Posted on 02/27/2005 9:35:15 AM PST by NormsRevenge
SACRAMENTO -- Gov. Arnold Schwarzenegger's proposal to overhaul the pension funds that 2.1 million California state employees have long depended on -- by converting the funds into plans resembling 401(k)s -- has teachers, firefighters and other workers suddenly worried about their retirement.
Under the proposal, which is pitting the governor against government employee unions, Schwarzenegger wants to replace the nation's two largest public pension systems with private retirement plans similar to the 401(k)s popular with businesses.
The proposal is designed in part to make up for the shortfall the pension funds have suffered in a struggling stock market. Because of subpar returns on their investments, as well as enhanced retirement benefits approved during good times, the state will be required to pay $2.6 billion this year into its largest pension fund, the California Public Employees Retirement System, and another $1 billion in the teacher retirement system.
Five years ago, the state's contribution was $160 million.
Schwarzenegger, who fumes that the pension system is "another government program out of control," has begun a campaign for his proposal that could attract up to $100 million in spending by business and unions and come before the voters in a special election this fall. His plan would steer all new government workers to individual investment accounts after 2007.
Unions, pension fund managers and their allies nationwide are fighting the idea, calling it a power grab designed to stifle the growing influence of the nation's public pension funds, which collectively manage about $2 trillion in assets. They warn of grim scenarios of ruined pensions and impoverished future retirees cast cruelly to the fates of the financial markets.
While a poll conducted in early January showed more than 60 percent of voters supported Schwarzenegger's idea, that was before both sides started their campaigns. And opponents, including the state's largest teachers union, say they're not backing down.
"The greatest insult I feel about it is, he's trying to balance the budget on the backs of California's working class," said 12-year San Francisco firefighter Tom O'Connor. "I don't think it's suddenly fair to blame the employees for having a decent pension."
Schwarzenegger is prepared for battle.
"There will be the unions and the special interests fighting us," he told a Republican party gathering Feb. 11. "Now we are going to the source, right there where all the evil is and we are going to fix this problem once and for all."
It's not yet known how much resemblance the plan will bear to President George W. Bush's proposal to privatize Social Security, although both plans envision separate accounts for future retirees.
Many other states are also struggling with gaps in their pension funds due to the stock market's slump and higher payouts to current retirees.
If Schwarzenegger's plan becomes reality, California will join at least three states -- West Virginia, Michigan and Nebraska -- as well as the District of Columbia, that have made individual investment accounts mandatory for many of their new public sector hires. But Nebraska dumped its private system in 2003 after a study showed that employees invested too conservatively and typically received returns nearly 5 percent less than the state's professional investment managers.
Other states have voluntary private account plans, including Colorado, Florida, Montana, North Dakota, Ohio and South Carolina. Still others have developed hybrids, such as Oregon, which approved a plan in 2003 that funnels the state's contributions into a traditional pension system and employee contributions to their own individual investment account.
A key Schwarzenegger target is the state's automatic contribution of an amount equal to 2 percent of every teacher's salary to the California State Teachers Retirement System, which now has $126 billion in assets. He also wants to stop paying a sliding-scale percentage of each state employee's salary that changes based on the funds' relative success in the markets.
This year's $2.6 billion payment for CalPERS is based on the state paying 17 percent of each employee's salary into the fund. That's risen from 4 percent in 2001 to 7 percent in 2002 to 14 percent last year. The higher percentages reflect the nearly $20 billion in losses suffered by CalPERS in 2001 and 2002 that ate away a big chunk of the $35 billion in gains in 1999 and 2000.
So far, CalPERS, which manages $183 billion in assets, has about 85 percent of what actuaries estimate it needs to pay its long-term obligations. That's a deficit of $27 billion.
CalSTRS reported investment losses of 6 percent in 2002 after 9 percent losses in 2001. Its actuarial shortfall is $23 billion, meaning it only has 82 percent of its long-term needs.
Although the funds' payouts to retirees have risen from $8.3 billion in 1999 to $13 billion in 2004, Schwarzenegger aides say the state's yearly contribution can't be expected to rise at such a dramatic clip. Instead, they want to unload the state's fixed costs onto school districts and employees who, like workers in private businesses, would carry the risk of market volatility.
That would allow the state to see significant savings in about 20 years, state officials said.
"The key is not to have the state taxpayers at risk of market decline," said Tom Campbell, Schwarzenegger's finance director and a Republican former member of Congress.
California's public employees can begin retiring at 50, with as little as five years of service. Retirees receive pensions averaging $1,669 a month, compared to $1,500 for similar state worker retirees nationally. Teachers, who don't pay into or receive benefits from the Social Security trust fund, average $3,606 a month in retirement income. They can retire at 50 after 30 years of service. Public employees contribute 5 percent of their salary to the retirement funds, while teachers contribute 8 percent. Their school district also pays 8.25 percent.
