Briefing Report: Carve-Outs and Realizing That 50/50 is Only a Labor Friendly Infomercial

Thursday, May 30, 2013

Equal sharing of normal costs between the state employer and public employees shall be the standard. It shall be the standard that employees pay at least 50 percent of normal costs and that employers not pay any of the required employee contribution. Equal sharing of normal costs is currently the standard for most state employees.[1]
-- California Government Code § 20683.2

“The pension reform law, AB 340 (Furutani), requires current state employees and all new public employees to pay for at least 50 percent of their pensions and establishes this as the norm for all public workers in California.”
-- Gov. Brown press release after signing pension reform law (9/12/12). 

California state public sector union employees will not contribute 50 percent of the normal costs for their taxpayer provided pensions.  Let that statement sink in as you reread the state law and proclamation listed above.  Legislative Democrats and their public sector union patrons, who drafted the state law behind closed doors during the pension reform effort of 2013, would have you believe the first sentence is erroneous, stating falsehoods and outright lies.  Yet if the first sentence is a falsehood, it’s a falsehood that has a real dollar amount loss of roughly $13 billion over 30 years to the pension investment fund and is ultimately covered by the taxpayer.

The greatest invention since sliced bread?

The Commission on Pensions of State Employees in 1929 developed the framework that established a pension system for its public sector state workers in 1932, today known as the California Public Employees’ Retirement System (CalPERS).  Years before the federal Social Security program set the then standard for retirement age, California provided full retirement at 65,[2] which they adopted from German Chancellor Otto von Bismarck and the Pennsylvania Railroad, both of which established 65 as the normal age of retirement decades prior to 1932.[3]  When discussing the contribution factor for employees and the employer (the state) the Commission specified that “Both parties expect to benefit from the retirement system and it seems reasonable that the costs of the benefits to be earned should be divided in approximately equal proportions.”[4]  The employees and the employer were to contribute equally to the retirement fund.

In 1935, the Social Security Act was established to provide income security for private sector retired workers with public sector workers being barred from joining. Private sector employees and employers both contributed three (3) percent in the fund. (Now the rate for the employees and the employer is 6.2 percent of your pay.)  Not long after creating the federal retirement system actuaries realized that the Social Security fund might not have enough assets to cover its liabilities in the decades to come.  In 1954 Congress opened Social Security participation to public sector workers to increase the number of employees and employers paying into the federal system.  California public sector employees fought to stay out of Social Security.  They rightly saw that more money was going to be taken out of their pockets to pay for the retirees of the day, rather than for their own retirement when they turned 65.  (I wonder if they saw the irony.)  In 1961, Governor Edmund G. “Pat” Brown brought most public sector state workers into Social Security and decided to offset the employee frustration of lost wages to pay for the federal Social Security fund by allowing the monthly calculation of state compensable salary/wages to be in excess of $133.33.  So the amount that CalPERS utilized to assess the employees state contribution into their state pension fund was based on the employee’s salary in excess of $133.33.[5]  As an example, if the employee earned $1000 per month, then only $866.67 was used to calculate their contribution into their retirement fund.  Thus the illusion of equal sharing, as envisioned by the Commission creating the state worker pension system, of employee-employer contributions to the retirement fund is lost to in excess of amount otherwise known as a specialized monetary carve-out.

All yours for an amazing low price…

What do $238, $317, $513, and $863 have in common?[6]  These are the current rates of monetary carve-outs, for unionized workers, of their monthly salary/wages used to calculate the state employee’s contribution into their own state pension fund.  There are roughly 220,000 state full-time, full-time equivalent, and part-time employees mostly represented by 21 bargaining units (BUs).  Exempt employees fall under the contribution terms and conditions as dictated by law.  Within each bargaining unit monetary carve-outs decided upon and then stipulated in the Memorandum of Understanding (labor contract between the state and the specific union).  Not only can these monetary carve-outs be adjusted in MOUs, but in the 2013 pension reform bill.  The state firefighters union had a carve-out of $238 prior to the 2013 pension reform.  As enacted, the pension reform measure provided the firefighters union a jump in their carve-out to $513, and then provides another bump in their carve-out in 2014 to $863.[7]  I wonder why they received those special monetary carve-outs?!?!

