State Pension Battle Begins

Sacramento Bee, February 11, 2005

Governor Arnold Schwarzenegger choosed the city hobbled by soaring public pension costs Thursday to embark on his effort to transform government retirement benefits throughout California.

The Republican governor warned that, unless California abandons traditional pensions that guarantee a set amount in retirement, state and local governments will find themselves in the dilemma faced by San Diego, where a $1.4 billion pension debt eats away at government services.

"We cannot continue with that madness," he said. But the state's retirement system took issue with Schwarzenegger's contention that pension costs are "out of control."

"The rates are not at the highest they've been in all time," said Darin Hall, a spokesman for the California Public Employees' Retirement System. As a percentage of payroll, the state's costs were 19 percent in the 1979-80 fiscal year, compared with 17 percent this year.

In addition, Hall said that the figures used by the governor to show a startling increase in the state's pension costs are misleading because he uses a period of unusually low retirement contribution rates as a starting point.

Most of the funding for pensions comes from CalPERS investments of contributions from government employers and workers - but when the fund falls short, the retirement system jacks up the rate that public agencies must pay to keep the system whole.

"It's like anything - the rates go up and go down," Hall said. "It's set up to fluctuate with investment returns."

Schwarzenegger has endorsed a proposed constitutional amendment by Assemblyman Keith Richman, R-Northridge, and the Howard Jarvis Taxpayers Association that would scrap traditional "defined-benefit" pensions in favor of 401(k)-style investment accounts common in the private sector. The change would apply to workers hired by the state, local governments and schools after July 1, 2007.

Schwarzenegger and Richman both say they would prefer to have the Legislature put the measure on the ballot, but are prepared to pursue an initiative if lawmakers fail to act.

The governor was in full campaign mode Thursday, using a backdrop of two armored cars and fake bags of money to illustrate the demands of the public pension system on the state's treasury. Later, he attended a luncheon at Petco Park to seek campaign funds for his ballot measures.

"The door's kicked wide open and the money's flying out and bleeding our state dry," he said. "These tax dollars should be building highways and should be putting cops on the street and nurses in hospitals."

Schwarzenegger blamed the crisis on the largesse of the state, which ramped up benefits that couldn't be sustained.

"California passed out some sweetheart pension deals in the past," he said, "promising state workers more than they should and more than they could." The result, he said, is a pension price tag that shot up in five years from $160 million to $2.6 billion.

But CalPERS now says that only 20 percent of the increase in state costs can be blamed on the sweetening of benefits. The rest of the shortfall resulted from the downturn in financial markets, said Hall, the CalPERS spokesman.

Under the 401(k)-style plan, workers and the government would both contribute to investment accounts that employees could take with them from job to job. The change would make the public costs predictable, although substantial savings would not be banked for several years.

Schwarzenegger said the new system will be fair to workers.

"Will it be generous? Yes," Schwarzenegger said. "Will it be gold-plated? No."

But J.J. Jelincic, president of the California State Employees Association, said the current system is far from extravagant.

"At $20,000 a year for 20 years of service, my guess is that that gold plating must be awful thin," he said.

When the retirement system was awash in investment returns in the late 1990s, the Legislature and then-Gov. Gray Davis improved the retirement formulas for state workers, which are based on a percentage of highest salary multiplied by years of service.

One of the primary criticisms of the plan Schwarzenegger is backing is that it would make it harder for state and local governments to recruit workers - requiring the state to offer higher salaries, at least for some jobs.

But Schwarzenegger dismissed that possibility Thursday. "I think we will have enough people that are interested in the same jobs," he said.

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Last modified: February 11, 2005

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