ALAMEDA, Calif. — California's independent Little Hoover Commission urged the state's leaders to take government employee pension-reform efforts a big step beyond where they have gone so far, by altering benefit levels for current employees.

So far, most pension reform efforts in the state have created two-tier pension systems with lower benefit levels for new hires.

That's what the state government agreed to with most of its unions in 2010. Some local governments have followed suit.

"State and local governments cannot solve this problem without addressing the mounting pension obligations of current employees," Daniel Hancock, chairman of the Little Hoover Commission, said Thursday in announcing the release of the report, "Public Pensions for Retirement Security."

The report urges the governor and Legislature to establish the legal authority for the state and local governments to freeze pension benefits for current workers. Benefits earned for service before the freeze date would remain vested, but going forward, those workers should accrue benefits under less costly retirement formulas, the report said. Payments to current retirees would not be affected.

The commission's report comes at a key juncture in recently elected Gov. Jerry Brown's efforts to craft an agreement to balance the state budget.

The governor, a Democrat, wants a statewide referendum on extending three temporary tax hikes, and he wants it to take place by the end of June, when those taxes are slated to sunset.

To meet that special election timetable, he needs legislative action by March, which will take two-thirds supermajority votes in each house — and therefore some buy-in from minority Republicans, who have publicly rejected the idea of a vote on tax extensions.

But the GOP also advocates pension reform. Brown, making an extraordinary appearance Thursday in front of the Legislature's joint budget committee, made it perfectly clear he is willing to make a deal trading pension reform for votes to put the tax measures on the ballot, as illustrated in his exchange with Assemblywoman Diane Harkey, an Orange County Republican.

"Let's get some pension reform; let's get some regulatory reform. I want it more than some of these folks want it," Brown said, in a reference to his fellow Democrats and their support from and for public employee unions.

"This is your chance to make them do something they don't want to do," he added. "All you've got to do is do something you don't want to do."

The Little Hoover Commission's report, which was released after Brown's appearance at the budget committee, suggests very strong medicine. The commission is an independent state oversight agency charged with recommending reforms to improve the operations of state government.

Increasing retirement liabilities, the report says, reflect a fundamental shift in the state's public retirement systems away from their original goal of providing a secure retirement income for public workers.

"Instead of retirement security, the public pension became a wealth generator," the report said.

"Payroll growth — in terms of both compensation for public employees and the number of employees — has ballooned pension liabilities," the report said. "The minimum retirement age has dropped to 55 — earlier for public safety employees — as people live longer, creating an upside-down scenario where governments potentially will send retirement checks to an employee for more years than they earned paychecks."

The report proposes some drastic solutions, and challenges the widely held assumption that benefit levels held by current employees are legally immune to rollback.

The commission concludes that assumption isn't necessarily true, and it is not enshrined in the state constitution.

"Many consider this issue settled by the courts, though the courts have provided openings to modify pensions for current public employees," the report said. "The extent of these options remains unclear, making this an area of law that must be clarified."

Going forward, the report recommends establishment of a hybrid retirement system, combining a lower defined pension benefit with a defined-contribution plan modeled on private-sector 401(k) plans. That's the system used for federal employees, who also participate in Social Security.

About half of the public employees in California do not participate in the Social Security system.

"Serious consideration must be given to extending Social Security to non-covered, public-sector workers, toward the goal of building a three-part retirement strategy as has the federal government," the report says.

The commission also recommends the implementation of a top-level cap on pension benefits, and strict formulas that limit employees' current ability to "spike" their pensions by juicing their final-year salaries with overtime or payouts for unused sick and vacation time.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.