"I don't think it's suddenly fair to blame the employees for having a decent pension," said Tom O'Connor, a San Francisco firefighter.
SACRAMENTO, Calif. — Gov. Arnold Schwarzenegger’s proposal to overhaul the pension funds that 2.1 million California state employees have long depended on — by converting the funds into plans resembling a 401(k) — has teachers, firefighters and other workers suddenly worried about their retirement.
Under the proposal, Schwarzenegger wants to replace the two largest public pension systems with private retirement plans similar to the 401(k) plans popular with businesses.
The proposal is designed in part to make up for the shortfall the pension funds have suffered in a struggling stock market. Because of subpar returns on their investments, as well as enhanced retirement benefits approved during good times, the state will be required to pay $2.6 billion this year into its largest pension fund, the California Public Employees Retirement System (Calpers), and $1 billion more in the teacher retirement system.
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Five years ago, the state’s contribution was $160 million.
Schwarzenegger, who fumes that the pension system is “another government program out of control,” has begun a campaign for his proposal that could attract up to $100 million in spending by business and unions and come before the voters in a special election this fall. His plan would steer all new government workers to individual investment accounts after 2007.
Unions, pension-fund managers and their allies nationwide are fighting the idea, calling it a power grab designed to stifle the growing influence of the nation’s public pension funds, which collectively manage about $2 trillion in assets. They warn of grim scenarios of ruined pensions and impoverished future retirees cast cruelly to the fates of the financial markets.
A poll conducted in early January showed more than 60 percent of voters supported Schwarzenegger’s idea, but that was before both sides started their campaigns. And opponents, including the state’s largest teachers union, say they’re not backing down.
“The greatest insult I feel about it is he’s trying to balance the budget on the backs of California’s working class,” said 12-year San Francisco firefighter Tom O’Connor. “I don’t think it’s suddenly fair to blame the employees for having a decent pension.”
Schwarzenegger is prepared for battle.
“There will be the unions and the special interests fighting us,” he told a Republican Party gathering Feb. 11. “Now we are going to the source, right there where all the evil, is and we are going to fix this problem once and for all.”
It’s not yet known how closely the plan will resemble President Bush’s proposal to privatize Social Security, although both plans envision separate accounts for future retirees.
Many other states are also struggling with gaps in their pension funds due to the stock market’s slump and higher payouts to current retirees.
If Schwarzenegger’s plan becomes reality, California will join at least three states, West Virginia, Michigan and Nebraska, that have made individual investment accounts mandatory for many of their new public-sector hires. But Nebraska dumped its private system in 2003 after a study showed that employees invested too conservatively and typically received returns nearly 5 percent less than the state’s professional investment managers.
Other states have voluntary private account plans, including Colorado, Florida, Montana, North Dakota, Ohio and South Carolina. Still others have developed hybrids, such as Oregon, which approved a plan in 2003 that funnels the state’s contributions into a traditional pension system and employee contributions to their own individual investment account.
A key Schwarzenegger target is the state’s automatic contribution of an amount equal to 2 percent of every teacher’s salary to the California State Teachers Retirement System, which now has $126 billion in assets. He also wants to stop paying a sliding-scale percentage of each state employee’s salary that changes based on the funds’ relative success in the markets.
This year’s $2.6 billion payment for Calpers is based on the state paying 17 percent of each employee’s salary into the fund. That’s risen from 4 percent in 2001 to 14 percent last year. The higher percentages reflect the nearly $20 billion in losses suffered by Calpers in 2001 and 2002 that ate away a big chunk of the $35 billion in gains in 1999 and 2000.
So far, Calpers, which manages $183 billion in assets, has about 85 percent of what actuaries estimate it needs to pay its long-term obligations. That’s a deficit of $27 billion.
The teachers fund has a shortfall of $23 billion, meaning it only has 82 percent of its long-term needs.
Schwarzenegger’s plan comes as more and more businesses are scrapping traditional pension plans and turning to so-called defined-contribution systems in which workers invest in their retirement accounts and receive matching money from their employers. Such plans, governed by section 401(k) of the federal tax code, have gone from covering 7 percent of the private work force in 1977 to 40 percent in 2003, according to the National Conference of State Legislatures.
Several members of the independent boards overseeing both California pension funds contend the sweeping change being sought by the governor is unwise.
At California State Teachers Retirement System, four of the governor’s own appointees voted against his plan, which led Schwarzenegger to retaliate by firing them, a move his critics dubbed the “Thursday afternoon massacre.”
Many employees also don’t see the need for change.
“I just think back to some of my relatives who had 401(k)s in great shape and were thinking about retirement when the stock market went downhill,” said Larry Carlin, who teaches physical education to seventh- and eighth-graders. “They had to continue working rather than retire.”