The State Worker

CalPERS pension or a 401(k)? State workers could choose under Democrat’s bill

California’s public pension crisis is bad and getting worse

California's two major public pension systems are underfunded and are asking local governments to pay more. Critics want to reduce benefits, while others say policymakers should allow time for recent changes to take hold.
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California's two major public pension systems are underfunded and are asking local governments to pay more. Critics want to reduce benefits, while others say policymakers should allow time for recent changes to take hold.

New state workers would have a choice about whether they want to join CalPERs under a bill a Senate Democrat submitted on Wednesday.

The bill by Sen. Steve Glazer of Orinda is a long shot. Lawmakers last year rejected other proposals to change public employee pensions, such as a bill that would have suspended cost-of-living adjustments that retirees receive.

Glazer’s proposal, Senate Bill 1149, would enable new state workers to choose alternate retirement options outside of the California Public Employees’ Retirement System, such as a defined contribution 401(k) plan.

That option probably is most appealing to younger workers who aren’t sure whether they want to commit to a 30-year career in civil service.

Currently, public employees must keep their jobs for five years before they vest into CalPERS or the California State Teachers’ Retirement System. If they leave before vesting, they do not receive pensions and they are not able to keep money their employers pay into the pension funds on their behalf.

Glazer’s bill would require public agencies to match employee contributions to 401(k) plans. The employees would keep the money if they leave civil service.

After five years, the employee could choose to join CalPERS instead of keeping the 401(k) plan, under Glazer’s proposal. That would make sense for workers who decide they like civil service and want to accrue long-term retirement benefits through the state’s pension plan.

“This program doesn’t undercut the existing CalPERS program,” Glazer said. “It offers as an option to new employees and arguably will help the hiring of new employees because of the potential flexibility to take that retirement savings with them” if they leave civil service.

The University of California began offering a similar option to new employees in 2016. It proved popular, with 37 percent of new UC employees choosing a 401(k) option over a state pension between July 2016 and January 2018, a UC spokeswoman said.

California pension plans tend to reward long careers in civil service. It takes 20 years for teachers beginning their careers at age 25 to come out ahead with a state pension instead of a fully matched 401(k) plan, according to a 2016 CalSTRS study.

On the whole, the study found, teachers are better off with pensions. It estimated that 86 percent of the state’s K-12 educators would earn higher retirement incomes with their pensions than they would have received with a 401(k) style plan.

Glazer said offering the 401(k) plan now would demonstrate to the public that lawmakers are serious about addressing the state’s pension debts. Today, both CalPERS and CalSTRS are riding a strong stock market to high returns, but they are both considered underfunded because they do not have enough assets to pay all of the benefits they owe to their members.

Several city governments that do not belong to CalPERS already offer 401(k) plans, including Orinda, where Glazer resides. San Diego voters in 2012 passed a ballot initiative that did away with pensions for most new city employees, instead offering them 401(k) plans.

The pressure is building. The public sees an unfunded pension system that’s going to continue eating away at public services, and there’s a lot of frustration out there,” Glazer said.

Meanwhile, Republican Sen. John Moorlach of Costa Mesa this week submitted a separate package of bills that would make it easier for local governments to break from CalPERS without paying crippling termination fees and allow CalPERS to suspend the cost of living adjustments it pays to its pensioners. Moorlach submitted similar bills last year.

Adam Ashton: 916-321-1063, @Adam_Ashton. Sign up for state worker news alerts at sacbee.com/newsletters.

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