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Local officials still penciling out when California pension reform will help

Published: Friday, Sep. 7, 2012 - 12:00 am | Page 1A
Last Modified: Wednesday, Feb. 26, 2014 - 11:34 am

Sweeping public pension legislation approved last week will change the relationship between thousands of California governments and their workers, but local officials are still figuring out the long-term outcome for taxpayers.

Many expect weeks of painstaking analysis followed by years of bargaining and employee turnover before they'll fully realize the savings. But in an era of squeezed budgets, local officials say they are ready to dig into retirement fund costs for some relief.

Once Gov. Jerry Brown signs the legislation, many think they'll have a bigger shovel.

"This will be the new base from which we operate for the next five, 10, maybe 20 years," said Dwight Stenbakken, executive deputy director of the League of California Cities.

Most of the pension legislation passed last week won't affect state employees. Many of the provisions are already in their contracts.

The fallout on local governments will vary greatly. Charter cities such as San Jose, San Diego and San Francisco aren't covered at all. Voters in those cities have passed their own pension changes.

For other municipalities and special districts, there's no one-size-fits-all plan; cities, counties and school districts are scrambling to analyze how the changes apply to them and when they might start saving money.

The bill state lawmakers approved last week shifts more pension costs to workers and cuts benefits for new hires, aiming over time to trim both what government employers pay in and what pension funds pay out.

Employees hired on or after Jan. 1, 2013, will be placed in less-generous defined-benefit retirement plans than workers hired earlier. The measure also puts a cap on how much of their pay will be used to figure their pensions.

New hires will have to wait longer to retire and pay at least half the cost of their pensions, with the employer paying the balance.

"It's been a very common practice for local employers to pick up their employees' pension costs," said Tim Yeung, a Sacramento-based labor attorney. "They've done it over the years instead of salary increases."

Lawmakers didn't change the pension formulas or retirement ages for current employees. Conventional legal wisdom has been that pensions, once promised, can't be altered.

But the measure does give municipalities a five-year window to negotiate the 50-50 pension contribution split with workers on the rolls before 2013. If talks fail, employers can impose the higher payments.

"This legislation marks a new era, and we should take it as an opportunity to rethink compensation, salary and benefits for the next generation of employees," said Sacramento City Manager John Shirey.

CalPERS estimates the measure will trim state and local public pension costs by $42 billion to $55 billion over 30 years. The changes will save just $146 million next year, with annual savings gradually increasing to $2.5 billion in the 20th year of the plan.

While there will be little help to the city's budget in the short term, Shirey said, it will bring significant savings over time.

Perhaps most dramatic will be the changes that await new hires within local firefighting ranks. Until now, many have been in pension plans that qualified them for retirement at age 50 at 3 percent of their highest annual salary multiplied by their years on the job.

All of the firefighters for the Cosumnes Community Services District, for example, are eligible for 3 percent at age 50. That means a firefighter who exits earning $81,000 annually would receive $48,600 per year in retirement payments after 20 years on the job.

Under the overhaul, Consumnes firefighters hired next year and new to the public pension system will be eligible for a reduced formula: 2 percent at age 50. In that case, given the same salary and service time factors, the formula would generate one-third less retirement income, or $32,400 a year.

In Yolo County, Deputy County Administrator Mindi Nunes said the new pension plan "is better than we expected."

Still, she is realistic. The county, which lost a large segment of its workforce in the downturn, isn't doing much hiring, and it will be years before savings on pension costs kick in.

The changes already in place for state worker pensions set something of a template for the measure lawmakers passed last week, Assembly Bill 340.

For example, retirement benefits for state employees hired since 2006 are calculated using a three-year salary average instead of their single-highest year. The rule deters "spiking," which allows an employee to take an end-of-career promotion or pay raise that drastically bumps up their pension checks.

Sacramento County already uses the three-year average to calculate retirement benefits for the vast majority of employees, and it recently established a reduced pension formula for miscellaneous workers hired after Jan. 1, 2012. The deal grants them 2.43 percent at age 65.

It's an actuary's guess whether that will prove to be less generous or more generous than the formula contained in the state's new plan.

The new legislation calls for 2.5 percent for workers hired starting in 2013. But the state plan sets an older age, 67, for the retirement benefit.

Another provision of the new law limits how much of a new worker's average final pay counts toward pension calculations: $110,000 for most employees; $132,000 for public workers such as teachers, police and firefighters who don't participate in Social Security. The figures will adjust annually for inflation.

Relatively few employees earn base pay that crosses the six-figure thresholds. A Bee analysis of state government payroll data, for example, shows that about 9,000 state workers, or 4 percent, earned $110,000 or more last year before overtime.

The pension cap will keep many rank-and-file law enforcement officers from moving into management jobs, predicted Ron Cottingham, president of Peace Officers Research Association of California, which represents 64,000 public safety employees.

"You could also see a brain drain" of experienced workers, he said, as higher employee contributions kick in. "People won't want to lose that much going forward, so they'll pull the pin and retire and go do something else."

Brown, who enthusiastically announced the measure last week, is expected to sign it soon. Then it will be organized labor's move. Some union leaders have suggested they would back a ballot referendum asking voters to overturn the law. They also could sue.

"Lawyers are looking at these things," said Cottingham. "We don't know yet if this is something that could be legally challenged."

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