Wait, wasn’t the original carve-out only $133.33?  In 1977, Governor Edmund G. “Jerry” Brown signed SB 839 (Dills) aka the Ralph C. Dills Act - a law allowing public sector employees in California to collectively bargain the terms of their employment, salary and benefits paid for by the California taxpayer in which they work on behalf of their employment.  Public sector union bosses began to use the bargaining table to attain a higher carve-out as well as increasing pay and benefits for all state bargaining unit members.  Former Assembly Speaker Willie Brown, and after serving as mayor of San Francisco, came to realize the detriment of public sector unions in bed with labor friendly politicians.   A self-proclaimed big friend of labor groups, he noted the irony in the public employee bargaining beast in 2010 when he said, “The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians, pushed by our friends in labor, gradually expanded pay and benefits to private sector levels while keeping the job protections and laying on incredibly generous retirement packages that pay ex-workers almost as much as current workers. Talking about this is politically unpopular and potentially even career suicide for most [Democrat] officeholders. But at some point, someone is going to have to get honest about the fact that 80 percent of the state, county and city budget deficits are due to employee costs. Either we do something about it at the ballot box, or a judge will do something about in Bankruptcy Court. And if you think I'm kidding, just look at Vallejo,”[8]…and Los Angeles, and Stockton, and San Bernardino, and Mammoth, and Pacific Grove and…and…and…. 

But wait, there’s more

So what if the salary calculations for the pension fund do not include a measly $513 of the public sector employee’s monthly salary?  The current standard contribution percentage for the majority of state employees (classified as miscellaneous and fall under the $513 carve-out category) is eight (8) percent.  Simple math tells us that 8 percent of $513 is $41.04.  That is the average amount that the average employee is not contributing toward their pension retirement each month.  If there are roughly 220,000 California state employees, then a very rough estimate of the monthly contribution loss is slightly over $9 million.  That amounts to over $108 million annually, and that’s without adding earned interest.  When calculated with compound interest over 30 years the loss reaches almost $13 billion dollars.[9]  The ironic part of the special carve-out for unionized state worker pension contributions is that they are required to pay their union dues based on their entire wages/salary, no special carve-outs, no state law dictating in excess of, just the colloquial “show me the money.”   Union Bosses 1 -- State/Taxpayers 0.[10]

If you buy now, we will give you two for less than the price of one

CalPERS’ classifies the employee/employer contribution to the fund as the normal cost, but little is normal about the costs. In addition, CalPERS sets the employer contribution rates.  As stated in a report by the nonpartisan Legislative Analyst’s Office (LAO), “Contributions to pension plans from employers and employees consists of two main components: (1) ‘normal costs’ and (2) unfunded liability costs.”[11]  If there are not enough assets to cover liabilities, meaning that they don’t have enough cash on hand, combined with expected investment returns, to pay for each and every current retiree and working employees in their retirement for the rest of their life, then the retirement system has an unfunded actuarial accrued liability (UAAL).  CalPERS currently has an $87 billion unfunded liability (state, municipal, and other public contracting agencies are part of the UAAL), and that liability is increasing rapidly.[12]  The LAO tabulates that employees pay “about one-third of the total required contribution.[13]  Again the employer (taxpayer) is required to pick up much more than the 50 percent touted in law, and by the Governor, to make up the total financial difference.

