Pension reform: Can Arnold lift SB 400?

A 17-page CalPERS sales brochure told legislators a decade ago that a major increase in state worker pension benefits would not increase state costs, but annual state payments to the pension fund have soared from $159 million to $3.9 billion since then.

The professionally designed pamphlet apparently helped build a persuasive case in 1999 for SB 400, which sailed through the Senate on a 39-to-0 vote and passed the Assembly 70-to-7.

But now Gov. Arnold Schwarzenegger wants to roll back pensions for new state hires to pre-SB 400 levels. The governor with only a half year left in office has said he won’t sign a new state budget without pension reform.

“The single biggest threat to the fiscal health and to California’s future obviously is our public pension system and the crisis that we have,” Schwarzenegger said in April as he endorsed a Republican-backed reform bill rejected by the Democratic majority.

The e-mail version of a news release for the governor’s round table pension discussion last week has an Internet link to the CalPERS brochure. The governor’s pension advisor, David Crane, quoted from the brochure at a legislative hearing in May.

The brochure contains several unequivocal statements that replacing a pension cut enacted in 1991 with major pension increases (some up to 50 percent), while also boosting payments to current retirees, would not increase state costs.

“NO INCREASE OVER CURRENT EMPLOYER CONTRIBUTIONS IS NEEDED FOR THESE BENEFIT IMPROVEMENTS,” says a line written in capital letters describing the impact on taxpayers.

“This is a special opportunity to restore equity among CalPERS members without it costing a dime of additional taxpayer money,” says a quote attributed to “Dr. William D. Crist, President, CalPERS board, June 16, 1999.”

Crane told the hearing the brochure failed to say the state would have to pay for investment shortfalls, the stock market would have to boom, CalPERS employees would get bigger pensions, and CalPERS board members get campaign money from beneficiaries.

“It’s nothing short of astonishing that the CalPERS proposal, which promoted the largest non-voter approved debt issuance in the state’s history, was not accompanied by disclosures of risks or conflicts of interest,” Crane said.

The brochure reflects the confidence of strong investment earnings, from 15.3 percent to 20.9 percent in the four previous years. The half dozen separate funds covered by the bill were bulging, with funding levels from 100 percent to 139.7 percent.

“CalPERS has enjoyed excess earnings in its fund, as a result of the booming stock market and investment strategies of the CalPERS board,” said the brochure.

Now that the funds were flush the brochure, titled “Addressing Benefit Equity: the CalPERS proposal,” said pensions can be boosted to solve a number of problems.

–Some retirees had lost up to 25 percent of the original purchasing power of their pensions. Retirees in the California Public Employees Retirement System get a 2 percent annual cost-of-living adjustment, which can fail to keep pace with inflation.

–The average CalPERS retiree was receiving $1,175 a month, when the 1999 poverty level for a family of two was $922 a month. Non-teaching school retirees were receiving an average of $922 a month.

–A pension cut enacted for employees hired after July 1, 1991, had some working side-by-side in the same job with workers hired earlier who would receive a much higher pension.

–Two-thirds of local government agencies in CalPERS (the brochure lists nearly 400) gave non-safety employees a higher pension than received by similar state workers. State pensions for safety workers, such as the Highway Patrol, also lagged.

“To attract and retain high caliber state safety employees, it is necessary to raise the level of benefits to remain competitive,” said the brochure.

What the brochure did not say was that the political timing for a pension increase was right. The Republican governor who pushed through the pension cut, Pete Wilson, had been replaced in 1999 by the first Democratic governor in 16 years, Gray Davis.

Another inequity mentioned in the brochure: The annual worker contribution, 5 percent of pay for miscellaneous workers, was fixed by statute and did not change as the annual state pension payment, then 12.7 percent of pay, dropped sharply.

The CalPERS board used the surplus to cut the annual state payment, $1.2 billion in fiscal 1997-98, to about $766 million in fiscal 1998-99. The brochure said the payment would drop to $160 million in fiscal 1999-00 if the legislation was enacted.

The brochure also made a specific prediction: “CalPERS fully expects the state’s contribution to remain below the 1998-99 fiscal year for at least the next decade.” In other words, below $766 million.

The first year cost of the benefit increase, about $600 million, would begin in fiscal 2001-02, said the brochure. That increase, coming on top of $160 million in the previous year, would be a total of about $760 million.

