Gov. Arnold Schwarzenegger signed a state budget yesterday that calls for lower pensions for new state workers, rolling back a “mistake” made a decade ago when a CalPERS-sponsored bill, SB 400, gave state workers a major benefit increase.
A record 100 days into the new fiscal year, it’s a hard-won victory for the outgoing governor, who vowed in January not to sign a new spending plan without the budget and pension reforms he has sought since his early years in office.
The proposal for a “rainy-day” budget reserve to give the state a financial cushion during economic downturns goes on the ballot in 2012, a constitutional amendment if approved by voters.
But the pension reform is only legislation, which unlike a constitutional amendment can be overturned by legislation — and that’s what happened when the Legislature passed SB 400 in 1999.
The new state budget calls for a rollback of the SB 400 pension formulas, returning them to the lower level enacted under former Gov. Pete Wilson in the early 1990s.
What the governor is calling “historic” pension reform legislation might dampen a drive for an initiative that would switch new workers to a 401(k)-style individual investment plan, mentioned by Republican gubernatorial candidate Meg Whitman.
An official of the trendsetting Highway Patrol union, a leader among the first bargaining units to agree to rollbacks earlier this year, said publicly in January “the last thing we want to do is leave it to the initiative process.”
The pension reforms called for in the new state budget are similar to cost-cutting contracts already negotiated by the Schwarzenegger administration with seven unions representing about 132,000 of the roughly 193,000 rank-and-file workers.
But the reforms have to be bargained with unions representing the remaining 60,000 workers. More than half are represented by the California Correctional Peace Officers Association, which has been without a contract since July 2007.
Schwarzenegger issued an executive order Thursday imposing the pension changes on about 35,000 supervisors and managers, who are not represented by unions and collective bargaining.
The big immediate savings for the state is an increase in the annual contribution that state workers make to their pensions, which ranges from an additional 2 to 5 percent of pay under the contracts already negotiated.
The largest state worker union, the 95,000-member Service Employees International Union Local 1000, agreed to a contract this week that would increase employee contributions by an additional 3 percent of pay, up from the current 5 percent.
The state’s contribution for these “miscellaneous” workers was increased by the California Public Employees Retirement System to about 20 percent of pay this fiscal year, also up 3 percent from last year.
The pension benefits of current state workers are protected by contract law and cannot be cut. Long-term state savings are expected to come from lower benefits for new hires, a “second tier” rolling back benefits to the pre-SB 400 level.
For the miscellaneous state workers the new hires would receive 2 percent of “final pay” for each year served at age 60. Current workers receive a more generous 2 percent at age 55.
“This was a hard-fought negotiation but we proved that collective bargaining works,” SEIU Local 1000 President Yvonne Walker said in a written statement. “We reached an agreement that helps the state maintain services, during this unprecedented fiscal crisis, while providing stability for our members.”
The Highway Patrol negotiated a “3 at 50” pension formula in SB 400 that set a statewide trend for police and firefighter pensions. Earlier this year the Highway Patrol agreed to a lower formula for new hires, “3 at 55.”
But it’s still more generous than the pre-SB 400 Highway Patrol formula, “2 at50,” which provided 2.7 percent of final pay for each year served at age 55.
The new state budget attempts to curb “spiking,” the manipulation of final pay to boost lifetime pension payments. A budget deal two decades ago is said to have made California the only state with final pay based on a single year.
The new budget bases final pay on the highest consecutive three-year average of salary, rather than the single highest year.
Schwarzenegger signed a budget with an $86.6 billion general fund, which purports to close a $17.9 billion shortfall with a patchwork of deep spending cuts, revenue transfers and loans, and optimistic forecasts of federal funding and tax revenue.
“These are tough economic times;” he told a Capitol news conference yesterday. “We are just going through three years of the biggest recession since the Great Depression. So I’m proud that we used this crisis as an opportunity to pass major reforms, reforms that will help ensure that we never have to suffer through a crisis like this again.”
The governor said the pension reforms “undid, basically, the mistakes that were made by the legislature in 1999 by passing SB 400.”
He said state payments to CalPERS soared by “more than 2,000 percent” in the last decade. The annual payment was $1.2 billion in 1997, dropped to $150 million in 2000 during the high-tech boom, and is about $3.9 billion this year.
With the CalPERS payment and other payments of $1.4 billion for retiree health and $1.2 billion to the California StateTeachers Retirement System, the total state retirement cost this fiscal year is about $6.5 billion.
For the first time, said Schwarzenegger, the annual state retirement cost is more than the state budget for higher education.
“This is why we had to do something about it,” he said. “Pensions have become the silent thief of our treasury, gradually stealing more and more money from various different areas like education, higher education, public safety, infrastructure, parks and the list goes on and on.”
CalPERS has been criticized for telling legislators that the pension benefit increases in SB 400, which included a retroactive raise for retirees, could be paid for by investment earnings, leaving state rates little changed for a decade.
“There were people that pulled wool over their eyes,” said Schwarzenegger. “They never really knew all the facts and the risks that were involved. Now this will be eliminated, this problem. We will have full transparency moving forward.”
When CalPERS sets annual contribution rates for the state, the new budget requires alternative forecasts of what would happen if earnings are lower than expected, assets are valued at market rates rather than actuarially “smoothed,” and periods for paying off obligations are altered.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 9 Oct 10