California Public Employees’ Retirement System

External Affairs Branch

(916) 795-3991 phone • (916) 795-3507 fax
www.calpers.ca.gov

Pension Reform Proposals Raise Serious

Concerns; Study Comparing Private and
Public Benefits Is Flawed
CalPERS has reviewed the report, “Comparing Public and Private Employee
Compensation and Retirement Benefits in California,” commissioned by the
California Foundation for Fiscal Responsibility (CFFR). CalPERS preliminary
review of CFFR’s pension reform proposals raise serious concerns regarding
issues of benefit equity and sound, objective methodologies of the study.

EQUITY ISSUES

CFFR’S RECOMMENDATIONS ON RETIREE HEALTH COVERAGE PUT THE FINANCIAL

SQUEEZE ON RETIREE MEMBERS, AND LEAVE SPOUSES AND OTHER
DEPENDENTS WITHOUT COVERAGE AFTER AGE 65
• CFFR recommends eliminating health benefits for spouses and dependents
of retirees when a retiree turns 65 in its Alternative A proposal.
Eliminating health care coverage for a retiree’s spouse and dependents
places a higher financial burden on retirees, many of whom have fixed
incomes. It leaves dependents to try to seek health care coverage
through the individual insurance market, fails to address the distinct
possibility that they will be unable to secure coverage at all, and fails to
consider the resulting societal costs should individuals fail to secure
private health insurance and be forced to enroll in public social service
and health programs.

• The Alternative A proposal also suggests that retirees be in an exclusive

risk pool. The current CalPERS pool spreads the risk and the costs over all
ages of members in the pool. The proposal to set up a retiree risk pool,
separate from active workers, would result in much higher costs for
retirees to bear, further increasing their financial burden.

CFFR PROMOTES A “RACE TO THE BOTTOM” PHILOSOPHY, PROMOTING THE NOTION

THAT NO ONE – PUBLIC OR PRIVATE -- DESERVES AN ADEQUATE, REASONABLE
RETIREMENT

• The study’s research and findings clearly illustrate how poorly the private
sector is doing in providing for retirement security of its employees. In
one example, the retirement benefits discussed were valued at less than
three times final annual pay, a level that most, if not all, financial
planners would consider insufficient for a secure retirement. Instead of
advocating for retirement security for all Californians, CFFR and the
studies author’s contend that an inadequately funded retirement is fine for
everyone.
FACT SHEET: CFFR PROPOSALS FLAWED
Page 2 of 2

RECOMMENDATION TO ALTER PENSIONS FOR CURRENT EMPLOYEES IS CONTRARY TO

THE UNITED STATES AND CALIFORNIA CONSTITUTIONS

As the Little Hoover Commission has acknowledged, for over 60 years, the courts
in this state have recognized that public employee pensions are contractual
promises of deferred compensation made by the employer. These
contracts are protected from impairment by both the California and United
States Constitutions. The study recommends taking away these benefits in
violation of employees’ constitutional rights expressly conceding that it,
“leaves to others the critical matter of the extent to which application of
these reforms to current program members would be legally feasible.”

METHODOLOGY

THE STUDY IS BASED ON ARTIFICIAL MODELS AND DOESN’T USE REAL DATA
• The report is a theoretical exercise, not a factual analysis. The basis of
the findings are “models” -- artificial constructs based on formulas, not
actual data reflecting the experience, demographics, and trends seen with
pensions and members. For example, the study claimed a California
Highway Patrol officer can retire at age 50 with 90% of pay, but fails to
state this would be rare since most officers do not start working at the age
of 20.

• In making comparisons of salary and benefits, the analysis excludes

bonuses and stock options that are commonly provided to private sector
employees to allow them to contribute to their retirement security,
resulting in an unfair and inadequate comparison.

PRESCRIBING A DISCOUNT RATE OF 6 PERCENT WHILE ASSUMING INVESTMENTS

EARN 7.25 PERCENT IS INHERENTLY INCONSISTENT AND RESULT ORIENTED
• The authors advocate a 6 percent discount rate, but assume in their
analysis that investments will earn 7.25 percent. This “smoke and
mirrors” construct results in the benefits appearing to be more valuable
and costly than would be the case with a higher discount rate.

THE STUDY FALLS SHORT ON SPECIFICS AND LACKS COMPARATIVE DATA

• The study fails to offer sufficient detail in the area of benefit plan design
and possible statutory language, making it difficult, if not impossible, to
understand the real impacts and potential cost savings that might be
achieved for public employers and employees.
• The study claims that the private sector sample plans are “consistent with
larger employers generally” but provide no data to support this claim. The
authors describe trends in the private sector but fail to acknowledge that
there are many large employer plans that have not followed these trends.