California Public Employees’ Retirement System

External Affairs Branch (916) 795-3991 phone www.calpers.ca.gov

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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.

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