MOORLACH UPDATE — Brown Pension Reform — April 1, 2011

This is not an April Fool’s Day joke.

Yesterday afternoon Gov. Brown released his public employee defined benefit pension plan reforms.  A few minutes before I received the news from my subscription services, David Barr of OC180News called to ask for my thoughts.  I guess he has a faster subscription service.

The article below provides the details of the Governor’s proposals, as well as the Republican Caucus response.  I was surprised to see some movement on this issue by the Governor.  If he can provide some of the guarantees that the Republican Caucus is asking for, it could be a game changer.

Gov. Brown’s proposals closely resemble those proffered by the Little Hoover Commission, see http://www.lhc.ca.gov/studies/204/report204.html

If you have a little more time, check out my testimony four years ago to Gov. Schwarzenegger’s Public Employee Post-Employment Benefits Commission, see http://www.pebc.ca.gov/images/files/Moorlach.pdf.  You may see a number of similarities.

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Gov. Brown Offers Pension Reform, John Moorlach, Tom Harman, GOP React

Dolores Barr, Editor and Publisher, OC180NEWS.com

After declaring on Tuesday an end to budget negotiations with Republicans in Sacramento, today Governor Brown put out his pension reform proposals. Although not specifically called budget plan B, that is the way it appears. In this special OC180NEWS report, we provide complete and unedited statements from Gov. Brown, Senator Tom Harman, and the GOP Caucus. In addition, we have comments from our very own pension expert, Orange County Second District Supervisor john Moorlach.

Here’s the statement from Governor Brown:


“SACRAMENTO – Governor Edmund G. Brown Jr. today released the actual bill language of seven separate pension reform measures. In addition, Brown listed five other specific pension reforms that he is developing. These include a pension benefit cap, limits on post-retirement public employment, hybrid defined contribution/benefit options, an action plan to address CalSTRS unfunded liability, and a measure to change and improve the board governance of CalPERS and CalSTRS.

All 12 of these pension reform measures were presented and discussed in detail with Republican legislators. Talks broke down, however, over other issues. Brown intends to introduce these pension reforms with or without Republican support.”

The details of the Governor’s proposal are further down in this report. Here’s what our own West Orange County State Senator Tom Harman said about the Governor’s proposal:

“These are some of the reform ideas Republicans brought up during negotiations but the Governor’s plan does not provide any constitutional protection for these reforms. Without going on the ballot, the legislature can undo them at any time. The other elephant in the room is current employee pensions. The Governor’s proposals do nothing to address the staggering unfunded pension liabilities we face today. We need something that will have immediate impact on the budget – not just something that will impact a budget 30 years down the road. With the taxpayers facing hundreds of millions of dollars in unfunded pension liabilities, there is no way we can shrug this off as undoable. It simply has to be part of the conversation.”

Although not directly discernable from the Governor’s statement, it looks like his idea is to push his pension reforms through the legislature, rather than putting them before the voters as a constitutional change. Republicans, as is evident from Senator Harman’s statement above, don’t like that idea.

Orange County District Two Supervisor John Moorlach, a pension expert, told OC180NEWS he “absolutely” agreed with Brown’s proposals.

“I’m surprised, it’s good to see,” Moorlach told us after a quick review of Brown’s points.

But when it comes to exchanging pension reform for putting Brown’s tax rate extensions before the California voters, Moorlach also expresses that agreement in terms of constitutional change.

“You’re not going to find a Republican who is going to give him the two-third votes he needs to put something on the ballot if it’s just to extend the taxes without anything else,” Moorlach told OC180NEWS. “Now, he’s got something on the table and if it is put in the form of a statewide ballot measure so we can constitutionally change all this stuff, then that might break off the two votes he needs in both houses.”

The basic issue is that about one half of Brown’s budget balancing plan comes from extending some tax rates which will go down if not extended. Trouble is, Brown can’t do that without at least two Republican votes in the State Senate and the State Assembly. Brown has been trying to get those votes, but on Tuesday, he announced he was giving up on that effort.

“His budget that he wants to extend the taxes on, that’s pro-union,” Moorlach said. “That’s why the republicans aren’t budging Without reform [also on the ballot].”

