Little Hoover Now Bigger: Pension Report Released

It is going to take awhile to work through the full 100+ page report of the Little Hoover Commission on public pensions. See the previous post on this blog. However, UC is included in the report although much of the attention is on CalPERS, CalSTRS, and other plans.

Below is a quote about UC:

“The University of California system also maintains its own retirement plan, independent of the parameters set by the state for other pension plans. The state does not contribute directly to the UC pension program. For 20 years, the UC pension plan was funded entirely by investment returns, a tradition that ended in 2010, when employees and the
university resumed making contributions into the pension fund to address the plan’s swelling unfunded liability.”

Some highlights:

With needed reforms, defined-benefit pensions can remain a core component of public employee retirement plans. The problem, however, cannot be solved without addressing the pension liabilities of current employees. The state and local governments need the authority to restructure future, unearned retirement benefits for their employees. The Legislature should pass legislation giving this explicit authority to state and local government agencies. While this legislation may entail the courts having to revisit prior court decisions, failure to seek this authority will prevent the Legislature from having the tools it needs to address the magnitude of the pension shortfall facing state and local governments.

The situation is dire, and the menu of proposed changes that include increasing contributions and introducing a second tier of benefits for new employees will not be enough to reduce unfunded liabilities to manageable levels, particularly for county and city pension plans. The only way to manage the growing size of California governments’ growing liabilities is to address the cost of future, unearned benefits to current employees, which at current levels is unsustainable. Employers in the private sector have the ability and the authority to change future, unaccrued benefits for current employees. California public employers require the ability to do the same, to both protect the integrity of California’s public pension systems as well as the broader public good…

Hybrid model. A new “hybrid” model for public employee retirement should be made available to state and local agencies to reinforce the principles of retirement security and shared responsibility. The model, being tested in Orange County for miscellaneous workers, combines a lower defined-benefit pension with an employer-matched 401(k)-style plan. The 401(k) element is risk-managed to protect employee investments from market volatility in order to generate an adequate retirement income…

Uniformity. The state also must establish standards for more uniform and reasonable pensions. The public outrage over the “spiking” of benefits to provide a larger retirement income cannot continue to be ignored, nor can the increasing number of six-figure pensions for some managers and high-wage earners. The gaming and abuses of the pension system must end. To restore public confidence in the public pension system, the state must impose a cap in the $80,000 to $90,000 range on the salary used to determine pension benefits, or alternatively, a cap on pensionable income. Under such an arrangement, compensation above the cap would be factored into contributions toward an employee’s 401(k)-style plan.

… Set a tight definition of final compensation, computed on base pay only, over a five-year average to prevent and discourage pension “spiking.” …

The Legislature must prohibit employees and employers from taking contribution “holidays,” except under rare circumstances.

The Legislature must require employees and employers to annually adjust pension contributions based on an equal sharing of the normal costs of the plan.

All proposed pension increases must be submitted to voters in their respective jurisdictions.

The Legislature must require all public pension systems to include in their annual financial reports the present value of liabilities of individual pension funds, using a sensitivity analysis of high, medium and low discount rates.

The full report is at http://www.lhc.ca.gov/studies/204/Report204.pdf

UPDATE: CalPERS responded at http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2011/feb/pension-report-statement.xml