State Treasurer Bill Lockyer, who sits on both the CalPERS and CalSTRS public pension boards, got the attention of his listeners during a legislative hearing yesterday.
“It’s impossible for this Legislature to reform the pension system, and if we don’t it will bankrupt the state,” is the Lockyer quote jotted down by one observer.
In an interview later, the treasurer said his use of the word “bankrupt” was intended to be “provocative” and “theatrical,” which he thought was probably understood by his audience.
“There were some folks who kind of winced from time to time during my remarks,” he said.
But the treasurer said the quote accurately reflects his concern about whether the retirement benefits promised public employees are affordable, particularly retiree health care.
“My general view of the pensions is that the current benefits that have been promised are probably hard to maintain and the (retiree) health benefits that have been promised are impossible to maintain,” he said.
Lockyer said his view has not been influenced by the CalPERS chief actuary, Ron Seeling, who got attention of his own when he said current pension benefits are “unsustainable” during a seminar last August.
“We obviously rely on the professional experts to help us chart the course,“ Lockyer said. “But Ron I think as a general matter is too apocalyptic.“
In a brief interview the treasurer did not go into detail about why current retirement benefits are a financial problem for government.
But the widespread worry is that a round of pension increases that began a decade ago assumed that most of the money would come from continued strong investment earnings in the stock market.
Even before the historic stock market crash last fall, critics contended that future earnings assumed by pension funds were too optimistic. And when there is a shortfall, state and local governments have to give the pension funds more money.
Some local governments say retirement costs are already crowding out funding for other programs, the bankrupt City of Vallejo being a leading example. The courts say promised pensions are a vested right that can’t be cut, unless replaced by something of equal value.
So, proposals to cut pension costs usually create a “second tier” of lower benefits for new hires, leaving the benefits for current employees and retirees untouched. But experts say significant savings from a second tier can take decades.
“People talk about a two-tier system as a way to do it,” Lockyer said. “I think that’s ultimately inevitable. But I don’t know that it’s ever possible legally or politically to do takeaways (of promised benefits).”
State and local governments began promising their employees retiree health care decades ago, before costs began soaring. Unlike pensions, most government retiree health plans are pay-as-you-go, setting aside no money now for future costs.
A governor’s commission estimated last year that state and local governments have an unfunded liability of at least $118 billion for retiree health care over the next 30 years.
Lockyer spoke yesterday (Oct. 22) to a joint hearing of the Select Committee on Improving State Government in each house chaired by Sen. Mark Desaulnier, D-Concord, and Assemblyman Mike Feuer, D-Los Angeles.
The treasurer said his comment about the Legislature’s inability to act on pensions came in the context of committee members asking about term limits, which allow legislators three two-year terms in the Assembly and two four-year terms in the Senate.
“I said, ‘I can tell you to this day who were major contributors for and against me in 1973, my first election to the state Assembly,” he said, but the memory of later elections has faded.
Lockyer said those who help with the first election leave an “indelible imprint” that remains fresh with legislators in the term-limit era, when their time as a lawmaker may only be a half dozen years.
“That sense of obligation is always too strong to ever do anything that is going to seriously affect, in an adverse way, the folks who helped elect you,” he said.
Lockyer had the kind of long and successful legislative career not possible in the term-limit era. After a decade in the Assembly, he moved to the Senate and became the leader, the Senate president pro tempore.
Then he served two four-year terms as state attorney general, before being elected state treasurer in 2006. He has a large political warchest, about $10 million, and his remarks about reducing pension benefits are unusual for a Democrat.
A Republican, for example, might bluntly say that it’s impossible for the Legislature to cut pension benefits because it’s controlled by Democrats, who are the traditional allies of public employee unions.
Recent proposals to reduce public pensions have come from Republicans. Gov. Arnold Schwarzenegger briefly backed a proposal in 2005 by former Assemblyman Keith Richman, R-Northridge, to switch new hires to 401(k)-style individual investment plans.
Schwarzenegger, calling current benefits “unsustainable,” issued a proposal last June for a two-tier plan. Benefits for new state hires would be rolled back to the level in effect before major increases began a decade ago.
A group founded by Richman and now led by Marcia Fritz, the California Foundation for Fiscal Responsbility, is talking about putting an initiative on the ballot next November to enact a two-tier plan and other reforms.
Asked if he could support their initiative, Lockyer said: “No, just because of who it is.” He said the group is “alarmist,” biased against public employee unions and previously wanted to replace monthly pensions with 401(k)-style plans.
“I think they are more propagandistic than constructive,” he said. “So it’s not a group I would care to be associated with.”
Lockyer thinks that a successful pension initiative would be difficult “when affected interests can dominate the airwaves with their point of view,” presumably referring to a well-funded opposition campaign from labor groups.
So, what is the solution to the pension problem?
“I don’t think I know one,” Lockyer said, “other than constructive dialogue with the public policymakers and interested groups.”
A Lockyer aide, Steve Coony, has been among those urging the California Public Employees Retirement System to look at the “sustainability” issue. CalPERS staff is talking to stakeholder groups and may convene a meeting early next year.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 23 Oct 09