Below are first the Governor’s proposal, then a detailed GOP response – in their own words. Let the reader beware.


PENSION REFORM PROPOSAL

APPLIES TO STATE AND LOCAL GOVERNMENTS

1.     Eliminate Purchase of Airtime. Would eliminate the opportunity, for all current and future employee members of all state and local retirement systems, to purchase additional retirement service credit. (RN 14777) (Note Walters, SB 522, would eliminate Air Time)

2.     Prohibit Pension Holidays. All California public agencies would be prohibited from suspending employer and/or employee contributions necessary to fund the normal cost of pension benefits. (RN 14777)

3.     Prohibit Employers from Making Employee Pension Contributions. All California public agencies would be prohibited from making employee contributions that fund the normal cost of employee retirement benefits in whole or in part. (RN 14777)

4.     Prohibit Retroactive Pension Increases. All California public agencies would be prohibited from granting any retroactive pension benefit increases, such as benefit formula improvements that credit prior service. (RN 14777)

5.     Prohibit Pension Spiking: Three Year Final Compensation. Final compensation for new employees would be defined as the highest average annual compensation during a consecutive 36 month period. (RN 14777)

6.     Prohibit Pension Spiking: Define Compensation as Only Regular, Non-recurring Pay. Compensation means normal rate of pay or base pay. (RN 14777) (Note Simitian, SB 27, would exclude from defined benefit changes in compensation principally for the purpose of enhancing benefits; would place stricter limits on creditable compensation)

7.     Felony Convictions. Prohibits payment of pension benefits to those who commits a felony related to their employment. (RN 14777) (*Note Strickland, SB 115, similar prohibition)

PROPOSALS UNDER DEVELOPMENT

Impose Pension Benefit Cap.

Improve Retirement Board Governance

Limit Post-Retirement Public Employment

Hybrid Option

Address CalSTRS Unfunded Liability.”

[End of Governor’s statement]

Next, here’s the official detailed response from the GOP Caucus:

Sacramento – Senate Republican Leader Bob Dutton issued the following statement today in response to Governor Brown’s 12-Point Pension Reform Plan:

Senate Republicans have been clear for months that public employee pension reform is a critical element required to reach a budget agreement. The governor heard it from the entire Senate Republican Caucus when he spoke to us on December 7, 2010, and again on February 9, 2011.

Senate Republicans believe that this is an achievable objective based on the public’s strong support for public employee pension reform and what we had heard from then-candidate Jerry Brown.

In Jerry Brown’s words:

"In some cases, managers and employees have secured pensions beyond their original base salary. It is wrong, the people doing it know it’s wrong, and we have to put an end to it…Pension reform can be hard to talk about. In the long run, reform now means fewer demands for layoffs and less draconian measures in the future. It’s in the best interest of all Californians to fix this system now." – Brown for Governor 2010, campaign press release, 20 July 2010

According to a March 2011 PPIC Poll, most likely voters statewide agree the cost of public pensions is a big problem: 57 percent believe state government should decrease state pension plans to help balance the budget; 71 percent support a 401K-style pension plan for government employees; 56 percent of government employees support a 401K-style pension plan for new workers.

Where we agree:

1.     Eliminate the purchase of Airtime. Would eliminate the opportunity, for all current and future employee members of all state and local retirement systems, to purchase additional retirement service credit.

2.     Prohibit pension holidays. All California public agencies would be prohibited from suspending employer and/or employee contributions necessary to fund the normal cost of pension benefits.

3.     Prohibit employers from making employee pension contributions. All California public agencies would be prohibited from making employee contributions that fund the normal cost of employee retirement benefits in whole or in part.

4.     Prohibit retroactive pension increases. All California public agencies would be prohibited from granting any retroactive pension benefit increases, such as benefit formula improvements that credit prior service.

5.     Prohibit pension spiking: three year final compensation. Final compensation for new employees would be defined as the highest average annual compensation during a consecutive 36-month period. (Senate Republicans would prefer five years).

6.     Prohibit pension spiking: define compensation as only regular, non-recurring pay. Compensation means normal rate of pay or base pay.