Chart from CalPERS board May agenda

So, why didn’t the state payment stay below $766 million for the next decade? The CalPERS explanation is not that investment earnings fell short, but that the state payroll grew much faster than expected.

A website,, attributes 51 percent of the increase to payroll growth during the last decade, 27 percent to the SB 400 benefit increase, 8 percent to other benefit changes, and miscellaneous factors 14 percent.

The CalPERS brochure said the SB 400 benefit increases would be funded with “excess assets” and two maneuvers: inflating the value of assets from 90 to 95 percent of market value and “amortizing” excess assets over 20 years instead of 30 years.

At the round table discussion last week, Schwarzenegger apparently figured that all of the state payments to CalPERS during the last decade are attributable to SB 400, except for continuing the $160 million annual tab when the legislation was enacted.

“I also want to just mention that if we would have not done SB 400 10 years ago we would now have $20 billion set aside, because it cost the taxpayers in California $20 billion in the last 10 years,” he said.

The governor said if the $20 billion spent on CalPERS had been placed in a rainy day fund, the state could have spread the money over the last four deficit-ridden years, avoiding cuts in important programs.

If state worker pensions trailed local government pensions before SB 400, the measure made the state a leader with what became a trendsetting increase for the Highway Patrol.

The patrol went from 2 percent of final pay for each year served at age 50 to 3 percent at 50. CalPERS also passed a resolution in 2001 offering to inflate the assets of local governments to help them pay for pension increases authorized by AB 616.

Now the Schwarzenegger administration has negotiated a tentative agreement that would lower benefits for new patrol hires to 3 percent at age 55, part of cost-cutting agreements pending with half dozen unions that could save $138 million this year.

“If similar agreements are reached with the state’s six other employee unions, state savings in FY 2010-11 would total $2.2 billion, with $1.2 billion of that from the general fund,” a governor’s news release said last month.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 16 Jul 10

13 Responses to “Pension reform: Can Arnold lift SB 400?”

  1. SeeSAW Says:

    Negotiating with the respective employee groups, as he has done, is the right way to fix the problem. Holding other groups as extortion pawns if they don’t go along is outrageious. Many local entities have already started to self-correct by going back to pre-1999 plans for new hires. Threats by GAS not to pass a budget without the reform that he demands is wrong. Pension reform will not solve the State’s problems automatically, because the State’s obligation to CalPERS is only 2.% of its total budget. GAS is gasping for air right now, because he thinks he needs to leave a legacy. He is wrong. He is a lame duck. He needs to get off this pension fixation and leave the issue for the next Governor and Legislature to be be elected in just four months.

  2. SeeSAW Says:

    I meant to say that the State’s total obligation to CalPERS is only 2.5% of its total budget. Such figure was provided by CalPERS.

  3. Fake OCO Says:

    Arnold has been a failure as gov, and if he can hold out for pension reform, and not what he just signed with the other 4 unions, but real reform-then he may redeem himself and his tenure as gov.

    But I won’t hold my breath.

  4. jskdn Says:

    ” in 1999 for SB 400, which sailed through the Senate on a 39-to-0 vote and passed the Assembly 70-to-7″

    Here was the Appropriation Committee vote:


    Ayes: Migden, Cedillo, Davis, Hertzberg, Kuehl, Maldonado, Papan, Romero, Keeley, Steinberg, Thomson, Wesson, Wiggins, Wright, Aroner

    Nays: Brewer,Ackerman,Ashburn, Campbell,Runner,Zettel

    CalPers also sponsored SB400. I fail to see why taxpayers should be on the hook for what was essentially a bait and switch.

  5. Bruce Ross Says:

    The funny part is the state and many locals are creating a two-tiered system just like the one CalPERS successfully lobbied to end because of its unfairness — and with some reason. The obvious fair solution is to prospectively change the accrual rate for everyone, but good luck getting a legislator to even understand the math there, let alone negotiating the contract.

  6. Fake OCO Says:

    good luck getting a legislator to even understand the math there, let alone negotiating the contract.
    Oh they understand the math, they are intentionally giving away the store….

