by Rocky Lucia
Pension reform sits at the top of the political hit parade when it comes to assigning blame for the economic ills suffered by state and local government over the last several years. The political and media opportunists have successfully moved the conversation on the cause of the 2008 economic meltdown from Wall Street to public employees. The faceless brokerage firms, banking and corporate entities and politicians who protect their interests have done a marvelous job of shirking responsibility for the economic meltdown suffered by this country. Rather than engage in a public debate on the actual cause of the worst recession since the Great Depression, the public has been convinced that public employees and their pensions are the root cause of our economy’s position at the brink of disaster.
Conservative moneyed interests continue to demand draconian economic and legal changes to the rights and benefits of public employees. Governor Jerry Brown has attempted to bring sanity to the debate on public employee compensation and benefits as well as the State budget crisis. His efforts have been continuously rebuffed by the conservative elements in state government and the lobbyists who protect the industries who drove us into a recession. In an attempt to reach common ground, the Governor has proposed a framework for pension reform which in some respects bears some semblance to a rational solution yet has elements which appear to be overreaching.
The Governor’s 12 point framework for pension reform will impact most clients of Rains Lucia Stern in varying ways. The proposal incorporates pending legislative efforts in addition to reforms that have not yet been seriously considered by the Legislature. The Governor’s proposal and certain elements of it may ultimately be enacted through the legislative or initiative process. While we will continue to monitor the status of all pension reform efforts, our clients should be mindful of the framework proposed by the Governor:
1. Eliminate Purchase of Airtime: Eliminates the opportunity for all current and future employee members of all state and local retirement systems to purchase additional retirement service credit. This benefit is paid by the employee and it does not create a burden on the system or taxpayers. To eliminate an option which in many cases assists employees who have served in the military will unfairly burden individual employees.
2. Prohibit Pension Holidays: All California public agencies would be prohibited from suspending employer and/or employee contributions necessary to fund the normal cost of employee retirement benefits in whole or in part. This proposal will eliminate any discussion about the employer appropriating money designed to ensure the protection of the system. CalPERS has already weighed in on the issue.
3. Prohibit Employers From Making Employee Pension Contributions: This will, in effect, eliminate the ability of the employees and employers to negotiate the manner in which benefits are provided. There has been a long history of employees bargaining with employers to make pension contributions on their behalf in order to realize savings to the employer. This proposal will effectively eliminate many bargaining options.
4. Prohibit Retroactive Pension Increases: As it currently stands, whether pension enhancement is retroactive is subject to negotiations. Prohibiting retroactivity in all cases limits the ability of the employer and the employees to strike a balance on wages and benefits. In some cases, retroactivity may be beneficial to the employer. Eliminating the option will not be advantageous in all cases.
5. Prohibit Pension Spiking: Three Year Final Compensation: New employees would calculate their pensions based on a three year average. It is not clear whether those three years would be their “final” three years. Many clients have previously negotiated the single highest year option in their contracts. In many cases, the employer has not agreed to the single highest year option. The ability to negotiate single highest year or three year average in some cases will be beneficial to the employer.
6. Prohibit Pension Spiking: Define Compensation as Only Regular, Non-Recurring Pay: The proposal does not provide much guidance as to the definition of “regular, non-recurring” pay. In fact, the two terms seem to conflict with each other. The notes in the Governor’s press release suggest that compensation that is determined to be designed to enhance pensions would be precluded. Without further clarification, one can assume that the “base wage” would be the foundation for the definition of “regular.” All of our clients will no doubt be impacted by this provision as it may apply to uniform allowance, shift differentials, POST pay and others. The retroactivity component is yet to be determined.
7. Felony Convictions: The proposal will eliminate the opportunity for individuals convicted of a felony “related to their employment” to receive payments pursuant to a public employee pension plan. A peace officer is held to standards which include off-duty conduct. Since off-duty conduct can be deemed to be related to job performance, this provision could in its final iteration be problematic. While fundamentally this may seem acceptable, the definitional challenges and practical applications will need to be vetted before the real impact of this proposal can be appreciated.
The following provisions of the Governor’s proposal were deemed to be “under development.” There is no way to determine the intent of the Governor other than to make certain assumptions based on the conceptual description.
8. Impose Pension Benefit Cap: This proposal seems to suggest that there will be a hard dollar cap on a pension benefit offered to a retiree. What the cap will be is yet to be determined. However, peace officers generally receive higher pensions than most public employees – the exception being management and elected officials. The alleged abuses arising out of the City of Bell are no doubt the impetus for this proposal.
9. Improve Retirement Board Governance: To propose enhancing retirement board governance on its face seems to be a laudable goal. Pension plans and retirement boards are governed by laws which impose very strict and harsh penalties for those who abuse their fiduciary duties. Trustees of pension plans are held to standards which include personal liability. Moreover, some are subject to criminal sanctions for violations of their duties. However, should this proposal turn out to be a form of a State-takeover of all pension plans with elected officials guiding investment decisions, there will be many opportunities for abuse.
10. Limit Post-Retirement Public Employment: This “concept” is likely to have significant impacts on many of our clients. While peace officers generally retire younger than most public employees, it is a direct result of the physical and emotional rigors of performing the most dangerous job in society. Prohibiting employees from working for public agencies unfairly and arbitrarily discriminates against them. There has been discussion that this “concept” would impose some form of a waiting period prior to additional employment. However, that is mere speculation at this point.
11. Hybrid Option: We believe the proposal suggests an intent to combine a defined benefit with a defined contribution retirement plan. Under no circumstances will a defined contribution plan afford public employees with the security and predictability that the current pension affords. The fact that Wall Street interests advance the notion of a defined contribution plan is evidence that this proposal satisfies the moneyed interests that, once again, caused the economic meltdown of 2008.
12. Address CalSTRS Unfunded Liability: The unfunded liability issues associated with California State Teachers Retirement System (STRS) should be addressed through the policy and investment decisions of the governing body of that retirement system. To legislate financial/investment decisions and policies is always a bad practice.
Like it or not, the public has been convinced that pension reform must become a reality. While all of us at Rains Lucia Stern who negotiate contracts for public employees continue to work steadfastly to protect pension benefits, changes are coming. Whether pension reform ultimately looks like the Governor’s 12 point proposal is as of yet undetermined. That being said, all public employees should be mindful of the multitude of proposals that have been put out in the media, the legislative arena and at the bargaining table. Governor Brown’s proposal gives us some insights into how pension reform may ultimately be determined. Stay tuned . . .