Reform, please…

Assembly Constitutional Amendment 23 (ACA 23), introduced this year by Assemblyman Keith Richman, might be called Pension Intervention Part II because it is the second attempt to reform California’s unstable and outdated public employee pension systems.

The first attempt came in early 2005 when Richman, concerned over the state’s wildly uncontrollable pension costs, introduced Assembly Constitutional Amendment 1 (ACA 1). This plan would have required all state and local employees hired after July 1, 2007, to be enrolled in a defined contribution (DC) pension plan.

A DC pension plan operates much like many companies’ 401(k) plans, with the employer making scheduled contributions into an individual worker’s investment account. This differs from the current defined benefit (DB) structure, where a beneficiary receives a defined monthly pension amount after retirement. The problem with DB plans is that pension costs are volatile and unpredictable, leaving governments at risk of defaulting on their obligations. California’s state and local budgets are increasingly burdened by pension deficits, forcing taxpayers to shell out more money to keep the system running.

The state’s pension systems are outdated and inappropriate for mobile 21st-century workers who value the ability to take their retirement money with them when they change jobs. That is currently forbidden to public-sector workers, but it would be possible under a DC plan.

Reform looked promising in early 2005 as Gov. Arnold Schwarzenegger championed ACA 1. The plan, however, proved unpopular with public-sector union bosses, who claimed the measure had the potential to eliminate on-the-job death and disability benefits.

Though the proposal was silent on the death and disability benefit issue, neither Richman nor the governor had any intention of tinkering with those benefits. Despite repeated efforts to dispel fears, the governor chose to pull the plan, putting the issue on hold.

Unfortunately, Schwarzenegger’s 2006 State of the State quashed any hopes that the governor would make pension reform a cornerstone of this year’s agenda. He did say he was “already talking to the legislative leaders about…pension reform.”

Only Keith Richman seems willing to give it another try. His new measure, ACA 23, would require all state and local public employees hired after July 1, 2007, to choose between a comprehensive DC pension plan and a hybrid pension plan. The hybrid plan combines features of both DB and DC plans.

If an employee chooses the comprehensive DC plan, he or she would obtain a 401(k)-like investment account. Employers would be obligated to match any employee contributions up to four percent of the employee’s annual salary.

The hybrid plan would also grant employees a 401(k), but with a smaller employer contribution. The difference would be made up from the DB portion of the hybrid plan, which would give, at retirement, non-public-safety employees one percent of highest average salary for each year employed. Public-safety employees would receive, at retirement, two percent of highest average salary for each year employed. Highest average salary is determined from an average of the highest salaries in three consecutive years.

Unlike the 2005 pension plan, death and disability benefits are specifically addressed. They will continue to be provided to all beneficiaries based on a formula using age, salary, and years of service.

California’s public employees deserve a pension system that provides them with more flexibility and choice. The state’s taxpayers deserve one that is more stable, predictable, and fiscally prudent. Once again, in 2006, the time has come for a pension intervention. CRO


copyright 2006 Pacific Research Institute