A new law passed in the final hours of the legislative session makes sweeping changes to public employee pensions that impose most of the changes on workers not yet hired, creating a two-tier system in the workplace where two groups of workers doing the same work receive different retirement benefits.

These new public employees — faculty and classified employees among them — will work longer for a reduced retirement benefit. Some will make increased contributions to their pensions. Assembly Bill 340 penalizes newly hired public employees because legal analysts agree that benefit and contribution levels cannot be easily changed for current and retired members. AB 340 passed without input or support from public employee unions.

CFT, along with the 1.5 million public employees and retirees represented by the Californians for Retirement Security coalition, was critical of the hastily passed measure. “Punishing hardworking public employees for the Wall Street-driven financial crisis that led to pension fund shortfalls is not acceptable,” said CFT President Josh Pechthalt.

Even conservative anti-tax ideologues and critics of public employee pensions were not supportive of the new law, charging that it was just a stratagem of Gov. Brown to help win public support for passage of Prop. 30 in November.

The new law incorporates many of the proposals Gov. Brown had advanced 10 months earlier. CFT supported proposals such as stricter anti-spiking regulations, which mainly affect administrator pensions, and ending pension holidays, in which employers stop making contributions. Download a table showing what the new law means to CalSTRS members.

A proposal to increase contributions will have minimal affect on CalSTRS members because teachers already contribute 44 percent of their pension cost through an 8 percent salary deduction. Like previous law, the new law specifies that contribution rates for the coming second-tier members of CalSTRS must be approved by the Legislature.

Members of CalPERS, however, may pay increased contributions. The new law specifies that unions representing CalPERS members must negotiate the changes through collective bargaining, with the caveat that this bargaining must increase employee contributions to 50 percent of pension cost within five years.

The new pension law omitted two of the governor’s initial 12 proposals; both of them were opposed by CFT. One would have created a new “hybrid” plan by combining the present defined benefit plan with a defined contribution plan much like a 401k or 403b plan. Another would have added new seats to the CalPERS board for appointees with financial expertise. CFT has worked over the past decade to seat educators on the boards of their retirement systems.

Lawmakers did not tackle massive shortfalls in the portfolios of CalSTRS and CalPERS. Both systems say they cannot invest their way out of the unfunded liability predicament.

The CalSTRS portfolio suffered a shortfall of $64.5 billion during the financial meltdown. In a preliminary estimate, CalSTRS predicted the new law would save its system $12 billion over 30 years, representing only a fraction of the shortfall.

The much larger CalPERS, which serves classified employees in 1500 school and college districts, state employees and nearly 1600 local governments, reported an unfunded liability of $106.7 billion in 2010. It predicts the shortfall will still be $85 or $90 billion for 2011. CalPERS estimated the new law would save $42 to $55 billion over the next 30 years.

Legislators acknowledged that the new law did not fully address the deficit. As a result, the Senate passed a resolution that requires CalSTRS to develop three options within the next six months to guide legislation. CalSTRS CEO Jack Ehnes welcomed this resolution and said he hoped the Legislature would pass legislation to support long-term funding by the 2013-14 session.

“The real solution is to ensure decent pensions for all workers,” said President Pechthalt, “public and private.”

— By Malcolm Terence, CFT Reporter

At-A-Glance: What the new law means to CalSTRS members (download pdf)

Download a table showing what the new law means to CalSTRS members.