California Pension Reform: Deadlock

The Governor and the Legislature are locked in a last minute struggle over the California pension reform talks.  Its been made more complicated by an unrelated Supreme Court ruling prohibiting the State from requiring Charter Cities to use prevailing wage on municipal projects.

Ironically, the Court ruling blows a hole in the Governor’s effort to include City employees and to rein in underfunded public employee pension plans. To do so, the Governor would now need a Constitutional Amendment rather than a simple statute. This means getting a 2/3 vote out of the Legislature AND putting the measure on a statewide ballot.

The second issue hanging up the pension deal is what to do with high wage employees. Governor Jerry Brown’s proposed capping of base pensions at the same level subject to Social Security taxes and providing an employer match a 401K style plan for amounts above the cap.

Our sources tell us that the Senate Democratic Leadership was prepared to simply cap pensions. But with no new provision for high wage employees, the Governor’s office and others balked. This is an argument that the IRS might not approve of such a plan. However, the IRS has also not signed off on the Governor’s “hybrid” approach.

One “off the shelf” pre-approved option is to subject income above the social security cutoff to a very low guaranteed rate such as T-bills.