The California legislation passed by the state Assembly that would have given participants a choice between staying with their existing CalPERS or CalSTRS defined benefit plans or moving to new defined contribution plans was on the right track. But it could have proved costly for public employers.
A state Senate committee last week effectively tabled the bill for further study. It is a good move, considering doubts on costs. Assemblyman Howard Kaloogian, sponsor of the bill, vows to keep pushing for passage. He should, but with more analysis and revision.
For participants, a choice would give them portability and even an opportunity to collect some pension benefits, when for CalPERS alone, 70% of those within the system retire without a benefit.
For public employers participating in CalPERS or CalSTRS, choice gives the illusion of lower pension expenses. Choice also could give an advantage in retaining valued employees and make downsizing less painful because departing employees might have portability of pension accruals.
But choice could prove more costly to public employers than if they have to remain with the California Public Employees' Retirement System or the California State Teachers' Retirement System.
Under the legislation, public employers would have to continue making contributions to the CalPERS and CalSTRS plans for employees who want to stay in them. Thus, public employers that permit employees choice would have to finance two types of retirement programs. So cost reduction for public employers could be elusive; in fact, it could prove more expensive, because administrative services, including actuarial work, would be spread out among fewer employees in the defined benefit plan as some employees join the new defined contribution plan.
In addition, those public employers opting for choice would have to immediately pay underfunded pension accruals.
Public employers are the last bastion to the vendors of defined contribution investment, record keeping, plan design and consulting services. To no surprise, vendors are lobbying for the legislation.
In all this, the word "may" is significant. The legislation allows each public employer to decide whether to offer the choice to its employees. They don't have to offer a defined contribution plan; but those that do so still have to remain in the CalPERS or CalSTRS plan for the employees who want to stay in it.
Mr. Kaloogian contends he wants to end the CalPERS and CalSTRS monopoly pensions for those who participant in them. As he looks more at the proposal, he needs to recall the reasons for these megaplans. They give economies of scale in managing pension plans, from administration to investing. Public employers that offer choice face huge costs in, among other areas, evaluating defined contribution plan designs and investment management hiring; and they face huge education costs to help employees decide whether a defined benefit plan or defined contribution plan is best for them. Even having financial resources doesn't guarantee a well-run plan. Participants, and taxpayers, may recall Orange County, whose treasurer created a financial disaster in one of the largest, richest local governments - which by the way has its own public pension plan.
Choice is great, but the Legislature and public employers need to fully face the costs before moving ahead.