Other states, also struggling with budget problems, will be watching closely to see how California handles this key issue with its 1.6 million public employees and retirees.
California Gov. Jerry Brown (D) has laid out a tough public-employee retirement plan that guarantees a fight with labor unions and will be closely watched by other states struggling with budget problems.
Sorting out California’s budget mess has been Job 1 for Governor Brown since the day he took office in January following the failure to find fiscal stability under previous governors, including most recently Arnold Schwarzenegger. The state and local governments face billions of dollars in unfunded liabilities due to what critics say are overly generous public-employee pension benefits accumulated over the years.
Announced Thursday, Brown’s 12-point plan includes several dramatic changes to California’s public-employee system, most of which would apply to new hires. Among the proposals:
• The retirement age for new, non-public-safety employees would be raised from 55 to 67. The retirement age for newly hired public-safety employees would be raised beyond the current 50 years to an age based on their ability to perform the job and maintain public safety.
• For new employees, pension benefits would be based on the highest average annual compensation for three years, rather than the current one-year system.
• All employees would be required to pay more toward their retirement and health care, and retirement pay for new employees would become a hybrid of traditional pensions and a 401(k)-type savings plan.
• Employees would be barred from buying service credits known as “air time” in order to boost retirement service credit for time not actually worked. Also banned would be “spiking” – giving an employee a raise shortly before retiring to boost their pension.
• New state employees would be required to work for 15 years to become eligible for any state-funded health-care premiums in retirement and 25 years to qualify for the maximum state contribution to those premiums.
• Brown also wants to add two independent, public members with financial expertise to the board of the California Public Employees' Retirement System (CalPERS), as well as make similar changes to other public retirement boards.
The Brown administration estimates its proposal, which would apply to all state, local, school, and other public employees, would save California some $900 million annually.
“It’s time to fix our pension systems so that they are fair and sustainable over a long time horizon,” Brown said Thursday. “My plan raises the retirement age and bans abusive practices like ‘spiking’ and ‘air time’ while mandating that public employees pay an equal share of pension costs.”
He added, “It is going to run into opposition, and it’s up to the Legislature to rise above that.”
Brown's plan would require consent of the Legislature, and several elements would require voter approval, including extending its provisions to employees at California's public university system.
As he did in trying to craft a cost-saving budget plan earlier this year, Brown will need the support of minority Republican lawmakers, as well as union-allied Democrats in the majority.
Republican state Sen. Mimi Walters, a member of a recently formed Senate-Assembly committee on pensions, said Brown was "moving in the right direction" with his plan to raise the retirement age and institute a mandatory hybrid system for paying retirees.
"Until we actually review the plan and can crunch the numbers, I will remain cautiously optimistic," Senator Walters said in a statement.
Polls show that most Californians favor reforming the state's public retirement system.
Union leaders, who had been briefed in advance of Brown’s announcement, were quick to indicate that they mean to fight any cuts to retirement benefits.
“It is unfortunate that he has proposed to increase the retirement age, shift greater costs to workers and impose a hybrid plan on new employees, when public employees already have agreed to hundreds of millions of dollars in pension concessions at the state and local level,” said Dave Low, chairman of the union coalition Californians for Retirement Security.
“Workers across California have negotiated contributing more to their pensions and two-tier benefits,” Low said in a statement. “We simply cannot stand for imposing additional retirement rollbacks on millions of workers without bargaining.”
According to CalPERS, California has 1.6 million public employees and retirees.