Friday, June 26, 2015

Would you like PEPRA with that?

That is a Big Deal
Yesterday, we posted UC prez Napolitano sunny explanation of her Committee of Two deal on the UC pension. A somewhat more nuanced  exposition appears in the Sacramento Bee.* We’ll come back to the Bee article below but first it’s important to understand the PEPRA** cap and its effect on new hires if the Committee of Two deal is put into operation.

The cap is $117,020. But that cap isn’t just a limit on the top pension that can be paid under the PEPRA methodology. It is also the top amount of pay that can be used in the pension calculation. CalPERS is now under PEPRA and here is CalPERS' explanation:


Pensionable Compensation Cap: Caps the annual salary that can be used to calculate final compensation for all new members.***


Many faculty who are paid more than the cap amount under the current pension would not receive a pension more than $117,020 in any case. Let's take a simple example. If you earned double the cap as your highest pay under the current plan, but had worked 20 or fewer years at UC and had a 2.5 age factor, your basic pension would be 50% of your highest pay. (20 x 2.5 = 50) So with 20 years or fewer, a simple cap of $117,020 on earnings wouldn’t affect your pension using the current formula

But under PEPRA, the limit is not a simple cap on the payout. The cap is on the earnings used for the formula. So only half your salary, if you earned twice the PEPRA cap, would be used in the calculation. Your pension with 20 years of service and earnings twice the PEPRA cap would be one fourth your earnings instead of one half. Again, the key point is that, as the CalPERS explanation says, the cap is on formula earnings, not on pension payout. Lots of faculty would have pay above the PEPRA cap and would be affected by the cut; the impact would not be limited just to eventual retirees with super-long service to UC. Any new hire earning more than the PEPRA cap would be affected, even if he/she would not have received more than $117,020 as a pension under the current formula. [Did the UC prez fully understand the cap and what it entailed?]

Cutting a pension benefit in half, as in our example above, is a Big Deal, even if it's just for new hires (who over time will become a larger and large share of the system). Creating some kind of alternative system that compensates the new hires for the cut is not a simple matter (and will eat up the “saving” caused by the cap). Napolitano promised in her sunny explanation that everyone would be consulted in the design of the new program. But will everyone want to go along? From that Bee article:

…AFSCME Local 3299, which represents custodians, cooks, bus drivers and other UC workers, has long pushed for a more modest pension cap. Spokesman Todd Stenhouse criticized the potential alternatives for higher-paid employees, which he said would undermine intended savings that could be used elsewhere at the university. “If you’re simply going to just take the money out of your right pocket and put it into the same place, does it really solve the problem?” he said…

Trouble ahead.


**PEPRA = Public Employees’ Pension Reform Act of 2013

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