LAO: GOP Pension-Slashing Measures Would Mean "Large Uncertainty" and $1 Billion a Year in New Costs for at Least 30 Years

Tuesday, December 27, 2011
For Immediate Release

LAO: GOP Pension-Slashing Measures Would Mean "Large Uncertainty" and $1 Billion a Year in New Costs for at Least 30 Years
Legislature's Fiscal Watchdog Says Proposals Threaten Massive Legal Challenges, Reduced Returns and Would Hurt CalPERS and CalSTRS

 SACRAMENTO -- The Legislative Analyst’s Office has found that ballot measures being sponsored by leading state Republicans would bring "large uncertainty" to the state's pension systems, cost governments $1 billion more per year for the next 30 years, and likely would force state and local governments to pay more to compensate teachers, firefighters, police officers, and other public employees.

 

"The LAO hit the nail on the head about these sloppily-drafted and extreme ballot measures being advanced by right-wing Republicans," said Steven Maviglio, spokesperson for Californians for Retirement Security, a coalition of more than 1.6 million retired and current public employees. "These unworkable initiatives will be an economic disaster for our state, be tied up in the courts for years, result in no significant savings for decades, and squeeze California's middle class even more. It's exactly why the Legislature should do what the LAO suggested last month: take the time to craft a proposal that will be legal, stop abuses, and result in real savings without decimating the retirement security of millions of hardworking Californians."

 

The LAO reviewed two ballot measures: A.G. Initiative Files 11-0063 and 0064. Both were filed by Dan Pellissier, president of California Pension Reform. Mr. Pellissier is a former Schwarzenegger and Republican legislative aide.

 

The following are excerpts from the analyses, which are available on the LAO's website at http://www.lao.ca.gov/laoapp/ballot_source/BalDetails.aspx?id=941 and http://www.lao.ca.gov/laoapp/ballot_source/BalDetails.aspx?id=940:

 

“There is large uncertainty about this measure’s possible fiscal effects ... There is also large uncertainty about how this measure—applying broadly to nearly every type of government worker—would apply to the variety of public employees in California, which include teachers, public safety workers, office workers, professors, and many others.”

 

"This measure ... would almost certainly be subject to a wide array of serious legal challenges pertaining to its changes to benefit plans that enroll current and retired public employees, including, but not limited to, suits alleging that the measure would impair public contract obligations under the U.S. and/or California Constitutions. Moreover, the provisions of this measure would be subject to potentially varying interpretations by public employers and pension systems. In some cases, provisions of the federal Internal Revenue Code—which governs the tax status of public pension plans—may limit the flexibility of pension systems to implement certain provisions of this measure."

 

"To ensure that total compensation for future employees is competitive with that offered by other employers, many public employers likely would increase pay, health benefits, or other non-retirement benefits for future employees. This would partially offset the retirement cost savings."

 

"Defined benefit pension plans would experience a reduction in their incoming cash flow that would become more substantial over the coming few decades, as future employees grow to a larger share of the public workforce. These reductions in cash flow could cause many California pension plans to shift their allocation of investments to ensure they can meet existing benefit obligations, thereby reducing their average annual future investment returns. In general, when pension plans have to assume lower investment returns in this manner, their estimated normal costs increase, as do estimates of their unfunded liabilities. For these reasons, in the short and medium term (perhaps over the next two or three decades), these changes could result in public employers having to contribute over $1 billion more per year (in current dollars) to cover pension costs of current and past employees."

 

"In the short and medium term (perhaps the next two or three decades), the various financial effects of this measure make its net fiscal effects for state and local employers difficult to determine. During these decades, public employers may face either increased costs or savings related principally to current and past employees’ pension and other retirement benefits."

 

"Over the next two or three decades, potentially significant increased annual costs or some savings in state and local government personnel costs, depending on how this measure is interpreted and administered.”

 

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