In the private sector, where workers can't tap Social Security before age 62, employees typically have less generous retirement benefits, according to the Washington, D.C.-based Employee Benefits Research Institute. But many of those workers also contribute nothing toward their employer's pension plan.
To lower their costs, businesses increasingly are scrapping traditional pension plans and turning to so-called defined contribution systems in which workers invest in their retirement accounts and receive matching money from their employers. Such plans, governed by section 401(k) of the federal tax code, have gone from covering 7 percent of the private work force in 1977 to 23 percent in 1996 and 40 percent in 2003, according to a National Conference of State Legislatures report.
Several members of the independent boards overseeing both California pension funds contend the sweeping change being sought by the governor is unwise.
"I'm afraid what I see in the future is perhaps some, perhaps many, retirees regretting their position of having lived for so long" because of poor returns, said Priya Mathur, a CalPERS board member.
At CalSTRS, four of the governor's own appointees voted against his plan, which led Schwarzenegger to retaliate by firing them, a move his critics dubbed the "Thursday afternoon massacre."
At CalPERS and CalSTRS, an army of actuaries and accountants also estimate that Schwarzenegger's proposed switch will add possibly billions of dollars in long-range costs. A steadily declining source of new employee contributions, they say, will force them to move their money into more liquid and lower-yielding investments to pay for those already in the retirement system.
Campbell said Schwarzenegger is willing to consider a system in which CalPERS and CalSTRS manage the individual accounts, keeping intact their giant portfolios and national influence in corporate governance reform. In essence, the two funds would turn into something like a giant mutual fund company, like Fidelity or Vanguard.
Nonetheless, many employees don't see the need for change.
"I just think back to some of my relatives who had 401(k)s in great shape and were thinking about retirement when the stock market went downhill," said Larry Carlin of Yuba City, who teaches physical education to seventh and eighth graders. "They had to continue working rather than retire."
I wouldn't want any change either if I could just hit up the taxpayers everytime my investments went bad.
$160 million to $2.6 billion in State "contributions" in just five years? California is doomed.
Go Arnie. Show Republicans what conservativism is.
must do this here in NY
Don't be fooled by the clever (dishonest) selection of statistics. They would have you believe the growth is due to out of control benefits. That was not the cause. Remember, the $160 million was from a time when the pension fund earned enough to pay for itself (a booming stock market). 2000 was an anomaly. (See chart below).
In its assessment of the reform proposal, LAO has also reported that there MAY be 1/2 to a billion dollars in savings AFTER several DECADES, but that is offset by the fact that Defined contribution plans COST MORE to administer. I posted that analysis here
Legislative Analysts Office, Analysis of the 2004-05 Budget Bill, February 2004:
|
Figure 2 |
||||||
|
Fiscal Year |
Misc. |
Misc. |
Industrial |
Safety |
Peace Officer/ |
Highway |
|
1991-92 |
11.8% |
4.0% |
13.4% |
17.4% |
17.4% |
21.7% |
|
1992-93 |
10.3 |
3.4 |
12.0 |
15.7 |
15.6 |
17.1 |
|
1993-94 |
9.9 |
5.0 |
11.8 |
15.5 |
15.2 |
16.9 |
|
1994-95 |
9.9 |
5.9 |
10.6 |
13.9 |
12.8 |
15.6 |
|
1995-96 |
12.4 |
8.3 |
9.0 |
14.2 |
14.4 |
14.8 |
|
1996-97 |
13.1 |
9.3 |
9.3 |
14.7 |
15.4 |
15.9 |
|
1997-98 |
12.7 |
9.8 |
9.0 |
13.8 |
15.3 |
15.5 |
|
1998-99 |
8.5 |
6.4 |
4.6 |
9.4 |
9.6 |
13.5 |
|
1999-00 |
1.5 |
- |
- |
7.5 |
- |
13.3 |
|
2000-01 |
- |
- |
- |
6.8 |
2.7 |
13.7 |
|
2001-02 |
4.2 |
- |
0.4 |
12.9 |
9.6 |
16.9 |
|
2002-03 |
7.4 |
2.8 |
2.9 |
17.1 |
13.9 |
23.1 |
|
2003-04 |
14.8 |
10.3 |
11.1 |
21.9 |
20.3 |
32.7 |
|
2004-05a |
16.5 |
11.9 |
13.1 |
23.4 |
23.2 |
35.4 |
|
|
||||||
|
a Public Employees' Retirement System estimates. |
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