The chief executives of CalPERS and CalSTRS this week advised legislators thinking about pension reform to take a long-term view, rather than over-react to a sharp drop in pension fund levels.
A major cost-cutting overhaul of public pensions urged by a bipartisan watchdog, the Little Hoover Commission, got no support from the two executives, particularly a proposal to test the legality of cutting the unearned pensions of current workers.
More money must be put into the pension funds to cover investment losses from a weak economy and stock market crash, the executives said, but pension costs won’t soar, crushing government budgets and wiping out funding for other programs as some fear.
The CalSTRS executive, Jack Ehnes, said the Hoover proposal diverts attention from workable solutions. He is preparing a written rebuttal, similar to his response to a cost-cutting pension overhaul recommended by the nonpartisan Legislative Analyst.
“You do need to recognize the long-term performance of the plan and not be suckered into these short-term reactions to the market,” Ehnes said. “I think that’s going to lead you astray and force you to make financial decisions that you don’t have to make.”
The California State Teachers Retirement System, unlike most public pension funds in California, cannot set the contribution rates that must be paid by government employers, requiring legislation instead.
In a June 2009 valuation, CalSTRS was 78 percent funded and in need of a $3.8 billion a year contribution increase to be fully funded in 30 years. Last fiscal year CalSTRS received a total of $5.3 billion from teachers, school districts and the state.
Ehnes said CalSTRS is not asking the state to “sign a check” for the full contribution increase. The state is struggling to close a huge budget gap estimated to be about $25 billion.
“That would be impossible,” Ehnes said of full funding now. “We recognize that. But we also recognize that you can right the fund through thoughtful incremental strategies going forward.”
The California Public Employees Retirement System, on the other hand, is the rare state agency that appears before the Legislature not seeking funding, but with the power to give the Legislature a bill that must be paid, the pension contribution rate.
The CaPERS executive, Anne Stausboll, did not directly criticize the Hoover or Legislative Analyst recommendations. She said the proposed pension reforms are big decisions that “affect the livelihood” of state workers.
“So we encourage you . . . look at them in a long-term framework related to a cost-benefit analysis,” she said.
Stausboll showed a joint meeting of the Senate and Assembly public employee retirement committees a chart with the contribution rates CalPERS projects for the state during the next decades.
The average CalPERS rate among the nearly two dozen state bargaining units, now about 21 percent of pay, is expected to increase to 25 percent by 2018, stay there for a decade, and then drop to 20 percent by 2040.
If CalPERS lowers its investment earnings forecast this month, the rate increase would be higher. The chart did not show dollar amounts. But the projected increase appears to be less than $1 billion.
The Department of Finance said the state payment to CalPERS this fiscal year, $3.769 billion ($2.148 billion general fund), is expected to increase to $4.14 billion ($2.384 billion general fund) in the new fiscal year that begins in July.
The general fund, which pays for schools and most state programs, has the $25 billion deficit. The rest of the CalPERS payment would come from special funds such as transportation.
Gov. Brown is proposing that the general fund spend $84.6 billion next year. The state payment to CalSTRS, all from the general fund, is $1.257 billion this year and expected to be $1.35 billion next year.
Providing health care for retired state workers is expected to cost $1.394 billion ($1.358 billion general fund) this year and $1.554 billion ($1.515 billion general fund) next year.
For Social Security that many state workers receive in addition to their pensions, the state expects to pay $632 million ($297 million general fund) next year. The state payment for Medicare is expected to be $217 million ($102 million general fund).
Much of the alarm in the Hoover report is about pension costs in local government, where personnel is a larger part of the budget. An actuary expects pension costs to increase 40 to 80 percent and remain there for decades.
The report said “cities such as Los Angeles, San Diego, San Francisco and San Jose prepare to spend one third of their operating budgets on retirement costs in coming years.”
The Hoover report argues that a common pension reform, higher contributions from workers and lower pensions for new hires, will not produce enough savings to avoid serious budget problems.
But the recommendation that the Legislature establish the groundbreaking legal authority for cutting pensions not yet earned, without reducing pensions for years already served, drew no support at the hearing.
Sen. Alex Padilla, D-Los Angeles, said he did not think it would “happen” this year. Dave Low, chairman of a labor coalition, said protecting collective bargaining, which set the pension benefits, is “an issue that is sacrosanct to us.”
The chairpersons of the retirement committees, Sen. Gloria Negrete McLeod, D-Montclair, and Assemblyman Warren Furutani, D-Long Beach, both thanked the Hoover commission for the report and said there is a need for pension reform.
Furutani, listing a number of clichés used at the Capitol, said he liked “don’t throw the baby out with the bath water.” He said he expects legislators to introduce a wide range of pension reform bills this year.
“I think some times people look at the PERS committee as a sleepy committee that deals with retirees and there is not much action,” said Furutani. “But I’m telling you folks we are not going to be a lounge act off in the saloon area.
“We are going to get to the big room, because this is going to get a lot of attention as far as the whole state of California and the whole country. Everybody is talking about this issue.
“And I think a good sober discussion about it, working together in a bipartisan manner, I think we are going to get there. And everybody is looking to make sure we take care of those employees that should have pensions. Pensions are like apple pie … It’s something we should look at as an opportunity for all people.”
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 4 Mar 11