Public Pension and Retiree Health Benefts:
An Initial ResponseTo the Governor’s Proposal
MAC TAYLOR • LEGISLATIVE ANALYST • NOVEMBER 8, 2011
AN LAO REPORT
2 Legislative Analyst’s Of
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www.lao.ca.gov
EXECUTIVE SUMMARY
Te Governor presented a 12-point plan to change pension and retiree health benefts or Caliornia’sstate and local government workers on October 27, 2011. Tis report provides background on the state’sretirement policy issues and our initial response to the Governor’s proposals.
Our Of ce’s Key Principles on Public Retirement Benets.
As we have noted in the past, we do not view the current system o defned beneft pensions or Caliornia’s public employees as an intrinsically badthing at all. Rather, we view pensions and retiree health benefts as just one part o overall public employeecompensation—in many cases, as benefts oered in lieu o what otherwise might be higher salaries overthe course o a public-service career. Moreover, we believe that encouraging public or private workers todeer a portion o their compensation to retirement represents sound public policy. Well-managed andproperly unded retirement systems, thereore, are meritorious.
What Is the Problem With Public Retirement Benefts?
Caliornia’s current structure o public employee pension and retiree health benefts has somesubstantial problems. Tere is a notable tendency in the current system or public employers and employeesto deer retirement beneft costs—which should be paid or
entirely
during the careers o retirement systemmembers—to uture generations. Tis leads to ununded liabilities that have spiraled higher in recent yearsand are producing cost pressures or the state and many local governments that will persist or years tocome. Under the current system, governments have very little exibility under case law to alter beneft andunding arrangements or current employees—even when public budgets are stretched, as they are today.Finally, there is a substantial disparity between retirement benefts that are oered to public workers andthose oered to other workers in the economy.Sustaining a fnancially manageable system o public employee retirement benefts—one that is moreclosely aligned with the benefts oered private-sector workers—will require substantial, complex, anddi cult changes by the Legislature, the Governor, local governments, and voters.
Governor’s Proposal Is a Bold, Excellent Starting Point
Would Help Increase Public Condence in Caliornia’s Retirement Systems.
We view the Governor’sproposal as a bold starting point or legislative deliberations—a proposal that would implement substantialchanges to retirement benefts, particularly or uture public workers. His proposals would shi more o the fnancial risk or public pensions—now borne largely by public employers—to employees and retirees.In so doing, these proposals would substantially ameliorate this key area o long-term fnancial risk orCaliornia’s governments. At the same time, the Governor’s proposals aim or a uture in which careerpublic workers receive a package o retirement benefts that would be (1) su cient to sustain employees’standards o living during their retirement years and (2) more closely aligned with beneft packages oeredto private-sector workers. For all o these reasons, we believe that the Governor’s proposals could increasepublic confdence in the state’s retirement beneft systems.
Many Details Le Unaddressed in Governor’s October 27 Presentation.
Despite the strengths o theGovernor’s pension and retiree health proposal, it leaves many questions unanswered. In particular, we donot understand key details o how his hybrid beneft and retirement age proposals would work. Moreover,
AN LAO REPORTwww.lao.ca.gov
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Public Pension and Retiree Health Benei ts: An Initial Response To the Governor’s Proposal
Assessment of Gov. Jerry Brown's pension reform plan says it's a "good start," but has some shortcomings.
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