A pension reform plan issued by Gov. Brown last month calls for more “independence and financial sophistication” on pension boards. Now he will soon have five openings to fill on the 12-member CalSTRS board.

Last week Brown aides interviewed three board members appointed by former Gov. Arnold Schwarzenegger whose four-year terms expire at the end of the year: Kathy Brugger, Jerilyn Harris and Beth Rogers.

Two seats have been vacant since February, when Brown yanked two last-minute Schwarzenegger appointments. One was a co-author of a Stanford graduate student study contending state pension funds have a $500 billion debt, not $55 billion as reported at the time.

At what may be the last California State Teachers Retirement System board meeting until February, Harris thanked persons who attended an evening reception last week for “those of us who are – may be moving on.”

“I’m in denial,” Rogers told her fellow board members. “We all have talked to the governor’s office and are hopeful that maybe we can continue in STRS.”

Three of the five seats are representatives of the “public,” apparently allowing the governor to choose the qualifications. But one seat must be filled by a CalSTRS retiree and another by a board member of a school district or community college.

“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” Brown said in his 12-point pension reform plan.

“Retirement boards need members with real independence and sophistication to ensure that retirement funds deliver promised retirement benefits over the long haul without exposing taxpayers to large unfunded liabilities,” he said.

As a starting point, Brown proposed adding “two independent, public members with financial expertise” to the 13-member California Public Employees Retirement System board.

“True independence and expertise may require more,” the governor said. He urged “government entities that control other public retirement boards” to make similar changes.

It seems possible, then, that Brown may keep independence and expertise in mind when he makes the CalSTRS appointments, particularly to the three public seats.

The governor’s plan defines “independence” as a board member who, along with family members, is not a member of CalPERS or an organization representing CalPERS members and has no financial interest in a CalPERS contractor.

The plan does not define “financial sophistication.” But it calls for replacing the State Personnel Board representative on the CalPERS board with the administration’s Department of Finance director.

One of the two gubernatorial appointees on the CalPERS board, Tony Oliveira, is a designated local government representative appointed by Schwarzenegger in February 2007.

The Kings County supervisor and former California State Association of Counties president has said several times at board meetings that his remarks may be his last, an apparent acknowledgement that he could be replaced at any time.

The other gubernatorial appointee on the CalPERS board, Dan Dunmoyer, is a designated life insurance industry representative appointed by Schwarzenegger in April 2009.

How the lack of independence and financial sophistication “contributed to unaffordable pension benefit increases” is not specified in the sketchy remarks in the governor’s reform plan.

CalPERS has been criticized for telling the Legislature that state costs would not be increased by SB 400 in 1999, a major state worker pension increase that set a trend for local government employers.

Legislative analyses of the CalPERS-sponsored bill and a 17-page CalPERS brochure said CalPERS expected the increased pensions to be covered by surplus funds and investment earnings.

What was not mentioned was a startlingly accurate forecast by CalPERS actuaries: If investment earnings averaged 4.4 percent, instead of the 8.25 percent assumed by CalPERS, state costs would soar to $3.9 billion in a decade.

A representative of the League of California Cities last month called for the repeal of SB 400 and AB 616 enacted in 2001, which made three higher pension formulas available to local governments in CalPERS and 1937 act county systems.

“We think it’s important to repeal SB 400 and AB 616 because we think they have generated pensions that are unsustainable and very difficult to explain to the larger public that we serve,” Rod Gould, Santa Monica city manager,told a legislative hearing.

The Legislature also was told that the main bill in a legislative package a decade ago that increased CalSTRS benefits, while decreasing state contributions, would be paid for with a CalSTRS surplus and have no effect on the state general fund.

The main bill, AB 1509 in 2001, created a Defined Benefit Supplement, a tax-deferred investment plan with guaranteed minimum earnings based on the 30-year Treasury bond and possibly higher earnings when CalSTRS investments do well.

For a decade ending last January, the supplement was funded by diverting a quarter of the teacher contribution from the seriously underfunded CalSTRS pension plan, 2 percent of pay from the total teacher contribution of 8 percent of pay.

The labor-friendly 13-member CalPERS board has six members elected by active or retired state and local government employees. In addition to the two gubernatorial appointees, one member is appointed by the Legislature.

Four members are on the CalPERS board because of the offices they hold: state Treasurer, state Controller, Department of Personnel Administration director, and State Personnel Board designee.

The governor appointed eight of the 12 CalSTRS board members until legislation, SB 1580 in 2002, authorized the election by active members of three board members.

Four CalSTRS board members are office holders: Treasurer, Controller, state Superintendent of Public Instruction, and Department of Finance director.

Up for re-election to four-year terms this fall are the CalSTRS chair, Dana Dillon, and vice chair, Harry Keiley. The two K-12 classroom teachers, each with two opponents, have strong backing from the California Teachers Association.

Running for an open community college seat being vacated by Carolyn Widener are Sharon Hendricks, endorsed by the California Federation of Teachers and Phyllis Hall, endorsed by the California Teachers Association.

Half of the members could be new when the CalSTRS board reconsiders its earnings forecast in February and April. A lower earnings forecast would cause an increase in the CalSTRS debt or unfunded liability, now about $56 billion.

On a split vote last December, the CalSTRS board dropped the earnings forecast from 8 to 7.75 percent a year, not the 7.5 percent recommended by actuaries.

Teacher groups urged the board to limit the decrease to 7.75 percent. Unsuccessfully pushing for the lower 7.5 percent rate were Schwarzenegger’s finance department representative and two board members appointed to represent the public.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 7 Nov 11