Posted July 12, 2007

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Bonus columns:
· Pension Divestment and Fiscal Sanity
· Funding OPEB With Pension Profits

A Possible Benefits Crackdown

The Push Behind Pension Prop 13

In California, a taxpayers' watchdog group has filed a ballot initiative to control public employee pension benefits. It's been dubbed "Pension Proposition 13," echoing the Jarvis-Gann property tax limitation initiative of the 1970s. Its formal name is the Public Employee Benefits Reform Initiative.

Whether the sponsors will garner enough signatures to qualify for the ballot remains to be seen. Proponents claim that taxpayers are fed up with lavish public employee pension benefits and will vote in droves to put public employees in their place. Public employee unions will campaign fiercely to protect benefits they feel they earned years ago in collective bargaining.

The proposal would:

· Limit pension payments for new employees to levels below those prevailing now in many jurisdictions
· Further limit pension payments for new employees who also earn Social Security benefits
· Prohibit retroactive benefits increases to current or new employees
· Base pensions on five-year average compensation for new employees
· Exclude overtime, sick leave, severance and vacation pay from the pension calculation
· Establish the U.S. Social Security age (presently 67 if born after 1959) as the minimum retirement age for new civilian employees (age 55 for police and firefighters)
· Require new employees to reach full retirement age to qualify for retiree medical benefits
· Require actuarial funding
· Allow modest pension increases if the plan reaches 110 percent funding

In light of all the possible provisions that a taxpayers' group might have inserted, this is pretty moderate stuff. First of all, it applies only to new employees. Second, it skirts the fatal political issues with respect to disability and survivors benefits raised by labor groups in Governor Arnold Schwarzenegger's earlier failed effort at pension reform. Third, it makes no mention of defined contribution plans, let alone mandates them.

Those who believe that traditional public pension plans have run amok will be attracted to this proposal. It addresses many of the abuses cited by critics, such as lavish unearned early retirement packages and pension spiking (see my May column on spiking). The benefits caps are probably consistent with average private sector benefits in today's labor market. Nothing in the proposal would preclude a public agency from sweetening its pension plan with a companion defined contribution program to supplement the pension. The proposal also requires proper funding to assure fiscal sufficiency. To this extent, it qualifies as a "reform" proposal.

Labor advocates are nonetheless expected to mount a strong campaign in opposition to this proposal if it reaches the ballot. They won't like the benefits limitations, the age requirements for normal retirement benefits, the prohibition against retroactive benefits, nor the exclusion of overtime, sick leave and special pay from pension payout calculations. After all, who needs a union if these benefits are limited by voter action?

Until the sponsors gain enough signatures to qualify for the next ballot, this proposal is just paper. But it may mark the beginning of a new trend that could easily go nationwide if similar groups in other states become fed up with pension fund abuses in their back yard. Only time will tell whether this is a tempest in a teapot or the beginning of a new wave of taxpayers' rebellions that focus on public pension plans.

Stay tuned. This could get interesting.

Last month:
· ‘Over-funded’ Pensions? Hardly!
· ‘Target-Date’ Funds Miss the Bull's-Eye
· Hounding the Fat Cats

Index of recent columns

Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net.
More biographical information.

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