Posted on 06/10/2005 8:17:18 PM PDT by calcowgirl
SACRAMENTO – Gov. Arnold Schwarzenegger may have dropped his original plan to overhaul state and local government pension systems, but he continues to warn of a potential San Diego-style meltdown of the state pension funds.
The governor said this week that if he can't push a pension overhaul through the Legislature, he will place an initiative on the ballot next June.
"We will continue with that, because we have to have pension reform," Schwarzenegger said Monday on a Sacramento radio talk show. "It has a potential of bankrupting the state, as you can see what happens in San Diego – $1.6 billion or something like this, unfunded pension."
The governor said the annual state pension payment of $160 million five years ago soared to $2.6 billion this year, and he contends that it would grow exponentially if the stock market plunges.
The growing strain on a state budget with a chronic shortfall is at the heart of Schwarzenegger's argument for a sweeping pension overhaul.
But the governor has a tough sell. He was forced to abandon a measure targeted for this fall amid disputed claims that it would end death and disability benefits for police officers and firefighters. That measure would have affected all public pension systems in California.
Key players needed to negotiate an agreement, namely Democratic legislative leaders and state employee unions, say pension costs are not out of control but simply peaking in a cycle driven by the ups and downs of the huge pension stock-market portfolios.
When pension fund investments soared during the high-tech boom five years ago, they say, less money was needed from the state to cover retirement benefits. But when the market dropped, the annual state contribution went up.
"The state's contribution as a percentage of the general fund is about the same as it was a decade ago," said J.J. Jelincic, president of the 96,000-member California State Employees Association.
The current pension contribution of $2.6 billion is a little more than 3 percent of the $82.3 billion general fund. A decade ago, the contribution was a little less than 2 percent, at $802 million from a $43 billion general fund.
Senate President Pro Tempore Don Perata, D-Oakland, said there's no need for a "radical" pension overhaul. Changes proposed by Senate and Assembly Democrats are limited to curbing some pension abuses and averaging state payments to avoid wild swings.
"Obviously, we are grateful that this issue has been removed from contention, because we were quite flabbergasted why it became an issue," Perata said when the governor dropped his plan in April.
Part of the increase in the state pension payment is the result of a major increase in benefits signed in 1999 by former Gov. Gray Davis, who was the first Democratic governor in 16 years.
But the nonpartisan legislative analyst estimates that the benefit increases enacted under Davis account for $600 million of the current $2.6 billion annual payment, which leaves the stock market's decline as the main reason for the state's increased payment.
As Schwarzenegger's aides try to write a new pension plan, they are finding willing negotiators in local government.
Associations representing cities, counties and sheriffs have all circulated papers suggesting a rollback of generous pension benefits, which are squeezing other programs.
A union-supported bill pushed through the Legislature in 2001 raised the cap on local government pensions, allowing their pension boards to grant a higher rate of benefits than those for state workers and teachers.
Local governments issued $2.4 billion in pension bonds last year, up from $1.3 billion the year before, according to the state treasurer's office. But apart from the city of San Diego, few if any local pension systems are in immediate trouble. A large part of San Diego's problem stems from the city's intentional underfunding of the system.
"I don't know anybody that is on the brink of financial ruin or bankruptcy," said Dwight Stenbakken, a lobbyist for the League of California Cities who tracks pension issues.
A difficulty facing Schwarzenegger is that the local government groups don't like his proposal to switch from a defined-benefit system to a defined-contribution program, similar to a 401(k)-style plan.
Instead of guaranteeing a fixed monthly payment for employees when they retire, the state would make contributions into an investment account that produces a lump sum that workers would control.
For the employer, a switch to a 401(k) plan avoids the risk of underfunding future pension obligations because there are none. Only fixed annual payments to the accounts are owed.
There would be no worry about big increases in annual payments when the stock market falls, and less temptation to grant big increases in benefits – in this case, contributions – when a rising market reduces the annual payments.
There also would be no way for a pension system to develop a disastrous unfunded liability like the one facing San Diego, which is estimated to be at least $1.4 billion.
But switching to a 401(k)-style plan provides no relief from current pension obligations and may increase costs in the startup years. New employees could be put into a new plan, but court rulings guarantee existing pension benefits for current workers.
If there is a switch to a 401(k), the two state pension systems still would depend heavily on the stock market for years as the pensions with guaranteed monthly payments are slowly phased out.
The California Public Employees' Retirement System had an investment portfolio worth $182 billion this year, and the State Teachers' Retirement System had a portfolio worth $125 billion.
Public-employee unions, pointing to poor investment returns and other problems in states that have made the switch, are generally opposed to Schwarzenegger's proposal for a 401(k)-style plan.
"The biggest problem is that it takes away a secure retirement plan from workers to move to a plan that basically puts everyone's retirement at risk and makes Wall Street a lot of money," said Jelincic, of the state employees association.
The governor's finance director, Tom Campbell, contends that insurance-like financial instruments could be used to ensure that a 401(k)-style plan, while protecting taxpayers, wouldn't shift the risk to government employees.
"The financial markets offer a variety of mechanisms to take this risk onto the shoulders of companies that make their business handling such risk," Campbell said in an article he wrote for a Sacramento newspaper.
State Treasurer Phil Angelides, a Democratic candidate for governor, has warned that the governor's plan would undermine the use of the public pension fund's stock holdings to push for change in corporate boardrooms.
The pension funds have pushed to curb executive pay and improve management. They also have pursued social goals by selling their stock in tobacco companies and trying to oust a Safeway executive during a grocery strike.
Campbell said that under a 401(k)-style plan, the two big pension funds could manage the employee investments, preserving the stock clout of the funds while giving the employees expert management at low cost.
The fund has 1.4 million members split roughly in thirds among state workers, nonteaching school district employees and local government employees.
Among the services provided for the 36 counties and 445 cities that belong to CalPERS is an annual evaluation of their pension funds, which can detect underfunding early and raise contribution rates if needed.
The stand-alone San Diego city and county pension funds don't belong to CalPERS. In recent decades, some large local pension funds have joined the system, including those in Oakland and Sacramento.
Over a trillion dollars in debt is not bankrupt already?
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
California's pension system wouldn't be in so much trouble if the pension managers wouldn't have been involved in the Enron investment kickback that caused brownouts, and billions of dollars in losses. Before Enron's involvement in California energy, the pension was doing pretty well. But of course the government was being run by dems back then right?
Huh? Modest reform? His proposal was a radical solution, throwing the baby out with the bath water. The problems can be solved without throwing out a system that has worked for over 50 years. His proposal did nothing to address the benefit problem and even the Legislative Analysts Office said this would save no money for decades.
His proposal for 401Ks handed control over to the Wall Street types, the same guys responsible for the losses that caused the need for most of the contribution increases. The 401K system would allow them to operate with much less accountability than today.
What are you talking about? Certainly not California pensions.
No the state in general. Sorry.
Why would the liberals care if the plans faulted?
Well, California has a ton of debt (bondage), but it's still measured in billions, not trillions.
Sorry, latest is over $25 billion. You're right, still quite a ways to go to a trillion.
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