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   PROPOSALS TO CLOSE PUBLIC DEFINED BENEFIT PLANS  
   
 

There are several legislative proposals and at least one potential ballot measure that would impact California’s public pension funds. These proposals include:

  • Assembly Constitutional Amendment [ACA] No. 1 and No. 5 (Richman)
  • The Howard Jarvis Taxpayers Association’s Fair and Fiscally Responsible Public Employee Retirement Act

What Would These Proposals Do?
These proposals vary in design, but all would mandate closing state, county, and local government “defined benefit” pension plans to new hires beginning July 1, 2007. The retirement benefits of those who are members of LACERA on that date, whether retired or active employees, would be unaffected.

How Would This Impact LACERA and the County?

  • Investments of assets may need to be more conservative because no new members will be added after July 1, 2007. More conservative investments historically have produced smaller returns for public pension funds.
  • If there are smaller investment returns, the employer may need to pay more to fund retirement benefits.
  • The employee and employer share the funding for the Cost-of-Living Adjustment program (COLA). If there are smaller investment returns, the employer and employee may need to pay more to fund the COLA program.
  • LACERA’s actuary estimates that the County contribution rate would need to increase by 3.66% of pay to pay down existing funding shortfalls. We expect the closed LACERA plan will have fewer members over time. So, LACERA will need to match the payment of this County debt to the shrinking membership payroll. This could equate to a $206 million increase to the County contributions for the fiscal year ending June 30, 2008.
  • LACERA’s actuary estimates that the County’s total contributions (the LACERA defined benefit plan and the proposed new defined contributions plan combined) for the first 10 years would be $1.29 billion more than the contributions required if all employees were covered by the LACERA defined benefit plan. The actuary estimates that the County would not realize any budgetary relief under the Richman/Jarvis proposals until the 2018-2019 fiscal year.

How Would This Impact New Employees Hired After July 1, 2007?
The proposals all mandate that new employees, hired after July 1, 2007 would not be able to participate in the state, county, or local government’s defined benefit plan. New hires would (or “may”) enroll only in a defined contribution plan, similar to a 401(k).

There are many differences between LACERA’s defined benefit plan and a defined contribution plan. Some major distinctions between the two include:

  • Retiree health care is not included in a defined contribution plan, but is available through LACERA’s current plan
  • Disability retirement is not included in a defined contribution plan, but is available through LACERA’s current plan.

Listed below are other differences between LACERA’s defined benefit plan and a defined contribution plan:

DEFINED BENEFIT PLAN
DEFINED CONTRIBUTION PLAN
Employer promises to pay specified benefit at retirement Employer promises to contribute specified amount to member account periodically
Retirement allowance is payable for the life of the member Benefit payments stop when money is exhausted
Employer invests the funds and bears the risk of adverse investment performance Employee decides how to invest the funds and bears the risk of adverse investment performance
Benefit amount is determined by average pay, years of service, and age Benefit amount is determined by investment performance and amount of contributions
Better inflation protection through COLA (cost-of-living) programs No COLA Program
Funds not available during active service Hardship withdrawals permitted, sometimes loans permitted during active service
Reciprocal pension benefits possible with specified public employers Possible transfer of member funds to tax- qualified plans as allowed by law
Various retirement benefit options available to member Not applicable

$5,000 lump sum death benefit for retirees

Not applicable

How Would This Impact Retirees?

  • As indicated above, current retirees and employees are guaranteed their LACERA benefits under state law. LACERA’s STAR COLA plan is optional. Although the STAR COLA benefit is vested for retirees who are currently receiving it, new inflation damage does not have to be included.The current Retiree Health Care program is available to employees who retire with a LACERA benefit. It is uncertain if non-LACERA members may participate in the Retiree Health Care program.
  • If the Retiree Health Care program is closed to new entrants as the LACERA defined benefit plan is closed to new entrants, retiree health care costs may increase since there will be fewer covered enrollees.

Other Important Facts

  • Smaller investment returns resulting from more conservative investments would increase employee contribution rates. Administrative costs of defined contribution plans are higher than defined benefit plans. The National Association of State Retirement Administrators (NASRA) reports that the median administrative cost of a defined contribution plan is approximately 1.40% of assets, whereas the median cost of a statewide public defined benefit plan is approximately 0.30%. The average cost of investing and administering LACERA’s defined benefit plan is 0.39 percent of assets.
  • Currently, new hires to L.A. County do not pay into Social Security and therefore employees would not receive a benefit from Social Security at retirement unless they paid into Social Security through another employer.
3/16/05
 
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