California Agency Calls State's Pensions 'Dangerously Underfunded,' Suggests DB-DC Hybrid Solution

(February 28, 2011) — A new report issued by California’s Little Hoover Commission has recommended that California’s public pension plans should switch to a hybrid model with elements of a defined benefit plan and a defined contribution plan.

Hoover’s report explained that California’s pension plans are “dangerously underfunded.” The causes, they outline, are overly generous benefit promises, wishful thinking and an unwillingness to plan prudently. “Unless aggressive reforms are implemented now, the problem will get far worse, forcing counties and cities to severely reduce services and layoff employees to meet pension obligations,” the commission stated.

In the commission’s study of public pensions, the finding showed that the state’s 10 largest pension funds – encompassing 90% of all public employees – are overextended in their promises to current workers and retirees. To combat growing liabilities, the commission recommended that a hybrid model, which combines a lower defined-benefit pension with an employer-matched defined-contribution plan, is a model that must be made available to public agencies. According to the report, California must collapse unsustainable pension formulas and create a lower defined-benefit formula to facilitate this approach. Furthermore, the report suggested that a cap should be put in place on the maximum salary that can be used to determine pension payments, or on the maximum pension that an employee can earn, protecting pensions for lower-wage earners.

“California’s pension system – a conglomeration of 85 defined-benefit pension plans – demands more uniformity and oversight,” according to the report.

In response to the report, the $226.5 billion California Public Employees’ Retirement System (CalPERS) issued a statement saying: “Pensions play an important role in the overall compensation of public employees today and have for nearly 80 years, and any change must honor the promises made to all public servants…CalPERS has earned a 7.9% return over the last 20 years above our assumed rate of return and we have gained more than $70 billion back since the financial crisis. We look forward to engaging with the decision-makers who must rely on all the facts when confronting these important issues and recommendations.”