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Friday, Mar 29, 2024

Reining in California’s Pension System

The year was 1999. The “Dot.Com” industry was growing rapidly and the stock market was experiencing unprecedented highs. Because of the stock market boom and the resulting significant capital gains earned by many of California’s taxpayers, California’s state coffers were bulging with surplus tax revenues. Based on an action taken by California’s legislators and Gov. Gray Davis, it must have appeared to them that the economic growth would last forever. What action am I referring to? The decision to lock the state into commitments to provide huge new retirement benefits for state employees that would encourage early retirement and impact the fiscal stability of our state forever. The significant increase in retirement benefits requires the state to pay for two workforces instead of one without setting aside funding to pay for the second. Perhaps “workforce” is not the proper term to use for the second group I am referring to since they no longer work. These are the retirees that could, one day, cost the state more than the active workforce. Most business people understand that there are years of ups and years of downs and that in the up years one must set aside reserves to cover the down years that will inevitably follow. Perhaps the decision would have been different if there were more business people in the legislature in 1999 and in 2001 when SB 400, (Ortiz) and SB 616 (Calderon) were passed. SB 400 dramatically changed public retirement formulas by reducing retirement ages and increasing the percentage of compensation, resulting in retirement packages that would provide annual compensation as much as 100 percent of the amounts received by employees during their highest earning year along with healthcare and other benefits. Under SB 400 the generous annual retirement compensation and benefits continue for the remaining life of an employee (which could last for 40 or more years based on retirement at age 50) and, after the employee’s death, his or her survivor receives annual survivor compensation. SB 616 provides benefits to local government (local contracting agencies of the California Public Employees’ Retirement System or CALPERS) employees similar to those provided to state employees by SB 400. There are those who argue that recent investment gains have substantially funded CALPERS, thereby reducing the burden on the state’s general fund. This is the same type of thinking that locked us into the commitments in the first place. These investment gains are not guaranteed to continue. It is unsafe and imprudent to make long term spending commitments based on current spikes in income. In 2005, former Assembly member Keith Richman, MD., proposed replacing the current, and costly, defined benefit pension plans with defined contribution plans similar to 401k plans for new state hires. The proposed plan would have shifted some of the responsibility for funding the retirement plans to the employees, thereby having retirement plans more comparable to those in private industry. Although the governor had initially planned to bring the proposal to the ballot, it fell victim to false union claims that it would deny benefits to widows and orphans of emergency personnel. Although Dr. Richman is no longer a member of the legislature he hasn’t given up his fight for fiscal responsibility in government. He recently founded the California Foundation for Fiscal Responsibility which, on June 21, 2007, filed a pension and retiree health care initiative with the office of the California Attorney General in an effort to save the state and local government agencies an amount estimated at more than $500 billion over 30 years. The initiative places limits on the defined benefit pension and retiree health care plans that can be offered to new state and local employees hired after July 1, 2009. Two key provisions of the initiative provide for: 1) increasing full retirement ages from 50 to 55 for police and firefighters and to 60 for other public safety employees with all other classifications coinciding with the 65-67 Social Security retirement ages, and, 2) limiting lifetime pension benefits to between 60 percent and 70 percent of an employee’s average base salary, including Social Security payments if earned while in a public agency position. I believe that it is essential to bring retirement benefits for the public sector in line with those of the private sector to avoid bankrupting our state. I also believe that this initiative will accomplish the necessary comparability. I urge everyone to help Dr. Richman obtain the 700,000 signatures necessary to qualify the initiative for the ballot and to vote “yes” on Election Day. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP and Vice-chair of the Valley Industry and Commerce Association (VICA).

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