Over the last 14 years the government contributions to the pension fund to cover normal costs and UAAL costs have tripled.  In 1997 the total state retirement contributions were $1.2 billion (averaged at roughly 12% of compensation according to CalPERS)[14] and the general fund retirement contributions were $672 million. The general fund is where money for education, libraries, health, and safety programs come from--programs that citizen’s care most about and utilize on a daily basis.  In 2012 the total state retirement fund contribution was about $3.6 billion (averaged at roughly 23% of compensation according to CalPERS)[15] and the general fund retirement contribution was just over $2 billion. I wonder what California teachers could do with $2 billion directly in their classrooms?!?!

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The unfunded liability will grow.[16]  In 2012, voters approved Proposition 30 (tax increase supposedly for schools) that provides at least $6 billion more for state coffers annually for at least five more years. Unfortunately, with state employees seeking massive pay raises and the CalPERS chief actuary seeking more government contributions, that $6 billion will come in very handy for legislative Democrats. But how can changes be made to effectuate at least the appearance of employees paying their true 50/50 fair share contributions into their own personal retirement account?  The state bargaining units are meeting with state representatives’ right now to draft new MOUs to be enacted in July 2013.  Some state bargaining units are currently negotiating for pay increases.  For example SEIU, which represents 9 of the 21 bargaining units, is seeking “a $2,500 bonus in 2013 and a 7 percent salary increase in 2014 and 9 percent in 2015.”[17]  Surely the union bosses would love a call from your Legislator[18] asking them to consider paying their 50/50 fair share and to strike all bargaining unit monetary carve-outs, or in excess of codes, in state law thus allowing state employees to contribute a little more equally to the wonderful state retirement system Governor Brown affectionately called “a Ponzi scheme.”[19]

For more information on this report or other Public Employment and Retirement issues, contact Gary Link, Senate Republican Office of Policy at 916/651-1501.


[1] The California Public Employees’ Retirement System defines “normal costs” as: The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate.
[2] For most state employees hired before January 1, 2013 the normal state retirement age is 55. For the small percentage of certain bargaining unit members hired after Jan. 15, 2011, it is 60.  For those newly hired after, it is 62. For most state safety members it is 50 and 57 respectively.
[3] Little Hoover Commission, “Public Pension For Retirement Security.”  (Sacramento, CA Feb. 2011) Pgs. 6-10.
[4] Commission on Pensions of State Employees, “Report of the Commission on Pensions of State Employees.” (Sacramento, CA: California State Printing Office 1929). Pg. 11.
[5] Public Pension For Retirement Security. See note above. Pg. 32.
[6] California Government Code. § 20671- 20694.  Normal Contributions as of May 2013.
[7] California Government Code § 20677.96.  (a).
[8] Willie Brown, “Homeland security chief takes responsibility,” San Francisco Chronicle, January 3, 2010, Op-ed.
[9] Interested calculated one time annually, at the beginning of the compounding period, using the CalPERS Board of Administrations’ dedicated return on investment (discount rate) of 7.5 percent.
[10] As an example BU 1 provides formulas to the State Controller’s Office so they can calculate, deduct, and then transmit that money to the union. http://www.calhr.ca.gov/Documents/bu01-20100701-20130701-mou.pdf
[11] Legislative Analyst’s Office, “An Initial Response to the Governor’s Proposal.” (Sacramento, CA Nov. 8, 2011) pg. 14.
[12] The Pension Fund That Ate California. “The City Journal” Steve Malanga, Vol 23, No. 1.
[13] An Initial Response to the Governor’s Proposal. See note above. Pg. 15.
[14] CalPERS’ Employer Contribution Rates.
[15] CalPERS’ Employer Contribution Rates. See note above.
[16] The Pension Fund That Ate California. See note above.
[17] Service Employees International Union 1000. Salary increase leads bargaining proposals, April 2013.
[18] Find your California state Senator and Assemblymember.
[19] Governor Brown, Presenting his 12 Point Pension Reform Proposal, to Conference Committee on Public Employee Pensions AB 340/ SB 827. (State Capitol, Sacramento California, Dec. 1, 2011)