THE GAME CHANGER:
AN ANALYSIS OF THE BARGAINING STRATEGY IN CALIFORNIA PUBLIC
EMPLOYEE PENSION REFORM NEGOTIATIONS
A Project
Presented to the faculty of the Department of Business Administration
California State University, Sacramento
Submitted in partial satisfaction of
the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION
by
Narisha Bonakdar
FALL
2012
THE GAME CHANGER:
AN ANALYSIS OF THE BARGAINING STRATEGY IN CALIFORNIA PUBLIC
EMPLOYEE PENSION REFORM NEGOTIATIONS
A Project
by
Narisha Bonakdar
Approved by:
__________________________________, Committee Chair
John B. LaRocco, J.D., LL.M
____________________________
Date
ii
Student: Narisha Bonakdar
I certify that this student has met the requirements for format contained in the University
format manual, and that this Project is suitable for shelving in the Library and credit is to be
awarded for the Project.
_____________________________________________
Monica Lam, Ph.D.
Associate Dean for Graduate and External Programs
College of Business Administration
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_____________________
Date
Abstract
of
THE GAME CHANGER:
AN ANALYSIS OF THE BARGAINING STRATEGY IN CALIFORNIA PUBLIC
EMPLOYEE PENSION REFORM NEGOTIATIONS
by
Narisha Bonakdar
The debate over California state employee pensions is as contentious as it is
longstanding. Since the inception of the State Employees Retirement System in 1931 (now
called the California Public Employees Retirement System), a series of Constitutional
amendments, collectively bargained agreements, propositions, and legislative mandates have
shaped the System and the retirement benefits available to state employees. Now, in a social
and political environment that is ostensibly in favor of large reductions in benefits, the unions
must make concessions to avoid being circumvented by policymakers or voters. This paper
presents an analysis of the salient issues related to state employee pension reform to determine
which measures are necessary to ensure that collective bargaining remains the central pillar of
state employee benefit negotiations.
_______________________, Committee Chair
John B. LaRocco, J.D., LL.M
_______________________
Date
iv
DEDICATION
To my beloved daughter, Brooklyn, for her many sacrifices and amazing spirit in allowing me
to pursue my dreams.
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ACKNOWLEDGEMENTS
I would like to thank Professor John B. LaRocco for inspiring my interest in labor negotiations
early in my business studies and for providing exceptional guidance and leadership as I delved
deeper into the subject matter in developing this paper.
I would also like to thank my family and friends for continually supporting me as I pursued
my educational goals. Without you, none of my accomplishments would not have been
possible.
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TABLE OF CONTENTS
Page
Dedication ................................................................................................................................ v
Acknowledgements ................................................................................................ …………. vi
List of Tables........................................................................................................................... ix
Executive Summary ................................................................................................................. x
Chapter
1. BACKGROUND …. .......................................................................................................... 1
Collective Bargaining in the Public Sector ................................................................. 1
California Public Employees Retirement Systems ...................................................... 1
State Employee Retirement Benefits ............................................................................ 3
History of State Employee Retirement Benefits ......................................................... 5
2. UNDERLYING ISSUES WITH STATE EMPLOYEE PENSION REFORM ................ 11
Unfunded Liabilities .................................................................................................. 11
Cost to Government/Taxpayers ................................................................................. 14
Public Sentiment ....................................................................................................... 15
Legal Authority to Alter Public Employee Benefits ................................................. 16
3. CURRENT PUBLIC EMPLOYEE PENSION REFORM PROPOSALS ......................... 22
The Public Pension Reform Act of 2011................................................................... 22
Public Pensions for Retirement Security Proposal .................................................... 23
Governor Brown’s Pension Reform Plan .................................................................. 24
4. LABOR NEGOTIATIONS AND “GAME THEORY” .................................................... 31
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5. ANALYSIS OF REFORM ALTERNATIVES .................................................................. 35
Evaluation Criteria.......................................................................................................... 35
Efficiency .................................................................................................................. 35
Equity ......................................................................................................................... 36
Legality ..................................................................................................................... 36
Political Acceptability ............................................................................................... 37
Analysis of Negotiating Points ....................................................................................... 38
Status Quo .................................................................................................................. 38
Voter Approval of Benefit Increases ......................................................................... 41
Increase Contribution Rates ....................................................................................... 41
Change Retirement Plan Type................................................................................... 44
Impose Pension Benefit Cap ..................................................................................... 51
Increase Retirement Age ........................................................................................... 54
6. RECOMMENDATIONS ................................................................................................... 59
7. CONCLUSION .................................................................................................................. 63
Appendix Public Opinion Polls 2005 - 2010.......................................................................... 65
References .............................................................................................................................. 66
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LIST OF TABLES
Tables
Page
1. State Employee Retirement State Formulas…………………………………………………9
2. Provisions of Pension Reform Proposals...……………………………..…………………..25
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EXECUTIVE SUMMARY
The debate over California State employee pensions is as contentious as it is
longstanding. Since the inception of the State Employees Retirement System in 1931 (now
called the California Public Employees Retirement System), a series of Constitutional
amendments, collectively bargained agreements, propositions, and legislative mandates have
shaped the System and the retirement benefits available to state employees. Now, after
millions in pension investment losses, a faltering California economy, and negative public
sentiment, state employees’ benefits are again being scrutinized.
Despite the collectively bargained pension benefit reductions and increases in
employee retirement contributions in 2010, numerous voter initiatives and legislative
proposals threaten to circumvent the collective bargaining process to further reduce state
employees’ retirement benefits. While benefits would generally fall under the auspices of
collectively bargained memorandums of understanding, the legislature, the Governor, and
voters all have the power to influence or mandate pension reform through the legislative
process, the power of executive order, and the initiative process, respectively.
More pension reform is imminent. The critical question is: how much? In a social
and political environment that is ostensibly in favor of large reductions in pension benefits, the
unions must make concessions to avoid being circumvented by policymakers or voters. This
paper analyzes the salient issues related to state employee pension reform and various
negotiating strategies to determine which reform measures the Unions should support to
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resolve the pension reform crisis through the collective bargaining process considering those
values fundamental to state employee Unions and the employees they represent.
While taking a neutral stance, this analysis is based on the assumption that California
statute clearly outlines that employee retirement benefits, along with other specified
employee-employer relations issues, are intended to be negotiated through the collective
bargaining process and, given this fact, that all stakeholders should work to ensure that
collective bargaining remains the central process for determining benefits and that other
means are used only as required by statute and the Constitution. It also assumes that the
current pension system is unsustainable and will lead to persistent or recurring unfunded
liabilities and unnecessary costs to the state if left unchanged.
Ultimately, analysis of the Unions’ position and the current climate suggest that the
Unions should support the elimination of retroactive benefit increases, the elimination of air
time purchases, the exclusion of all forms of compensation other than base pay from final
compensation calculations, the limitation post-retirement employment to prevent doubledipping, and the eligibility of employees convicted of work-related felonies to receive pension
benefits. Additionally, they should support the development of a hybrid system for all new
state employees work to maintain a defined benefit retirement plan as the primary retirement
savings mechanism for state employees.
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