Reporting from Sacramento — — California's biggest public pension fund is likely to bill California taxpayers an extra $700-million Wednesday to meet future obligations for retirees, whose benefits have been threatened by steep investment losses.
The anticipated request by the board of the California Public Employees' Retirement System follows a steep investment loss during the worst part of the recession last year. And it would deepen a $19-billion hole in Gov. Arnold Schwarzenegger's budget for the fiscal year that begins July 1.
The governor and other critics have been calling for immediate action to shrink California's burgeoning pension costs.
"This is further evidence of an unsustainable pension system that must be reformed," Schwarzenegger said. "Every additional dollar we spend on state employee pensions is a dollar we take from education, health and public safety."
The jump in the annual pension costs, recommended by a board committee Tuesday, affects state government and 1,042 local school districts, where CalPERS covers non-academic workers.
The state is on the hook for $600 million and the school districts must pay the remainder. The state's portion of the annual tab is three times the size of the $200 million that fund executives had expected to seek from the state.
This year, the state paid $3.3 billion into the CalPERS fund, while the school districts added $1.1 billion. The increases would take the totals to $3.9 billion for the state and $1.2 billion for the schools for the next fiscal year.
Separately, the California State Teachers' Retirement System is expected to ask the state Legislature and the governor next year to increase its employers' contributions significantly. Without that, the fund estimates it could be $43 billion short of money to meet future obligations.
Dozens of cities and counties around the state, including Los Angeles and San Diego, also are dealing with projected pension shortfalls that are eating into funds needed to pay for vital local services, including public safety and health.
Unlike the teachers' fund, CalPERS doesn't need to ask lawmakers or the governor for permission to raise contributions. State law has long given the fund's board unilateral authority to authorize increases, which were set by others, but a 1992 voter-approved initiative gave the board the power to determine the amount of the increases.
Last year's 24% drop in the value of CalPERS' portfolio — by more than $55 billion — was one of several reasons for the fund's need to hike employer payments. And a new actuarial study shows that retirees are living longer and that there are more of them.
CalPERS reserves also have fallen to about 60% of what would be needed to meet contractual obligations to retirees through 2042. That's far below the 80% level that actuaries consider secure. The increased contribution would rebuild reserves to 75%.
The effect of the losses on employers has been reduced by "smoothing" them out over a 30-year period, allowing CalPERS to record a loss last year of only $115 million. And a 17% gain on investments this fiscal year has helped recoup part of the losses in the $204-billion fund.
Schwarzenegger, who advocates cutting the state's pension benefits, is expected to make the CalPERS rate hike request his prime exhibit in this year's budget negotiations with the Democrats.
CalPERS' finances have been out of whack since the Legislature and former Gov. Gray Davis passed a major benefits increase in 1999, betting that the good times of the high-tech boom then wouldn't go bust, which it did about a year later.
Schwarzenegger has embraced a Republican-sponsored bill that would raise the retirement age for state workers, change the way their pension benefits are calculated and hike the amount that employees contribute.
Other critics have suggested that the state switch to a two-tiered pension system that maintains the same benefits for current employees and retirees but moves to a so-called defined-contribution program — akin to a 401(k) plan in the private sector — for future hires.
In the short term, Schwarzenegger hopes to keep rising pension costs below CalPERS' estimated levels with budget proposals to cut worker pay, reduce total employment and boost employee retirement contributions. State employees currently are forced to take three days of unpaid leave a month.
The GOP-sponsored bill faces a tough time in a Legislature dominated by Democrats and their public union allies. Democrats said the proposal wouldn't do anything to plug this coming budget year's deficit.
The governor, instead of trying to push a pension-cutting bill through the Legislature, should "sit down and negotiate contracts" with about two dozen public employee unions that could lead to immediate savings, said Nathan Barankin, a spokesman for Senate President Pro Tem Darrel Steinberg (D-Sacramento).
Such negotiations, some of which are underway, probably would lead to at least some savings, predicted Dave Low, assistant director of governmental relations for the California School Employees Assn., whose members participate in CalPERS.
Some unions, he noted, might be willing to embrace a two-tier pension system. But no negotiator should be expected to slash benefits to compensate for the fact that average life spans are up a year for male union members and a couple of months for females.
"That increase," he said, "is going to occur no matter what you do."