  7. Scott Lay Says:

    jskdn — However, all of those Assembly Appropriations “no” votes, except for Dick Ackerman, switched 9 days later and voted for the bill:

  8. NorCalSportsFan Says:

    Defined benefit plans are not sustainable and will result in the bankruptcy of this state which is becoming an even greater probablility. A % matching 401k plan with disability insurance is what the majority of well run businesses utilize in the present. The % matching needs to be tied to deficits and surplus in the state budget. In that matter, big government will be reined in and state employees will have a stake in being efficient and managing expenses. Like most people in the private sector, the employees will then budget a percentage for savings and 401K fit their retirement goals. The current system needs to be phased out completely with a bridge for those people retiring in 20 years or less. If the cuts don’t start immediately, this state will become involvent shortly. Increasing fees and taxes are already killing people. The unemployed or underemplyed (>20% of CA population) cannot afford to pay the majority of the fee increases and sales taxes and property taxes at the local level. We’re getting hit with the federal, styate, and local government fiscal irresponsibility at all levels. The state of the economy and this country will not get better until drastic matters are taken and could be an all or nothing for state emplyees if the unions aren’t flexable. The Utah state pension system is the way things will happen- check it out and get used to it. I would take it further and not mandatre a 10% match, but that is reasonable. Better start moving now, before it sinks thius state and with it much of the country.

  9. Greg Says:

    Some of these names are familiar… And look who voted against it!
    AYES: Alquist, Aroner, Ashburn, Bates, Battin, Bock,
    Briggs, Calderon, Campbell, Cardenas, Cardoza, Cedillo,
    Corbett, Correa, Cox, Cunneen, Davis, Dickerson, Ducheny,
    Dutra, Firebaugh, Florez, Frusetta, Gallegos, Granlund,
    Havice, Hertzberg, Honda, House, Jackson, Keeley, Knox,
    Kuehl, Leach, Lempert, Leonard, Longville, Lowenthal,
    Machado, Maddox, Maldonado, Margett, Mazzoni, Migden,
    Nakano, Olberg, Oller, Robert Pacheco, Rod Pacheco,
    Papan, Pescetti, Reyes, Romero, Runner, Scott, Shelley,
    Soto, Steinberg, Strom-Martin, Thomson, Torlakson,
    Vincent, Washington, Wayne, Wesson, Wiggins, Wildman,
    Wright, Zettel, Villaraigosa
    NOES: Aanestad, Ackerman, Baldwin, Brewer, Kaloogian,
    McClintock, Thompson
    NOT VOTING: Baugh, Floyd, Strickland

  10. Jeff Stone Says:

    Remember folks most public employees do not pay into social security and the only retirement they have is Calpers. Could you live on what you have in your 401K for the next 30-40 years? I think not.

  11. Jeff Stone Says:

    I forgot to mention that I am a proud member of the San Bruno Fire Department for the last 30 years.

  12. Tom Says:

    Anyone that thinks a portion less than 3% of the state’s budget is responsible for sinking the ship needs to step out of the conversation until they read up on where the other 97%+ is going…..welfare, politicians taking care of friends/donors, plain old BIG GOV.

    A loose illustration: Texas (or most other states) wants to put an extra lane in to ease congestion on a freeway, so they plan it, bulldoze/prep. it, pave it, and start using it…cost 20 million.
    California wants to do the same, so they form a committee to discuss planning stages, environmental impact, etc… they alternate the route to protect 5 remaining frogs on an endangered species list (God only knows who made the list) and train and hire 10 specialist to help educate the public on why they need to be protected….they yield to numerous protests about air quality and allow it to get tied up in years of litigation….if it ever gets off the ground they have to have Ca. legal low-emission heavy euip. and material specially made….2.75 billion dollars later the lane is in and already 5 years out-of-date!!!! Pull your heads out of your….I mean out of the sand. P.S. roll all your retirement numbers back to pre 1999 and we will start from there.

  13. Colin Panetta Says:

    There is NO system of checks and balances. This bill should not have been allowed to be put to a vote, yet alone passed. Some say that the benefits of state workers are constitutionally protected from being taken away, but what about this bill that did the reverse and retroactively handed out past benefits to all state employees by increasing payout per year by 25-50% while lowering the retirement age at the same time… dramatically increasing the present value of the pension benefit to 2-3 times the value prior to the vote. The pension spiking issue should also be addressed and if Chris Parker could go after employees that have stolen money from the state creating a HUGE spending gap… it could really be a help

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