California reforms state employee pensions through new contract agreements

Yesterday, Governor Schwarzenegger announced that California has reached agreements with four state employee unions which will move the state closer to comprehensive pension reform for state employees. The new agreements include significant measures such as requiring employees to contribute at least 10% to their pensions one of the highest contributions in the nation and rolling back a pension increase enacted in 1999. The Governor hopes that these measures will cut back on the state’s ballooning pension costs.

The agreements also include changes to the retirement formulas used to calculate pension payments for new employees such as additions to the number of years a new employee has to work before they receive full benefits and adding additional years to the final retirement compensation calculation in order to avoid pension spiking in the last year of work.

According to the Governor, the current formulas are causing continued increases in pension costs, that coupled with the ongoing budgetary problems the state faces are forcing the need reform.

Even while the reforms passed, California Public Employees’ Retirement System (CalPERS) voted to increase the state’s required contributions towards pensions by an estimated $600 million in fiscal year 2010-11.

Along with pension reform, the unions also agreed to a proposed employee compensation savings for next year which will work out to be one day of unpaid personal leave per month during the next fiscal year. All told, the days off will amount to the equivalent of a five percent pay cut. The Administration is also moving forward with a five percent reduction in the cost of the state workforce payroll through Executive Order S-01-10, which requires all department directors to reduce their payrolls by 5 percent. These agreements are expected to save the state $72 million. If similar agreements are reached with the state’s eight other employee unions, state savings in FY 2010-11 would total $2.2 billion, $1.2 billion General Fund.

The four agreements announced will cover 23,000 employees represented by the California Association of Highway Patrolmen (CAHP), California Department of Forestry Firefighters (CDFF), California Association of Psychiatric Technicians (CAPT) and American Federation of State, County and Municipal Employees (AFSCME).

“I am absolutely committed to getting pension reform done because we cannot continue down this unsustainable path that has taxpayers on the hook for $500 billion in debt,” said Governor Schwarzenegger. “I applaud these four unions for stepping up and taking these first steps in helping to reform our state’s out-of-balance pensions and I encourage other public employee unions to negotiate on behalf of their members and California taxpayers. I will continue to fight for taxpayers and work with any union that comes forward and is ready to negotiate reforms.”