Nguyen and Campbell Sound Off On Hybrid Pension Debate

There has been a lot of criticism of the innovative employee pension plan negotiated by the Orange County Board of Supervisors and the labor unions representing County workers and managers. The innovative hybrid defined-benefit and 401(a) plan, first negotiated with Orange County Employees Association (OCEA) currently offers new employees the opportunity to select a lower cost hybrid plan that offers 1.62% @ 65 in defined benefits and a 401(a) plan contribution. Compared with the option of the 2.7% @ 55 offered to the majority of county workers, the plan can cost significantly less, and is designed for younger employees, who may not be interested in a long term of employment in the government sector. Once an IRS rule is changed, the option will be made available to current employees as well.

In an Orange County Register Commentary, Supervisor’s Janet Nguyen and Bill Campbell weigh in on the debate as to the benefit of the plan and how what the county offers in benefits affects its ability to attract qualified staff.

In recruiting new employees with experience and expertise in the public sector, the county’s primary competitors are other public-sector entities that offer a defined-benefit plan rather than a defined-contribution, 401(k)-style plan. Until the state Legislature or California voters (through the initiative process) pass a law mandating 401(k) plans for all new public-sector hires, Orange County cannot effectively compete for and retain qualified individuals.

Given that constraint, the county negotiated with its general employee representatives a new agreement that offers a choice of two retirement benefit plans. The current plan 2.7 percent of salary for each year worked, with eligibility benefits beginning at age 55 provides for a greater retirement benefit, but also requires a significantly higher contribution by the employee, with some employees contributing as much as 18 percent of their paycheck. The new plan, which is the lowest pension available under California law, can be supplemented with an optional 401(k) plan and allows for a lower employee contribution.

Not only does the agreement allow for new hires to choose between the two plans, but it also allows existing employees to opt-in to the new plan on a onetime basis. So why would someone opt for the new plan, the Register asks? The answer is pure dollars and cents. A 30-year-old new employee making $35,000 would save $2,125 per year under the new plan. A 50-year-old employee with 20 years of service and making $55,000 would save $3,338 per year by switching to the new plan.

Supervisor Nelson has been critical of the potential benefits of the plan claiming that no self interested employee would select the hybrid plan. Since the implementation of the new option 8 new employees have opted to take the 1.62% plan. While there have been 68 new hires during this period, many were rehires of prior employees, including employees recently laid off. The total number of brand new workers was 20. These numbers are not statistically significant and cannot be used to draw conclusion about what the long-term benefit of the hybrid 1.62% option will have. This is why such performance studies occur ever three years. You cannot predict experience with any accuracy using small short-term data sets.

The Orange County Employees Retirement System is not broke. The County is not broke. While there are needs for budget cuts the costs of public employee pensions are not the cause. Employee pension costs only make up 2.5% of the California budget. While that is a lot of money, it is not the budget breaker that some would have you believe it is.

Read the complete commentary from Nguyen and Campbell HERE.