What Happened?
After passing Measure D – a ballot proposal to reform the pension system for new hires - in Bakersfield City, California, a local councilman pushed the same reforms for all of Kern County. The result is significant savings for municipalities in the region.
The Goal
In an interview with the Reason Foundation, City Councilman Zack Scrivner discussed how upon entering office he learned the county was allowing employees to retire at age 50 and calculating their final pension compensation as 3 percent per year multiplied by the number of years of service.
This system has been deployed throughout California and cities across the country, and has led to several instances of pension spiking when public employees cash in on unused vacation and sick days in the last year of working to manipulate the system into calculating a higher compensation package in retirement. Scrivner discovered many public employees were retiring with more than $100,000 in pension payments, with benefits skyrocketing as well.
As public pension benefits kept rising, Scrivner saw the state’s unfunded liability jump $180 million since the mid-1990s – when there was a $94 million surplus – to reach $93 million in the red. By the time Scrivner got in office, the city was paying $15 million annually toward public employee pensions, which increased to $25 million a year by 2011. Scrivner made it a goal to reform the crumbling pension system.
Measure D
Scrivner reported a few wins in negotiations with some unions, able to bring down the percentage of their last year’s income. However, after years of unsuccessful negotiations with other unions – public safety employees, specifically - Scrivner proposed the city council put Measure D on the ballot in 2010. The measure calls for all new hires:
- Be placed in the 2% at 50 retirement age tier
- Pay the entire portion of their retirement costs, which is 9% of payroll
Immediately after passing Measure D, the police union filed a lawsuit accusing the city council of violating collective bargaining rules. The suit was dismissed.
Initially, Measure D was projected to save the city $1.5 million immediately, with cumulative savings of closer to $7.5 million in 10 years. However, once the measure was implemented, new estimates showed much higher savings, closer to $10.5 million in 10 years and more than $50 million after 20 years. Within 30 years, Measure D could potentially save the city $129 million.
Other Reforms
Kentucky recently passed pension reforms by deploying a hybrid cash balance plan in place of its defined benefit plan. The hybrid cash balance plan includes:
- 4 percent return for new hires
- Base additional benefits on the investment performance of the state’s retirement systems
A study by the Urban Institute found the new system may benefit public employees more in the long-term than the traditional plan, while saving the government money. About 55 percent of public employees with up to 24 years of service will enjoy the same lifetime benefits under the new plan, while those who dedicate more than 25 years of service may experience a reduction in payouts with the hybrid plan.
The Pension Problem
Gov1 has kept a keen eye on pension struggles and reforms nationwide including pension spiking or using insurance premiums to lower liabilities.