California Considers Rate Increases

Cathy Bussewitz of the Associated Press reports, California pension fund considers rate increase:
Board members of California's largest public pension fund said Tuesday they are likely to take more money from the state general fund to pay employee pension benefits, a proposal that has led to criticism at a time when the state faces a $19 billion deficit.

Board members for the California Public Employees Retirement System said the amount would be less than the $600 million increase they had estimated last month.

That's in part because the Legislative Analyst's Office issued a report saying total payroll expenses for the state were lower than CalPERS' estimate. The actual figure is used to determine the state's contribution to pension benefits.

"If we defer these contributions, it will mean larger increases are needed in the future," Alan Milligan, interim chief actuary for CalPERS, told the board. "We feel that may end up being more challenging than what the state is facing today."

CalPERS staff said much of the increased contribution would be paid by fee-based agencies, including the Department of Motor Vehicles and Department of Transportation. The full board is expected to consider the issue Wednesday.

In April, a key CalPERS committee voted to increase the state's contribution by an additional $600 million. The fund says it needs the extra cash because of investment losses and retirees' longer lifespans.

Citing the state's fiscal condition, the full CalPERS board postponed a final decision after state Treasurer Bill Lockyer requested more information about how the increased contributions would affect the state general fund.

"The $600 million would have had a pretty burdensome impact on a budget that's already under an intense amount of strain," said Joe DeAnda, spokesman for Lockyer, a CalPERS board member. "The results came in, and the hit to the general fund turned out to be a lot less hurtful."

The legislative analyst's report said the total increase in funding from the state would be $481 million, with about $184 million coming from the state general fund. The rest would be paid in part by the fee-based agencies.

"It's the right thing to do," Andrea McCarthy, a spokeswoman for Gov. Arnold Schwarzenegger, said in an e-mailed statement. "CalPERS is clearly recognizing that deferring contributions raises costs and shifts burdens to future generations, and the governor commends CalPERS's efforts to end that practice."

The pension fund board does not need legislative approval to boost the state's contribution rate.

Meanwhile, Don Thompson of Bloomberg Businessweek reports, California committee defeats pension-reform bill:

Gov. Arnold Schwarzenegger's drive to cut California's pension costs stalled when a Senate committee derailed a bill that would have reduced benefits for newly hired state employees.

The legislation by Senate Minority Leader Dennis Hollingsworth failed Monday on a 4-2 party-line vote in the Senate Public Employment and Retirement Committee.

It would have required new state employees to contribute more toward their retirement. Most would have had to work 10 years longer, until age 65, to be eligible for retirement benefits. Public safety employees would have had to work an extra seven years -- to age 57 -- before they could retire.

Hollingsworth said his bill, SB919, would have saved the state $110 billion over 30 years. He said the issue is not dead, despite being rejected by the committee. He plans to make it a point of budget negotiations this summer as the state tries to close a $19 billion deficit.

"It wouldn't be a sanely crafted budget without pension reform," Hollingsworth, R-Murrieta, said in a telephone interview.

California's two major public employee pension funds estimated their unfunded liabilities at $61 billion in July 2008. That drives up the cost to taxpayers, who must cover the shortfall.

The California Public Employees Retirement System, the nation's largest pension fund, is considering imposing $600 million in additional costs on the state to cover its shortfall.

A study by graduate students at Stanford University commissioned by the administration and released in April put the unfunded pension liability at nearly $240 billion for the public employees' retirement fund and $157 billion for the teachers' retirement fund.

The committee's chairman, Sen. Lou Correa, D-Anaheim, said pension changes should be negotiated through collective bargaining agreements rather than imposed by lawmakers. Those changes already are being discussed through negotiations with state and local public employee unions, he said.

Schwarzenegger has made pension reform a priority of his final year in office and has said he will not sign a budget agreement without it.

"Every year we are diverting more and more money away from higher education, health and human services, public safety, parks and environmental protection to pay for unsustainable retiree costs, and without action, those costs will keep skyrocketing," the Republican governor said in a statement. "This is a classic example of Sacramento promising more than it can afford."

California is reaching a critical point. Without the requisite pension reforms, the state will face ballooning costs to sustain the pensions of retirees. Measures must be taken now or else a grim situation will turn unmanageable in a few short years.