However, the non-partisan state Legislative Analyst’s Office (LAO) warned that the bad news is that there may well be additional costs with Schwarzenegger’s overhaul plan (See Schwarzenegger Supports CalPERS Overhaul Efforts ) that could offset at least some of those savings.
In a letter to state Attorney General Bill Lockyer, LAO Legislative Analyst Elizabeth Hill and Director of Finance Tom Campbell warned that state officials may well have to sweeten state employee compensation to make up for the lesser pension offering. Schwarzenegger has proposed closing state defined benefit plans to new entrants as of July 1, 2007 and redirecting those workers into defined contribution programs. “Over time,” asserted Hill and Campbell, “these types of increased public employer costs could offset a significant portion of the retirement savings.”
Generally, according to the LAO analysis, the fiscal impact of Schwarzenegger’s plan would produce:
- a “major” cutback in state and local government retirement costs for the post-July 1, 2007 workers. The extent of those savings will depend on how much government employers will kick in to their DC plans – 6% to 12% maximums – which LAO said is lower than they’re now paying in a DB scenario. Under the Schwarzenegger plan, the maximum employer DC contribution would be 9% for public safety workers, 6% for other workers, assuming Social Security participation. The ceiling would be 3% higher for workers outside of Social Security coverage.
- an increase in employer costs in starting up a DC plan including an education program to inform public workers of their new options as well as ongoing costs of managing funds and individual accounts.
- an unknown effect on government employers’ costs connected to closing down DB plans – an impact that would be affected by future policy decisions by retirement boards and existing government employees. The two analysts point out that governments will still be responsible for existing DB members’ benefits for several decades until the last employee or beneficiary dies and that the ultimate fiscal impact will be affected by how quickly governments are required to pay their unfunded liabilities. “To the extent that (retirement) boards required unfunded liabilities to be paid off more quickly, governments would experience increased near-term costs with comparable longer-term savings,” the LAO analysts wrote.
According to the LAO analysts, the Schwarzenegger plan also provides for a six-month period from July 1, 2007 to January 1, 2008 during which current DB plan members could opt out and move the net present value of their DB plan assets to the new DC program.
The LAO analysis of Schwarzenegger’s latest budget plan is at http://www.lao.ca.gov/2005/budget_overview/2005-06_budget_overview.htm .