August 29, 2011
We have reviewed the
proposed initiative measure that concerns state and local retirement
plans and establishes a new state entity to administer defined pension
benefits for non-governmental employees in California (A.G. File No.
11-0026). The proposal does not specify whether it seeks to amend the
State Constitution or statutes or both.
This complex measure
has many provisions that are unclear. The measure’s provisions address
the following issues, among others:
Funded Status of Public Pension
Systems. The measure appears to establish mechanisms intended to
reduce unfunded liabilities—thereby improving the funded status—of state
and local public pension systems. Subsection G of Section 4 of this
measure and its appendices appear, for example, to establish mechanisms
to reduce benefits of certain current and future retirees in some
pension systems and withhold these adjusted savings within the public
retirement trust fund from which they originated. If we understand these
provisions correctly, they could, if implemented, reduce future state
and local governmental costs in the long run. (Subsection Q  of
Section 4, however, could perhaps be interpreted to prevent some
governments from achieving some such cost savings in the short run.)
Offsetting any such long-term cost reductions likely would be increases
in other forms of public employee compensation and some increase in
state government costs, such as those required under this measure to
increase State Controller’s Office pension oversight.
Change in Retirement Ages.
Subsection J of Section 4 of this measure increases the “minimum
retirement age” for public employees to 59 years and six months. This
provision seemingly only would apply during certain periods when this
measure’s mechanisms to improve pension system funded status are in
effect. These provisions, if implemented, could result in some state or
local savings over the long term.
Changes in Pension System
Cost-of-Living Adjustments (COLAs).
The measure provides that in every
year when a public pension system is less than 97 percent funded, a
reduced COLA for retiree benefits will be instituted. This provision
could, if implemented, reduce state and local pension contributions
costs by an unknown amount.
State and Local Retiree Health
Benefits. Subdivision K(4) of Section 4 of the measure appears
to expand dramatically state and local agencies’ requirements to pay for
retiree health coverage for public employees.
New State Entity. The
measure also establishes a new state entity “that mirrors the California
Public Employees’ Retirement System” to administer defined pension
benefits and retiree health care benefits for non-governmental employees
in California. It is unclear to what extent such benefits and the costs
of their administration would be paid for by these employees, their
employers, and/or taxpayers (especially if the employers cease operation
and/or seek bankruptcy protection in the future).
System Actuarial Practices.
Several provisions of this measure relate to public pension systems’
actuarial practices, including provisions relating to systems’ mortality
tables and pooling of certain assets and liabilities. The latter
provisions could potentially result in significant changes to pension
costs for school and community college districts, as well as some other
Significant Legal Issues.
Complicating our efforts to provide a fiscal estimate are the
significant legal challenges that would face various provisions of this
measure, including, but not limited to, likely claims that the measure
would impair pension and other contracts with current and past public
Not Possible to Provide an
Estimate. Given all of these uncertainties, we are informing you
that, in our opinion, a reasonable estimate of the net impact of this
proposed initiative cannot be prepared within 25 working days from the
date this proposed initiative was received. As required by subsection
(c) of Section 9005 of the Elections Code, we are informing you that it
is our opinion that the measure could result in a substantial net change
in state or local finances if adopted, given the magnitude of the
changes proposed in this measure.
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