Tens of thousands of California state workers are taking advantage of a perk that pays them pension benefits for years they don't actually work, and reformers looking for places to cut have put it at the top of the list.
State law allows the employees to increase their retirement benefits by tacking up to five fictitious years — known as "air time" — onto their public service. Although they pay a fee for the privilege and officials say it is high enough to cover the eventual payouts, critics of air time note that the boost can cost taxpayers millions when the state pension system's investment income falls short, as it has in recent years.
Air time offers a return nearly twice as generous as a similar benefit — known as an annuity — that can be purchased on the private market, said Dan Pellissier, who advised former Gov. Arnold Schwarzenegger on pensions. Pellissier, who as a state employee purchased five years' credit, is now pushing to eliminate air time as president of California Pension Reform.
Private financial advisors agree.
"It's a phenomenal deal for retirees, but it's an absolute fleecing of the taxpayers," said Scott Hanson, a principal in Sacramento-based investment firm Hanson McClain.
Hanson said he gets calls about air time frequently and advises nearly all state employees to sign up. It offers a guaranteed 7% to 8% return, as opposed to a 3% return available for similar investments in the private sector, he said.
Gov. Jerry Brown zeroed in on the benefit after mentioning pension reform in his State of the State speech last month. Pressed for ideas on how to fix the chronically underfunded public pension system, he told reporters: "I certainly think getting rid of the ability to buy air time would be a good place to start."
Eliminating air time for thousands of employees —- at least 47,000 had signed up by September — would not solve the financial problems facing the California Public Employees' Retirement System, which covers 1.6 million state workers and retirees. But doing away with an advantage for state workers that's not offered to most other citizens could help Brown show he is working to tighten the state's belt.
The fees collected from state workers buying air time are poured into the state pension fund, which suffered devastating losses during the recession. In 2003, the taxpayers' contribution to that fund was about 7% of workers' salaries. This year it will be 23% — or $4 billion — to help absorb the losses, according to Brown's proposed budget.
State officials said they could not determine how much, if any, of that sum would go to air-time payouts.
Pension fund spokesman Brad Pacheco said all state employees are encouraged to carefully consider whether they might get a better return by placing their money in the stock market or in other investments. He said he weighed those options for himself — then bought the maximum five years of air time.
"I didn't feel comfortable that I could put [the money] in the right place. I'd just rather have the guaranteed payment," he said.
The inspiration for air time came from a group of Senate and Assembly staffers determined to recoup the pension credit they lost while running their bosses' election campaigns — when their salaries must be paid with private money, not by taxpayers.
Lawmakers helped them out in 2002 by passing a bill granting them the right to buy air time, but then-Gov. Gray Davis vetoed it. The next year, a measure was passed that gave the same rights to all state employees rather than just lawmakers' aides.
Davis, who at the time was collecting millions of dollars in contributions from public employee unions to fight a recall, signed it. The former governor did not respond to multiple requests for comment.
Listed alone in opposition to the bill was Davis' own Department of Finance, led by Steve Peace. Peace said in a recent interview that he didn't remember why his department opposed the bill, but that his fiscal advice was routinely overridden by the governor's political advisors.
Pension payouts are calculated by multiplying a small percentage — between 1.2% and 3% — of an employee's final salary by the number of years he or she worked. A typical manager in a state agency retiring at 55 after 25 years with a final salary of $100,000 would receive a pension of $50,000 a year.
If that employee bought five years of air time at the current price of $124,000 — the cost varies by age, salary and length of service and can be purchased on an installment plan, using payroll deductions — he or she would get an extra $9,840 per year for life, according to the calculator on the pension system website.
In that case, the employee would break even at age 67. State actuaries anticipate that the average male retiree will live until age 83 and a woman until almost 86.
A 30-year-old employee with a $50,000 salary would pay about half as much for air time and get the same $9,840 extra if his or her salary climbed to $100,000 by retirement. The employee would break even at age 61.
Air time used to cost employees even less. In September, officials raised the price 17% to 38%, depending on job category, after discovering that pension forecasters had made faulty estimates about the age at which people would retire, their future salary increases and how long they would live.
"It's still a tremendous benefit," Hanson said.