Employees now must pay half
Local governments and agencies are taking a close look at the new pension reform law from Sacramento that requires public employees to pay a greater share of their retirement benefits.
Legislators said the Public Employee Pensions Reform Act of 2012, or AB 340, will save billions of taxpayer dollars by capping benefits, increasing the age of retirement and eliminating the policies that conspire to give many public workers a retirement salary in the more than six-figure range.
AB 340 will not modify or cut pensions for current employees.
Under the new law, state employees, firefighters, teachers, police officers and other public workers hired after Jan. 1, 2013 will be required to pay at least half of their normal pension costs—which comes to about 8 percent of their gross salaries— while also receiving fewer benefi ts and working longer.
Current employees must also pay more, but their obligation will be phased in over several years.
In addition, the formula used to compute public employee retirements—a percentage of salary times years of service—was revised in order to reduce the burden on taxpayers.
The minimum retirement age for most new workers was increased from 50 to 52. Maximum retirement benefits were pushed back as far as age 67.
According to the California Public Employees Retirement System (CalPERS), the changes will save state and local governments between $42 and $55 billion during the next 30 years.
The bill affects three-quarters of California cities that are CalPERS members. The plan excludes University of California employee retirements and counties and cities with their own retirement plans, such as Los Angeles.
Proponents of the law say it gives cities, schools and public agencies with unionized work forces new cost-cutting power. If organized labor doesn’t agree to equal cost sharing by 2018, municipalities will be allowed to impose an employee contribution increase without union approval.
Local officials respond
Local city officials are trying to sort through the pension changes.
“We will have to comply with the law, but there are questions as to what specifically the state will mandate cities to do as opposed to state employees,” Calabasas City Manager Tony Coroalles told The Acorn.
The cities of Agoura Hills and Calabasas each pay 100 percent of their employee CalPERS pensions. The city employees are not unionized.
“Our city, as do our neighbor cities, pays the employees’ portion of retirement. There is a provision that state employees must pay 50 percent of their retirement within five years, but it unclear whether cities will be required to do this or whether the law just makes it possible for cities to cut their contributions,” Coroalles said.
In March 2011, Westlake Village officials voted to adjust the health and pension packages for 10 current employees, two retired city workers and the five City Council members. New hires must contribute 5.8 percent of the 8 percent toward their CalPERS retirement. The change will be phased in over five years for existing employees.
Previously, city employees contributed nothing toward their pension funds.
Ray Taylor, city manager for Westlake Village, is waiting to see if his employees must contribute still more to reach the AB340 threshold..
In the Las Virgenes Municipal Water District, 85 of 117 employees receive fully-paid pensions. The rest pay only 1 percent. LVMWD employees also receive Social Security and a type of public 401K retirement plan, also funded by the district.
LVMWD employees are represented by three different unions. The water district is expected to ask for higher employee retirement contributions when labor talks are reopened.
Local governments and other public agencies reportedly have until 2018 to modify the employee contributions and impose the increases that would make the workers pay their 8 percent share.
Teachers affected, too
Teacher and school administrators enrolled in the California State Teachers’ Retirement System must also comply with AB 340. Among other requirements, the educators will need to work longer to receive a full retirement package. The teacher retirement age was increased from 60 to 62.
Of the nearly 220,000 Cal- STRS members receiving retirement benefits, some 3 percent receive pensions exceeding $100,000 annually. The earnings reflect the salaries of administrators, who often earn higher paychecks than teachers.
A Sept. 5 report from the state controller’s office criticized CalSTRS for failing to adequately audit public teacher retirements and allowing abuses in the system such as pension spiking, which is a large jump in salary received in the final year of employment that helps boost benefits.
“Starting with more rigorous auditing and better use of existing technology, CalSTRS must fortify its ability and resolve to crack down on those seeking unjust enrichment at the expense of their fellow educators and taxpayers,” California Controller John
Chiang said in a statement.
The CalSTRS pension system uses three factors to determine retirement benefits: age at retirement, years of service and highest average salary.
While the new law essentially requires employees and employers to share pension costs equally, it will not change the contribution formula for existing school employees covered by CalSTRS. The educators do not receive Social Security on top of their pensions.