SAN FRANCISCO (Reuters) - California’s Democratic-controlled state Assembly on Friday passed a pension reform plan that cuts back some of the most generous public employee retirement benefits in the nation, although its immediate effect may be to fan a political fight over tax increases.
The pension bill, unveiled by Governor Jerry Brown on Tuesday after months of talks with fellow Democrats, would modestly raise retirement ages and reduce benefits for new employees. It also eliminates some abusive practices that have led to exorbitant pensions for a relative handful of workers.
The state Senate is expected to pass the legislation later on Friday, and Brown is eager to sign it.
California’s public pension plans are underfunded by hundreds of billions of dollars, although the depth of the problem is a matter of heated debate. The California Public Employees Retirement System (Calpers), the state’s main pension plan and the largest of its kind in the country, said the new legislation will save $42 billion to $55 billion over 30 years.
The ability of a state government controlled by Democrats to defuse an issue that Republicans have seized on in Wisconsin and other states could have national implications for the widespread crisis in state and local finance.
The California Assembly approved the bill by a 48-8 vote. Unions cried foul, though critics argued that the protestations were really a show to help convince the public that the reforms were real.
Brown has repeatedly said that pension reform will show Sacramento’s commitment to check spending, which in turn will help sell voters on his November ballot initiative to raise the state’s sales tax and boost income taxes on wealthy Californians.
The tax measure has long been central to Brown’s plans to restore the state’s fiscal health. The measure would prevent further spending cuts in a state where the budget has already been slashed dramatically in recent years, and thus is strongly supported by teachers’ unions and other state workers.
Brown originally proposed bigger changes in a 12-point pension plan.
“The governor offered us a car,” said Republican Assembly member Chris Norby, who supported the original plan. “This is more like a tricycle. It’s never going to get us there.”
Jim Beall Jr., an Assembly Democrat, responded: “This is not something we’re going to do overnight. We’re going to have to work on this over the next several years.”
Service Employees International Union government relations official Terry Brennand said the new law amounted to a sea change in benefits. “They are potentially subjecting a generation of workers to retiring into poverty, or working until they die,” he said.
Calpers, which oversees pensions both for state workers and for many cities and counties, pegged the present value of the savings from the new law at $10 billion.
Stanford University public policy expert Joe Nation, who has calculated Calpers long-term unfunded liability at close to half a trillion dollars, said Brown’s plan did little to solve the problem.
“It’s better than moving backwards but this barely moves the ball forward,” said Nation, a former Democratic member of the state Assembly.
Respected columnist Dan Walters wrote in the Sacramento Bee that union umbrage was a political ruse to raise taxes. “Their harsh criticism of the plan will be used by the tax campaign to make Brown and other Democratic politicians look like they’re being tough and courageous on pensions,” he said.
The plan raises the minimum retirement age for most new state employees to 52 from 50. Safety workers, mainly police officers and firefighters, will in most cases still be able to retire as early as 50. It also puts a cap on how high pensions can go, tames practices such as pension “spiking” that lead to higher payouts, and requires new public-sector workers to split payments to their pension accounts at least evenly with employers.
Current employees would also be responsible for half their contributions. Savings to the state from its employees paying more toward their pensions will be used to reduce its unfunded pension liability.
Brown abandoned his proposal for “hybrid” pensions combining features of traditional pensions and 401(k)-style retirement accounts.
Public response to the legislation is not clear. Brown’s tax initiative is winning in current polls, but typically support slips as election day nears.
Reporting by Jim Christie; Writing by Peter Henderson; Editing by Jonathan Weber, Lisa Shumaker and Dan Grebler