Public pension reform key issue in California race

LOS ANGELES Wed Oct 27, 2010 3:54am EDT

California state worker Curtis Walker looks over retirement plan brochures at the Calpers regional office in Sacramento, California October 21, 2009. REUTERS/Max Whittaker

California state worker Curtis Walker looks over retirement plan brochures at the Calpers regional office in Sacramento, California October 21, 2009.

Credit: Reuters/Max Whittaker

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LOS ANGELES (Reuters) - With decades of public service under his belt, 72-year-old California gubernatorial candidate Jerry Brown joked last month that he is the best pension investment California has ever seen.

"If everybody in state service worked as long as I have, the pension system would be overfunded by 50 percent," Brown quipped in a debate.

But at an estimated half a trillion dollars, California's public pension shortfall is no laughing matter, and Brown quickly moved on to lay out serious solutions.

Long consigned to the periphery of public debate, pension reform is suddenly on center stage in the race between Democrat Brown and Republican Meg Whitman thanks to California's gaping budget hole and public pay scandals.

Reform measures will appear on November 2 ballots in cities including San Francisco and San Jose, while Los Angeles Mayor Antonio Villaraigosa announced a reform plan last week.

"We've seen it building over time," Dave Low, chair of Californians for Health Care and Retirement Security, a group that represents more than 1.5 million public employees, said of the growing political buzz around pension reform. "There has been a somewhat coordinated and relentless sort of drumbeat."

California's pension woes mirror those of dozens of other U.S. states, and its issues pale in comparison to those of Illinois, for instance. But as the nation's largest state, its top pension funds, including the California Public Employees' Retirement System (CalPERS) and California State Teachers' Retirement System (CalSTRS), rank among the world's largest. Those two cover one-tenth of all adults in the state.

A 1999 law that gave state workers generous pensions and pay raises is widely blamed for igniting the pension crisis.

SAVINGS COULD TAKE DECADES

Both Brown and Whitman have pledged to plug the massive funding gaps through higher retirement ages and increased worker contributions, but it could be decades before the benefits of any of the reforms are realized because the proposals would only apply to new hires.

"You are definitely not getting at the crux of the liability, which is the unfunded liability for current employees," said Vladimir Kogan, a doctoral student at the University of California San Diego.

Rejigging the benefits for current employees and retirees is simply not on the table and probably never will be.

"The case law is clear. If someone is hired as a city clerk, or a police officer or a legislative analyst, you name it, and as part of that employment contract they are promised a retirement ... they are guaranteed it," said Joe Nation, a Stanford University professor of public policy. "You can't get to a point in the future and say 'Well gee, we're really sorry, the state is out of money.'"

California's powerful public employee unions have already agreed to some changes. As part of the state budget deal brokered by Governor Arnold Schwarzenegger this month they agreed to higher retirement ages and a rollback of retirement benefits to pre-1999 levels.

That deal, however, covered only about 16 percent of the active membership of CalPERS.

"What Schwarzenegger did was stop the forward movement, but we are still in bad territory," said Marcia Fritz, president of the California Foundation for Fiscal Responsibility, a group that advocates for pension reform.

'HANGING ON IN QUIET DESPERATION'

To reduce the state's pension costs further, Whitman favors adopting a 401k-style retirement plan, known as a defined contribution plan, for new public employees and raising the retirement age to 65 from 55 for workers other than frontline safety workers like police officers and firefighters.

Unions are sure to "fight tooth and nail" against any shift toward a 401k-style plan, according to Kogan, making it highly unlikely to pass through the legislature.

And, according to Nation, keeping separate benefits for public safety employees means ignoring much of the problem.

"If you add up the shortfalls that exist in CalPERS for safety employees versus non-safety employees, safety accounts for about two-thirds of the shortfall," he said. "There is no realistic way to solve the pension problem in California unless everyone has a seat at the table."

Brown, who leads in the polls, favors maintaining the current system but increasing employee contributions, raising retirement ages and putting a cap on benefits.

Some, however, worry that Brown's strong union ties will make widespread reform difficult for him.

"My concern is that Brown would get in the way, which would be very bad for California," Fritz said.

Pension reformers might find their best ally not among elected officials, but rather among the voting public in the form of a ballot initiative.

"I think it would pass," said California Institute of Technology professor Rod Kiewiet. "Most people in the private sector would think 'Well, it's good enough for us.'"

Barring that, however, Kiewiet doesn't see California crashing and burning in the near future. Rather, taxpayers will just get used to seeing fewer and fewer state services.

"Things are real crappy, but people are used to crappy government," Kiewiet said. "What's that Pink Floyd song? 'Hanging on in quiet desperation is the English way.' It's not. It's the California way."

(Reporting by Nichola Groom; Editing by Mary Milliken and Jim Marshall)

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