are several legislative proposals and at least one potential ballot measure
that would impact California’s public pension funds. These
- Assembly Constitutional
Amendment [ACA] No. 1 and No. 5 (Richman)
- The Howard Jarvis
Taxpayers Association’s Fair and Fiscally
Responsible Public Employee Retirement Act
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.
are other differences between LACERA’s defined benefit
plan and a defined contribution plan:
to pay specified benefit at retirement
to contribute specified amount to member account
allowance is payable for the life of the member
stop when money is exhausted
the funds and bears the risk of adverse investment performance
how to invest the funds and bears the risk of adverse investment
is determined by average pay, years of service, and age
|| Benefit amount
is determined by investment performance and amount of contributions
protection through COLA (cost-of-living) programs
||No COLA Program
|Funds not available
during active service
permitted, sometimes loans permitted during active service
pension benefits possible with specified public employers
of member funds to tax- qualified plans as allowed by law
benefit options available to member
$5,000 lump sum death benefit for retirees
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.