Ignoring a plea from the largest state worker union, the CalPERS board adopted a new policy allowing the state to get immediate savings from new contracts boosting worker pension payments.
Under the old policy it would have been fiscal 2012-13 before the state got the savings.
CalPERS said in a news release last week that the policy change could allow the state to save up to $500 million this fiscal year, if all of the unions agree to pay more toward their pensions.
“This change is within best practices and is in keeping with how we treat our public agency plans,” Rob Feckner, the CalPERS president, said. “As labor agreements are approved, this will also provide some immediate relief to our fragile State budget.”
Although the news release did not mention it, the savings would offset a $600 million increase this year in the state payment to the California Public Employees Retirement System, up 18 percent from $3.3 billion to $3.9 billion.
The policy shift, coming on a split vote of the 13-member board, was opposed by the largest state worker union, the Service Employees International Union, representing 95,000 state workers in nine bargaining units.
“We would like you to defer this action until at least we are done with bargaining,” Neal Johnson of SEIU told the board. He said changing the policy now could “impact” the outcome of the negotiations.
One of the two “no” votes on the board, J.J. Jelincic, said the shift not only “changes the dynamic at the bargaining table,” but reduces the amount of money flowing into the under-funded pension system.
Jelincic said the old policy would allow CalPERS to get a higher contribution from the state until 2012, when the state payment would be lowered by an amount similar to the increase in the worker payment.
But until then, he suggested, the state would be getting money from the increased worker payments in addition to the full amount from the state. The new policy would lower the state payment immediately.
“What J.J. is saying is true,” said chief actuary Alan Milligan, “in that if there is a change in the underlying plan, a change in the member contribution rate, and no change in the policy then we would actually collect more in the current year.”
Anne Stausbol, the CalPERS chief executive, told the board the new policy “cuts both ways,” raising contributions immediately if there is a benefit increase. She said bargaining units that reached agreements asked for the change.
Gov. Arnold Schwarzenegger announced this week that he signed legislation approving new labor contracts negotiated with a half dozen unions representing 37,000 of the roughly 200,000 state workers.
Among other things, the new contracts give new hires lower pensions, rolling back big increases granted by SB 400 in 1999. New and current workers will contribute 10 percent of their pay to pensions, up from 5 to 8 percent currently.
In a bargaining update last week, the president of the giant SEIU Local 1000, Yvonne Walker, is quoted on the union website as telling the governor’s negotiators: “There’s not much more room for us to move.”
The SEIU said it offered to increase worker pension contributions by an additional 2 percent of pay. A failure to reach an agreement with the aggressive SEIU, known for battling other unions, could derail the governor’s pension reform.
The half dozen contracts approved by the governor have “protection clauses” that allow them to be reopened if other bargaining units get better deals.
But Schwarzenegger, apparently confident of getting pension reform, proposed in talks to close a huge state budget gap that the state get a $2 billion loan from CalPERS paid off with savings from benefit cuts, the Sacramento Bee reported last week.
The major savings from the pension reform is expected to come from a reduction in CalPERS payouts to retirees, an estimated $74 billion during the next 30 years if all of the state worker unions agree to pension cuts.
Annual state payments to CalPERS would drop, but not by much. The new contracts include a pay raise for most workers beginning in 2012, a 2 to 5 percent increase in the top level of the pay range. That raises the salary on which pensions are calculated, offsetting the savings.
In an analysis of the half dozen new labor contracts last month, the nonpartisan Legislative Analyst’s Office said the Schwarzenegger administration had not yet submitted actuarial estimates of future retirement costs.
“A recent CalPERS estimate, for example, indicated that similar pension benefit changes — if extended to all state employees — would reduce annual state pension contributions by over $200 million by 2020 and up to about $1 billion by 2040,” the analyst said.
If the governor and the Legislature ask for a loan from the pension fund, they will face an independent 13-member CalPERS board, a majority unelected by the public, that has the rare power to tell the lawmakers how much they must spend.
The CalPERS board, like most public pension systems in California, sets the annual payment that must be made to the pension fund by the government employer — this year $3.9 billion from the state.
Six CalPERS board members are elected by CalPERS members. Three are appointed, two by the governor and one by the Legislature. And four are officeholders: the state treasurer, controller, and personnel board and department representatives.
Two decades ago the governor and the Legislature didn’t go hat in hand to CalPERS seeking a loan. The lawmakers simply took more than $1 billion of “surplus” CalPERS funds, while also putting the CalPERS actuary under their control.
The courts ordered repayment of the money taken from CalPERS. An initiative responding to the “raid,” Proposition 162, approved by 51 percent of the voters in November 1992, gave CalPERS and other public pension funds new powers.
The labor-backed initiative gave the pension funds sole power over their funds, administration and actuaries. In a safeguard against manipulating pension board membership, a public vote was required to change board selection procedures.
Before the initiative, the state constitution required pension boards to give equal weight to three things in the use of assets: providing benefits to members, minimizing employer contributions, and paying reasonable administrative costs.
The initiative changed the balance, requiring pension boards to give highest priority to providing benefits to members of the systems and their beneficiaries.
As he spoke on behalf of the SEIU request to delay giving the state immediate savings from the new labor contracts, Jelincic reminded the board of its “fiduciary” duty while managing the money of others.
“I believe this is a bad policy,” Jelincic said. “It’s here to provide relief to the state. I would point out two months ago the fiduciary counsel said you really shouldn’t be looking at the interests of the employer. You really need to look at the interests of the fund.”