85.7 F
San Fernando
Thursday, Mar 28, 2024

Commentary: Public Employee Retirement Benefits Threaten California’s Future

In 1999 and 2002, respectively, the California Legislature passed (and Governor Davis signed into law) Senate Bills 400 (SB 400) and 183 (SB 183) placing a burden on the state’s financial condition that would (except in years of unusually high revenue growth) substantially guarantee endless deficits. SB 400 dramatically changed public retirement formulas by reducing retirement ages and increasing the percent of compensation, resulting in retirement packages that would provide annual compensation as much as 100 % 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 400 also provided an increased cost of living retirement allowance for state and school retirees who retired prior to 1998. SB 183 expanded the definition of the State Safety retirement category to include many non-safety classifications (such as billboard inspectors and milk inspectors). Employees included in the State Safety category receive greater benefits than employees in other categories. When SB 400 was passed, California had just experienced a huge growth in revenues due to the rapid growth of the “Dot.com” industry and unprecedented highs in the stock market. People were buying and selling stocks frequently which resulted in tremendous additional tax revenues to the state. Instead of recognizing this condition as a temporary phenomenon and saving the excess revenues for periods of normal or substantially reduced revenues, Legislators and Governor Davis passed SB 400 which locked California 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. Since the debate of SB 400 on the floor of the Senate lasted for only one minute, it appears that the legislators believed that the unprecedented revenues and economic growth would continue far into the future. Because these elected representatives didn’t have the foresight to set aside even a portion of the higher revenues to fund the enhanced retirement benefits, substantial liabilities were created without a guaranteed funding source. Governor Schwarzenegger is taking action to reduce the future impact of both SB 400 and SB 183. He proposes reforming the unsustainable pension formulas, for new hires only, which will protect existing employees’ pensions and ensure that new promises do not incur debt that is overly burdensome on our state budget. The reforms are estimated to result in a savings of $74 billion in reduced pension payouts and $19 billion in reduced costs of retiree health benefits through 2040. The Governor’s proposed plan provides the following reforms that apply only to new employees hired on or after July 1, 2009: – Return to pre-SB 400 retirement formulas for Miscellaneous, Industrial, State Safety, and Peace Officer categories. – Repeal the SB 183 expanded definition of the State Safety retirement category – Change the benefit formula for Firefighter and Highway Patrol from 3% per year of service at age 50 to 3% per year of service at age 55. – Compute final compensation for Peace Officers, Firefighters and Highway Patrol based on the average of the highest 3 years of salary instead of the highest year of salary. There are those who argue that for the state to continue to attract the best employees, the retirement benefits must exceed those in the private sector. This was true in earlier years when public sector salaries were significantly lower than private sector salaries. Now public and private sector salaries are substantially similar, thus it is no longer necessary or prudent to provide enhanced retirement benefits to attract new hires to the public sector. With the current financial condition of our state, all possibilities for reducing costs must be considered. In the current situation, reducing retirement benefits for new hires on or after July 1, 2009 appears to be “low-hanging fruit” compared to some of the extremely tough choices that are being considered. Some legislators are blaming the Governor for stalling the budget because he is committed to making sure that these reforms are agreed to before the budget is completed. They are saying that policy items do not belong in budget negotiations. The fact is that the only time (in the remainder of his term) the Governor is assured to have the leverage necessary to accomplish these much needed reforms is now. Therefore, it is extremely important for him to fulfill his commitment and stand tough. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP, chairman of the Valley Industry and Commerce Association (VICA) and a director of First Commerce Bank

Featured Articles

Related Articles