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Requiem for a Pension Fund? 

Gov. Arnold Schwarzenegger launches an attack on CalPERS. The giant pension fund's Democratic allies aren't taking it lying down

Wednesday, Apr 6 2005

Page 2 of 5

If Schwarzenegger gets his way, observers say, the nation's largest public pension fund -- whose billions of dollars in investments within California have often been deployed to suit the wishes of powerful and well-connected Democrats -- could be squeezed into oblivion. Not coincidentally, untold billions of dollars for future management fees of 401(k) accounts could flow out of CalPERS and into the coffers of Wall Street firms whose political sensibilities are more in keeping with those of the governor and his conservative backers.

Just as significantly, experts say, CalPERS's role as a leading voice for shareholder rights -- which has long angered Republicans and their corporate allies -- could dissipate entirely over time as the current participants in its traditional pension program, whose proxy votes CalPERS gets to cast in corporate elections, retire and die off. "CalPERS's [corporate] opponents have been waiting for a very long time for a moment like this," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at Cal State Sacramento. "Now they may finally see their chance."

As a political gesture, state Finance Director Tom Campbell's February appearance before a CalPERS committee at the pension fund's headquarters a few blocks from the state Capitol was predictable. Hastily instigated by Campbell himself after word leaked that the pension fund's board was about to formally oppose the governor's reform initiative, which it soon did, his two-hour visit played out like a suspense film whose plot the panel already knew.

Still, Campbell did his best to convey the impression that despite proposing to radically alter the way the 800-pound gorilla of pension funds conducts its business, Schwarzenegger really intends CalPERS no harm. He even gushed about the pension fund. "[CalPERS] rightly identifies its good performance record. It's better than good. It's a very fine performance record," Campbell effused.

As the governor's messenger, Campbell was merely reciting the line that has been Schwarzenegger's mantra since January, when he gave his blessing to a proposed law introduced by Assemblyman Keith Richman (R-Northridge) that would amend the state constitution to allow the pension system's overhaul. This is the line: The state, awash in red ink, can no longer afford to offer what is widely considered to be among the nation's most generous public-employee pension plans.

Schwarzenegger has challenged the Democratic-controlled Legislature to work with him in advancing the Richman legislation (along with the rest of the governor's reform agenda), with little response. Should lawmakers continue to resist, the governor has threatened to call a special election to take the matter directly to voters in a ballot measure, most likely in November, supporters say.

Calling the pension system "another financial train on another track to disaster," Schwarzenegger presents his argument for switching from traditional pensions to 401(k) funds for future workers as an effort to shift more of the burden for state employees' retirement savings from taxpayers to the workers themselves. That, understandably, has not sat well with teachers, firefighters, police officers, and other government workers. Their unions insist that public-sector employees are often paid less than workers in the private sector and that the relatively generous pension benefits play a large role in the state's ability to attract and maintain quality personnel.

Some of those same unions, it should be noted, were major contributors to former Gov. Gray Davis' campaign during the 2003 recall election that swept Schwarzenegger into office. "I don't see anything surprising in the governor's attacking labor unions while trying to do something for his business and corporate friends," says Sherry Bebitch Jeffe, senior scholar at the School of Policy, Planning, and Development at the University of Southern California. "He doesn't figure to lose a constituency there."

There's little denying that the proposal -- which has the backing of an array of business and anti-tax groups, including the California Chamber of Commerce and the Howard Jarvis Taxpayers Association -- hits future state workers directly in the pocketbook. Under the current CalPERS system, for instance, workers and employers (whether state, county, or local governments) each contribute the equivalent of about 11 percent of the workers' pay to their retirement savings, with CalPERS investment returns accounting for the rest. Workers' contributions remain fixed in good times and bad. But depending on what sort of returns are available in the stock market, state and employer contributions may fluctuate wildly.

The reform proposal would cap the amounts that the state and employers contribute -- as little as 6 percent as the maximum for many employees, with higher percentages for public safety and other workers, including schoolteachers, who do not participate in the federal Social Security system. The cost of death and disability benefits that are a standard part of defined benefit plans would become a negotiated item, with workers expected to pick up at least a share of the cost, a prospect that especially rankles police and firefighters. Workers hired after the change became law would no longer be guaranteed fixed retirement amounts for life, as are current participants in the system. Like private-sector participants in 401(k) plans, public-sector workers would assume the risk for their retirement savings returns.

Proponents say the change is needed because the system is unsustainable: The state's contribution to annual retirement costs was $160 million in 2000, but for the current fiscal year the state will pay $2.6 billion to retirees above what CalPERS's investments and worker contributions can provide. Under the contribution caps contemplated by the reform proposal, the state would be off the hook for most of that $2.6 billion, supporters say. "Public employees should not get better pensions than the private sector," says Karen Hanretty, spokeswoman for the California GOP. "Our tax dollars are paying for gold-plated pension benefits that are bankrupting state and local governments."

Democrats and their labor union constituents say that's misleading, insisting that even with the costly benefit enhancements that CalPERS approved for members in the 1990s, 80 percent of the state's increased obligation to the pension fund in recent years is attributable to the stock market's swoon, which whacked CalPERS investment returns. They contend that while the existing contribution formula has resulted in the state having to pony up big time after the stock market crash, under the same formula there were years in the '90s, when the market was churning out record returns, that the state and employers contributed almost nothing. "The $2.6 billion [argument] is an aberration, and the people on the other side know that," says J.J. Jelincic, president of the California State Employees Association, who worked in the CalPERS investment office for 18 years.

About The Author

Ron Russell


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