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California legislature approves pension reform

SACRAMENTO (Reuters) - California’s legislature passed pension reform on Friday that cuts some of the most generous public employee retirement benefits in the United States, but critics said it is only a first step in fixing a pension deficit that has been decades in the making.

California Governor Jerry Brown speaks at a news conference to announce the Public Employee Pension Reform Act of 2012 at Ronald Reagan State Building in Los Angeles, California August 28, 2012. REUTERS/Mario Anzuoni

The pension bill, unveiled by Governor Jerry Brown on Tuesday after months of talks with fellow Democrats, would raise retirement age and reduce benefits for new employees. It also will eliminate some practices that have led to exorbitant pensions for a relative handful of workers.

“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.”

Assembly Democrat Jim Beall Jr. countered, “This is not something we’re going to do overnight. We’re going to have to work on this over the next several years.”

The pension reform raises the minimum retirement age for most new state employees to 52 from 50. Safety workers, mainly police and firefighters, will in most cases still be able to retire as early as 50.

It caps pensions, 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 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 had originally proposed bigger changes in a 12-point pension plan. He abandoned his proposal for “hybrid” pensions combining features of traditional pensions and 401(k)-style retirement accounts.

California’s public pension plans are underfunded by hundreds of billions of dollars, although the extent of the problem is a matter of heated debate.

The California Public Employees Retirement System (Calpers), the state’s main pension plan and largest of its kind in the country, said the legislation would save $42 billion to $55 billion over 30 years.

Calpers, which oversees pensions for state workers and for many cities and counties, pegged the present value of the savings from the new law at about $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,” he said. Nation is a former Democratic member of the state Assembly.

Service Employees International Union government relations official Terry Brennand said, “They are potentially subjecting a generation of workers to retiring into poverty or working until they die.”

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 state and local finances.

The California Assembly approved the bill by a 48-8 vote. The Senate passed it 38-1.

Brown is eager to sign the bill, which he considers critical for cementing support for a tax hike that will be on California’s ballot in November. The bill garnered significant support from Republicans in the legislature on the last day of the session.

Brown has repeatedly said that pension reform would show Sacramento’s commitment to rein in spending, which could help sell voters on his November ballot initiative to raise income tax on wealthy Californians and the state’s sales tax.

Brown’s tax initiative is winning in current polls.

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 been slashed in recent years. It is strongly supported by teachers’ unions and other state workers.

Reporting by Jim Christie and Mary Slosson; Writing by Peter Henderson; Editing by Jonathan Weber, Lisa Shumaker and Dan Grebler