Its impact might be minor, but a state union’s offer to give up part of a raise to reduce pension debt is notable for what it might signal.
The California Association of Highway Patrolmen, which represents about 6,700 uniformed CHP officers, recently reached a four-year agreement with Gov. Gavin Newsom’s administration that diverts about a half-percent of a 3.5 percent raise to go toward pension debt. The proposal still requires approval from union members and the Legislature.
The agreement is unique because it specifies the diverted money — about $25 million over four years — will go toward reducing the long-term unfunded debts for California Highway Patrol pensions.
The $378 billion California Public Employees’ Retirement System as a whole has assets worth about 70 percent of what it owes to public workers and retirees.
Within the fund are many accounts for various public agencies with different funded ratios, including local governments. In a worst-case scenario, a cash-strapped public agency could stop paying its pension bills, triggering a reduction in benefit payments to retirees from CalPERS.
The patrol plan within the California Public Employees’ Retirement System has about 64 percent of what it would need to pay all its current and future obligations, leaving it with a $4.8 billion gap, or unfunded liability.
“Our association does things a little bit different in terms of being very blunt with our members and feeling like, with the unfunded liability, we have to be owners of that along with the employer,” said Jon Hamm, former CEO of CHP union. Hamm helped current CEO Carrie Lane negotiate the new contract.
While workers and their state employers typically split the “normal cost” of retirement benefits, keeping them funded at current levels, the state generally shoulders the unfunded liability on its own by sending more money from its operating accounts to CalPERS.
In addition to setting aside money from officers for the unfunded liability, the proposed CHP contract specifies that the state will contribute about $343 million from two different funds toward the patrol plan’s unfunded liability.
Pay now, or pay more later
State Sen. John Moorlach, R-Costa Mesa, suggested other unions could follow in officers’ footsteps.
“It’s got to start and it’s got to gradually go in this direction,” said Moorlach, a member of the Senate Budget and Fiscal Review Committee.
Moorlach said that absent a change to the California Rule, the legal precedent prevents public employers from reducing future benefits for any current worker, the state has few tools to reduce pension liabilities.
“You either start doing it now or you do it later with massive pay cuts,” he said, referring to a recession scenario.
The CHP pay structure is also unique in that officers receive automatic salary increases each year based on a salary survey of peace officers in five local law enforcement department in the Bay Area and Southern California.
The rest of the state’s unions must bargain for annual raises, which are identified in each new contract. Since workers in those unions don’t receive automatic raises like the CHP officers, it wouldn’t make as much sense for their contracts to identify pension-related concessions; they would be baked into the negotiations and the final raises reflected in the contracts.
“A concession we rarely if ever make is saying, ‘members will receive less than what they’re promised,” said Steve Smith, spokesman for the California Labor Federation.
“But there have been changes on contribution side,” he said, referring to unions increasing their share of pensions’ normal costs. “Our goal is to make sure these funds are healthy and sustainable for the future. There’s a shared responsibility we all have — workers, unions and employers, to make sure that happens.”
Newsom’s pension budget
The California Highway Patrol Member Retirement plan is in the worst financial shape among five state employee retirement funds administered by CalPERS.
The state pays about 59 cents toward retirement benefits to the fund for every dollar it spends on patrol officers’ salaries.
The fund that is in the next-worst shape is for state firefighters and peace officers, including correctional officers. The state this year will pay about 47 cents for every dollar it spends on those workers’ salaries, and the plan is about 68 percent funded.
For safety workers, the state contribution is 22 cents on the salary dollar; for industrial workers it’s 21 cents; and for the fund for miscellaneous workers, it’s about 31 cents. Those funds are 70 percent to about 78 percent funded.
Newsom’s budget for the year included about $7.8 billion in optional payments to CalPERS and the California State Teachers’ Retirement System to reduce the burden of unfunded pension liabilities on state and school employers. The $3 billion CalPERS portion will be spread among the five state funds.
So far, other contracts the Newsom administration has reached with other unions haven’t included specific provisions designating payments to unfunded liabilities. Nor has the state’s estimated $21 billion budget surplus resulted in raises outside the bounds of past increases.
The agreements Newsom’s bargaining team has reached are in accord with his past, including his support, as mayor of San Francisco, for a 2010 initiative that led to city employees paying more money to fund their retirements.
He was a member of the University of California Board of Regents when it in 2016 created an alternate retirement program that lets new workers choose a 401(k) style plan instead of a pension. Unions last year fought and killed a proposal that would have created a similar option for state workers.