.

(c)    The Governor shall appoint the independent trustees for statewide retirement systems, and the Legislature shall determine the method of selection for other pension plans.

(d)   All trustees shall be held to the highest prevailing standards of fiduciary law.

Definitions. For the purposes of this amendment:

“Actuarial” means the prevailing professional and governmental-standard method of converting accrued and future retirement benefits costs to present values and required funding levels. Whenever professional actuarial practices and generally accepted accounting principles for governments differ, the more fiscally conservative approach shall apply.

“Competitive benefits” do not exceed the level necessary to attract and retain employees in the labor markets from which public employees are recruited. Social Security benefits eligibility shall be considered in such determinations. Benefits which do not exceed comparable and valid local or regional labor market survey averages in the private sector shall be conclusively competitive.  Benefits approved by voters shall be presumptively competitive.

“Full actuarial funding” is the complete and timely payment of the normal actuarial cost and the actuarial amortization of unfunded liabilities accrued in a retirement benefits plan over active employees’ remaining service periods.

“Integrated benefits” are reduced by the amounts paid from other sources including lifetime Social Security benefits.

“Normal actuarial cost” is the current service cost to actuarially fund employees’ retirement benefits and excludes the annual amortization of unfunded liabilities.  For employees hired on or after the transition date, the discount rate used to determine and fund normal actuarial costs shall be a recent five-year simple average of U.S government bond rates and taxable municipal bond index rates. This discount rate shall also apply to public employees who previously received a retroactive benefits increase of more than 25 percent of their accumulated benefits for prior service of more than five years.

“Pension plan” means a defined-benefit retirement income plan paying lifetime income to public employees.

“Public employee” means a paid provider of services to a public employer eligible for retirement benefits.

“Public employer” means the state, a municipality, school district, political subdivision, special district or public agency.

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