In ‘major policy change,’ these state workers will get state-funded 401(k)s, plus pensions

California correctional officers are on track to win a deal that “fundamentally enhances” their retirement benefits through a “major policy change,” according to an initial analysis of the agreement produced by the Legislative Analyst’s Office.

One of the biggest changes presented in the tentative agreement between the California Correctional Peace Officers Association and CalHR is a guaranteed employer contribution to a 401(k) plan known as Savings Plus.

The state would make a one-time contribution of $475 to the account in November 2024. Starting with the January 2025 pay period, the state will make monthly contributions worth 1% of the employee’s salary. This would be on top of the employer-funded CalPERS pensions that state civil service employees receive, and all permanent full-time employees would be eligible.

By granting members access to both a state-funded pension and a 401(k) plan, the CCPOA agreement “fundamentally changes the state’s retirement benefit,” according to the LAO’s analysis.

“Such a change warrants serious and extensive deliberation,” the analysis read.

The CalPERS pension represents a “defined benefit” plan, which provides a fixed and predetermined amount of money for employees upon retirement. The employer bears the responsibility for investing and funding these traditional pension plans. Retirees often value the sense of security that comes with a guaranteed income each month.

In contrast, a 401(k) is the most common form of a “defined contribution” plan, which puts the investment burden largely on the employee. Employees fund their own accounts with pre-tax dollars, and the employer typically matches an employee’s contribution up to a certain amount. In the 1990s, the defined contribution plan surpassed traditional pensions as the dominant form of retirement plan.

As part of those deliberations, the LAO report prompts the Legislature to consider what problem the proposal is trying to address, in addition to whether there should be a vesting requirement on the 401(k) plans. The analysis also poses the question of whether the state should decrease pension benefits for state workers who also receive employer-funded 401(k)s.

Former state finance director Michael Genest said he wouldn’t be surprised if other unions, particularly those representing public safety officers, asked for similar retirement perks.

“If one guy can get it, why can’t the other guy get it?” Genest said. “That’s the way this stuff works.”

The proposed agreement doesn’t include any reduction of pension contributions. Genest suggested the state could’ve used the introduction of 401(k)s to lower the financial burden placed on it by an underfunded pension fund. In July, CalPERS reported that the fund was approximately 72% funded, meaning it could pay only 72% of the benefits it owes if it had to pay them out today.

“It’s a missed opportunity,” Genest said.

If the state were to change its mind and choose to decrease its CalPERS contribution, it would face significant hurdles due to the so-called California Rule — the longstanding legal precedent that bars public agencies from cutting retirement benefits without offering workers additional compensation. The state would have to give CCPOA another perk, such as increasing the 401(k) benefit further, if it wanted to decrease the pension liability, Genest said.

CalHR pay study for guards relies on ‘flawed’ methodology

The LAO’s initial analysis also criticized the methodology that CalHR used to conduct a 2022 study of correctional officer compensation. (The last compensation study that used appropriate methodology was conducted 10 years ago.)

The study concluded that wages for state prison guards lag 10% behind six large county sheriff’s departments — Los Angeles, Orange, Santa Clara, San Bernardino and San Diego counties — that employ correctional officers. When looking at total compensation, state correctional officers earned about 23% less than their counterparts in those agencies, the study found.

Chief among the study’s flaws was the omission of overtime from the salary calculations (LAO says OT accounted for roughly 24% of regular pay in 2022). Additionally, the employee salaries used for comparison were disproportionately high due to the high cost of living in those six counties. The counties do not correspond to where the majority of California correctional officers live, the LAO said, noting that zero CCPOA members live in two of the counties.

“We recommend the Legislature not use this study to evaluate whether or not the state’s compensation for correctional officers is appropriate,” read the LAO report.

On Wednesday afternoon, the Assembly and Senate budget committees considered and passed the tentative agreements for bargaining units represented by CCPOA, SEIU Local 1000 and the International Union of Operating Engineers.

The bills will then need the approval of the full Legislature before Gov. Gavin Newsom could sign them. Union members will also need to ratify the agreements before they can take effect.

This story was originally published August 30, 2023 at 12:30 PM with the headline "In ‘major policy change,’ these state workers will get state-funded 401(k)s, plus pensions."