California pension politics heating up

By Jim Christie - Analysis

SAN FRANCISCO (Reuters) - Big changes may be in store for public pension funds in California, where prominent public officials are increasingly anxious about their growing burden on government finances.

At the state level, Attorney General Jerry Brown, a Democrat, says he would consider overhauling public pensions if elected governor in November. Republican Governor Arnold Schwarzenegger -- in his last term -- says state pension finances are in crisis.

He has even conditioned signing a state budget on lawmakers agreeing to overhaul the system to reduce its cost to the state's government.

With that demand, Schwarzenegger has put one of the state government's most important long-term fiscal challenges front and center at a time when Californians are acutely aware of how recession, financial and property market slumps, skittish consumers and high unemployment have slashed the state's revenue and sent its overall finances reeling.

Key mayors are likewise concerned about pensions.

Los Angeles Mayor Antonio Villaraigosa, for instance, says the pension system of the second largest U.S. city is not sustainable, and San Francisco Mayor Gavin Newsom is backing a measure on his city's June ballot that would shift more of the funding of San Francisco's pension fund onto city employees.

In an interview with Reuters on Friday, Mayor Chuck Reed said San Jose -- California's third largest city and the biggest city in Silicon Valley -- faces a daunting challenge from its pension funds.

"In our next fiscal year our pension obligations will be $200 million, compared to our general fund revenue of about $700 million -- and it's going up the following fiscal year and the following fiscal year and the following fiscal year," Reed said.

Public pension reform is "high on the list of taxpayers,' voters' concerns," he added. "This year will be a breakthrough year on it."

Former California lawmaker Joe Nation hopes so. Now a lecturer at Stanford University he oversaw a study in April through the Stanford Institute for Economic Policy Research that estimated the state's three biggest public pension funds face a collective shortfall of more than $500 billion over the next 16 years.

"The numbers are finally coming home," Nation said.

HELPING MAKE THE CASE

The biggest U.S. public pension fund, the California Public Employees' Retirement System, inadvertently gave Schwarzenegger's demand some momentum this week when on Tuesday it took initial steps toward asking for an additional $600 million in annual funding from the state government.

That would take the state's contribution to the fund, best known as Calpers, up to $3.9 billion.

Schwarzenegger had pressed lawmakers on pension reform a few days earlier while presenting his latest budget plan and he immediately pounced on Calpers' move, describing it as "further evidence of an unsustainable pension system that must be reformed."

"Every additional dollar we spend on state employee pensions is a dollar we take from education, health, and public safety," Schwarzenegger said.

By Wednesday, state Treasurer Bill Lockyer prevailed on fellow Calpers' board members to postpone discussion of requesting more money from the state government in light of its fiscal woes.

California faces a $19.1 billion budget gap, which Schwarzenegger wants to close mainly with deep spending cuts to health and human services. Among the more controversial proposals is one to scrap the state's welfare system at a time when the state's unemployment rate is over 12 percent.

Lockyer removed the political bull's-eye Calpers pinned on itself just in time as California's budget politics are gaining steam, said Jim Hawley of the Elfenworks Center for the Study of Fiduciary Capitalism at St Mary's College of California.

"It would look to me like it has a tin ear," said Hawley. "I can't believe anyone would raise a $600 million request this week. It's really quite striking."

MOVING TOWARD TWO TIERS

Marcia Fritz oversees the California Foundation for Fiscal Responsibility, which believes public pensions are financially out of control because generous benefits must by law be paid to retirees. But retirees are living longer than before, adding to the expenses of public agencies, which will translate into tax increases and reduced services.

She wants Calpers to press ahead with its request because she expects that would fuel talks within government agencies employing the $206 billion pension fund about reducing retirement benefits for future public-sector employees.

One way to ease those costs would be to move toward two-tier pension systems, in which new public employees receive lesser benefits, an idea gaining momentum with officials across California -- 18 regional government groups are looking into it including some within public-employee unions, Fritz said.

She recently met with union representatives and said they did not reject two tiers outright as they once would have. Instead, she said they are more concerned that government employers will cut pension costs with pink slips.

"The main thing is to avoid layoffs," Fritz said.

Investment losses by public pension funds in recent years are also raising doubts among public-sector unions about their financial stability, said Dave Low, chair of Californians for Health Care and Retirement Security, which represents more than 1.5 million public employees across the state.

"Four years ago the stock market hadn't gone down the toilet," Low said. "People are more inclined now to negotiate."

In Santa Monica, City Manager Rod Gould is preparing for contract talks next year with 11 city employee unions amid an expected $7 million bump in 2012 through 2014 in the city's contribution to Calpers for managing pensions.

"Pension reform is going to be on the table," he said. "The increased costs are not sustainable long term."