RPT-Calpers official sees 'year of pension reform'

(Repeating for additional subscribers)

* Schwarzenegger has made reform condition of budget deal

* Workers favor changes over move to defined contributions

* Reform precedents set by local, other state governments

By Jim Christie

SAN RAFAEL, Calif., July 19 (Reuters) - With public pension politics heating up, a senior official at the biggest U.S. public pension fund said on Monday he expects major changes this year in how public retirement plans in the most populous U.S. state are funded.

Stephen Kessler of the California Public Employees' Retirement System, best known as Calpers, said at a retreat for the fund's top officials that changes could be approved as part of a state budget agreement between Republican Governor Arnold Schwarzenegger and California's Democrat-led legislature.

Schwarzenegger has said he will not sign a budget for the fiscal year that began this month unless it includes provisions for overhauling the state's public pensions and for reducing its costs to the state government. He has described pension financing as one of the state government's greatest financial challenges going forward.

"This is going to be the year of pension reform," Kessler, Calpers' benefits expert, said during a presentation at the retreat in San Rafael, California.

Speaking to Reuters at the gathering, Kessler said he believes Schwarzenegger is deadly serious about holding firm to his demand because cutting the cost of pensions for the state government would bolster his legacy as his second term draws to close. He cannot run for reelection because of term limits.

IN NEED OF VICTORY

Schwarzenegger entered office promising to bring order to California's fiscal woes only to find that easier said than done. Lawmakers have thrown up roadblocks to his efforts, contributing to lengthy and bitter budget battles, and California's credit rating now hovers a few notches above "junk" status.

Those struggles have grown more intense in recent years amid plunging revenue because of the recession, housing crash, financial market turmoil and high unemployment. Another budget dispute is brewing, with Schwarzenegger and lawmakers facing a $19 billion shortfall.

Schwarzenegger's "green" legacy is also threatened by a ballot measure to block the 2006 law he championed to strengthen regulation on pollution linked to climate change.

Cutting the costs of California's public pensions would provide Schwarzenegger with a substantial policy victory, the main reason Kessler expects he will to hold firm to his demand for a pension overhaul in a budget deal.

"Things are coming to a head," Kessler said. "Pension reform is a big legacy issue for this administration."

Kessler noted Schwarzenegger has called for public employees to increase by an additional 5 percent their personal contributions to their retirement plans.

Public employees allied with Democratic lawmakers do not like the idea but it may be the easiest reform for the legislature to back because unionized public employees are adamantly opposed to introducing defined-contribution pensions similar to private-sector 401(k) plans.

Like Kessler, Calpers President Rob Feckner said he expects the landscape of public pensions in California to change: "We're already seeing things happen."

Local governments and agencies across California are clearing a path for Calpers by raising retirement ages for employees, trimming benefits and asking workers to put more of their own money toward pensions.

Meanwhile, other states are tackling pension expenses. Illinois and New Jersey, both short on cash like California, approved bills this year to make public pensions less generous. (Editing by Eric Walsh)