7.     Felony convictions. Prohibits payment of pension benefits to those who commits a felony related to their employment.

We also agree in concept with the governor’s efforts to do the following:

Impose pension benefit cap

Improve retirement board governance

Limit post-retirement public employment

Major areas where we disagree:

        1.    Let the people vote on permanent public employee pension reform. Governor Brown is proposing laws that can be repealed tomorrow by a majority vote of the Legislature. His proposal provides no protection against future pension giveaways.

               Senate Republicans want lasting pension reform placed on the ballot and protected by a vote of the people. Why won’t Governor Brown let the people vote on permanent pension reform?

2.     Voluntary hybrid pension system does nothing to address the state’s long-term financial risk. Governor Brown’s proposal assumes public employees will volunteer for lower benefits, which ignores reality.

Senate Republicans believe only a mandatory hybrid pension system modeled after Little Hoover Commission and Legislative Analyst’s Office recommendations can reduce the financial risk effectively.

3.     Unsustainable pensions costs. Governor Brown’s proposal does nothing to address the $60 billion unfunded state health benefit liability the State Controller’s Office recently identified or the $70-plus billion of unfunded state pension liability. One analysis suggested that the statewide unfunded liability for pension benefits could be as much as $500 billion.

Senate Republicans believe state employees should pay their fair share of these unfunded liabilities to reduce future costs so our children and grandchildren don’t pay for overpromising today, and that the ability of state local governments to deliver quality services is not impaired.

4.     No ability to change benefits in the future. Governor Brown’s proposal provides no ability to change pension benefits in the future if they are still unaffordable.

Again, consistent with the independent Little Hoover Commission recommendations, Senate Republicans are proposing greater protection for California families against runaway pension costs by allowing the flexibility to change future pension contracts for new state employees.

5.     No protection from future pension giveaways. Governor Brown’s proposal allows salary and pension increases to public employee unions with a simple majority vote of the Legislature.

Senate Republicans believe taxpayers should be protected by a 2/3rd super majority vote of the Legislature to change the salary and benefits of public employees. It’s the only way to ensure that public employee salaries and benefits are appropriate and sustainable.

While Senate Republicans applaud the governor’s "developing" proposal to address the CalSTRS Unfunded Liability, when Senate Republicans proposed to set actuarially-sound rates for CalSTRS funded within the Prop. 98 guarantee, the governor did not seem interested in pursuing a solution to the CalSTRS issue.

It is interesting that after today’s media stories outlining a $56 billion unfunded CalSTRS pension liability, the governor announces a "developing" proposal. Nonetheless, we are glad the governor is still considering Senate Republican recommendations even after unilaterally ending budget discussions.

Senate Republicans remain committed to a budget solution that includes significant and permanent public employee pension reforms. Unfortunately, given the events of the last few weeks, it seems clear that public employee unions will not allow Governor Brown or legislative Democrats to place such a measure before the voters.


[End of GOP statement.]

FIVE-YEAR LOOK BACKS

April 1

2001

The OC Register’s Sunday Commentary section had an “Editorial update” at the top of page 2.  It was nice to have a voice of reason on the frenzy revolving around the Treasurer’s office over a safe investment harshly downgraded by the rating agencies.  As I stated in my Update back then:  “You’ve got to love it when people, who don’t know what they are doing, try to do something.  Alas, isn’t that the way it goes in any political arena?”

The fracas over Orange County Treasurer John Moorlach’s investments in Edison International securities appears to be resolved.  Despite Southern California Edison’s financial difficulties, the county has received its scheduled payments.  And now, at the urging of Supervisor Todd Spitzer, the treasurer’s office has agreed to tweaks in its investment policy.  The treasurer or assistant treasurer must sign off on the day’s trades, and the office cannot invest in companies with a “credit watch – negative” label.

We don’t think Mr. Moorlach did anything wrong in the investments.  The magnitude of California’s electricity crisis – and the resulting shakiness of investments in usually steady companies – took virtually everyone by surprise.  We think a bit of grandstanding was involved in taking him to task on the issue.  Still, the changes, although a bit micromanaging, probably won’t impose any undue hardships on the office.

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