Calpensions

In an echo from five years ago, Gov. Arnold Schwarzenegger yesterday urged a cut in pensions for new state hires, warning that soaring retirement costs are taking money from other programs.

But his final State of the State address did not include the spur he used in the same annual agenda-setting speech in 2005 — a threat to go to the voters with an initiative if the Legislature does not act.

The omission was not the best of news for Marcia Fritz, the president of a group that has filed an initiative that would cut pension benefits for new state and local government hires and extend retirement ages.

Fritz is looking for a “heavy hitter” to help raise an initial $400,000 to hire a firm to begin gathering the voter signatures needed to place the measure on the November ballot, creating momentum for additional fund-raising.

Schwarzenegger wants to repeat the success of negotiations last fall that, breaking a deadlock of nearly three decades, produced a plan to ensure an adequate water supply for the future and fix the crucial Sacramento-San Joaquin Delta.

“I ask the legislature to join me in finding the equivalent of a water deal on pensions, so that we can meet current promises and yet reduce the burden going forward,” the governor said yesterday (Jan. 6).

Voters will be asked to approve a $11 billion water bond. But with mounting state debt and another huge state budget deficit, some legislators think a vote on the bond scheduled in November should be delayed several years until the economy recovers.

Fritz welcomed a “strong effort” to get pension reform through the legislature, but she is skeptical about the outcome. She said savings from the pension initiative could pay for the water bond.

“We could do both of them,” Fritz said, “if that’s what the governor wants.” She said offsetting the cost of the job-producing water bond with a plan to cut pension costs could attract fiscally conservative voters.

Much has changed since Schwarzenegger proposed his “Year of Reform” five years ago.

Riding a wave of popularity after an historic recall election, he had used an initiative threat to persuade legislators to cut workers’ compensation costs. But public employee unions spent more than $100 million to defeat all four of his “reform” initiatives in November 2005.

A pension cut was not among the rejected proposals that would have limited state spending, delayed teacher tenure, created a redistricting commission and required written consent of union members to use dues for political contributions.

Schwarzenegger proposed switching new state and local government hires (the pensions promised current workers are protected by court decisions) from guaranteed monthly payments to 401(k)-style individual investment plans.

But in one of the first setbacks for the new governor, Schwarzenegger dropped the pension plan in April 2005 after hard-hitting television ads said death and disability benefits for police and firefighters would be eliminated.

The author of the plan, former Assemblyman Keith Richman, R-Northridge, said the claim was erroneous and, even if true, easily fixed by legislation. He later founded the group led by Fritz, the California Foundation for Fiscal Responsibility.

Now Schwarzenegger and the Richman group are no longer proposing a switch to the 401(k)-style plans common in the private sector. The 401(k) plans give employers a stable annual pension cost with no future debt.

But critics say the 401(k) was designed to be a supplement, not a full retirement plan. And the recent stock market crash showed how individual investment plans can be an unreliable source of retirement income.

What Schwarzenegger and Fritz are advocating now is pensions with lower monthly payments for new employees, reducing rising costs that the governor said will take money from “our universities, our parks and other government functions.”

Schwarzenegger’s current pension plan, unveiled in June, would give new state employees the same pensions received by state workers before a major benefit increase a decade ago, saving the state an estimated $74 billion over the next three decades.

The new state workers would have to work 25 years, instead of 20, before receiving maximum retiree health coverage that would pay 85 percent of the average HMO premium, instead of the current 100 percent, saving the state $19 billion.

The initiative filed by Fritz goes farther than the governor’s plan, providing lower pension payments, requiring employees to work longer before retiring and covering local government pensions in addition to state workers.

Among other things, minimum “normal cost” contributions to pensions and retiree health care would be required. The power to set contribution rates would be shifted from pension boards to city councils, the Legislature and other elected bodies.

Fritz estimates the initiative would save $533 billion over 30 years. The nonpartisan Legislative Analyst, not citing a specific amount, said the initiative could potentially cut pension costs “50 percent or more” over the long run.

“We are reforming it and minimizing the risk, while still providing a modest but adequate retirement benefit,” said Fritz.

A spokesman for a union coalition has said that “nuclear war” would result if the initiative is placed on the ballot, an all-out effort to defeat it.

“The provisions in this initiative are draconian in terms of the size of the cut of the benefits,” said Dave Low of Californians for Health Care and Retirement Security.

Low rejects the view that current pension benefits are “unsustainable” and threaten other government programs. He said most annual pension contributions are lower now as a percentage of pay than they were 30 years ago, when benefits also were lower.

“Because we went through a gigantic market crash last year suddenly they (the benefits) are unaffordable?” said Low. “The premise does not stand up to an actual review of the facts.”

Schwarzenegger, on the other hand, said state pension costs increased 2,000 percent during the last decade, while state revenue only increased 24 percent. What he did not say is that contributions had dropped dramatically a decade ago as investment earnings soared in a booming stock market.

“We are already putting in there every year more than $3 billion for pensions,” the governor said of current contributions. “That amount will go up to $10 billion.”

He did not say how many years it will take for state pension costs to triple. But Los Angeles officials are estimating their pension costs will double in the next four years, going from $653 million to $1.3 billion.

The city’s chief administrative officer said the current retirement system is “unsustainable” and planning is underway for a June ballot measure that would cut pension benefits for new city hires, the Los Angeles Times reported yesterday.