Gov. decries CalPERS plan to cover its losses

The state’s largest pension plan is scheduled to vote today on a proposal to spread this year’s severe investment losses over 30 years and save cash-strapped state and local governments hundreds of millions of dollars initially.

But Gov. Arnold Schwarzenegger opposes the move as a “pass-the-buck-to-our-kids idea.”

The California Public Employees’ Retirement System, the fund for state and local government workers, has to take action to cover tens of billions in losses from the recession.

Its holdings were valued at $239.2 billion at the start of last July but plummeted nearly 30% by the end of March, a month when key stock market indexes fell to their lowest levels in more than a decade.

The portfolio has since risen to $184 billion with Wall Street’s second-quarter spurt, but it is still down 23% from July.

Without action, cities, counties and other public entities would be hit next year with large increases in their annual CalPERS contributions -- jumping from 16.9% of total payroll this July to 24.8% next July.

Under the proposal, called a smoothing policy, the public entities would pay a substantially smaller increase next year -- 19.7% of total payroll. That would rise over the years, though, as annual employer contributions grow, in what are expected to be better times, to make up the difference in the lower payments in earlier years, CalPERS said. The CalPERS proposal is supported by the California State Assn. of Counties and the League of California Cities. The plan “will blunt the impact of increased employer rates that cities and counties will be facing in the coming years,” the two groups wrote in a joint letter to the CalPERS board.

Eraina Ortega, a lobbyist for the county group, called smoothing “a prudent thing to do” that would not affect overall fund stability or hit counties with unexpected new costs at a time of “huge budget shortfalls.”

Smoothing is not a new tactic at CalPERS. The pension fund instituted such a policy in 2005 as a continuing tactic to protect employers from sharp hikes following the dot-com crash in the technology sector and an economic downturn in the wake of 9/11.

But this year’s far worse losses require a separate treatment, CalPERS actuaries argued in a memo to the board. Calling the global market decline a “unique event,” the memo said the smoothing plan should be paid outside the existing smoothing process.

CalPERS’ assumption that investment earnings would average 7.75% annually for years to come is “lulling employers into complacency about the real size of contributions needed to meet pension promises,” said David Crane, the governor’s special advisor for employment and the economy.

Schwarzenegger, who faces a $24.3-billion budget deficit and the prospect that California could run out of cash next month, isn’t buying CalPERS’ financial prognosis about projected long-term growth of its investments.

“By deferring pension contributions,” the governor said, “CalPERS would not only be gambling that its investment earnings in this economy would grow faster than its pension obligations, but it would also be using our kids’ money to do so because they would be the ones stuck footing the bill.”

California’s government, including CalPERS, should be focusing on fixing its pension system to cut future costs rather than relying on actuarial maneuvers to temporarily ease the pressure on public agencies to meet burgeoning pension obligations, Schwarzenegger said.

His opposition to the CalPERS smoothing proposal doesn’t ensure its defeat.

The governor appoints only three seats on the 13-member board, which is dominated by government employee labor unions.

An earlier draft of the smoothing plan was approved on a 6-4 vote in May, with dissenting votes from both sides of the political aisle, including state Treasurer Bill Lockyer, a Democrat. “We agree with the governor in the sense that at least on the state level we should bite the bullet and take the increases now rather than later,” said Joe DeAnda, a Lockyer spokesman.

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marc.lifsher@latimes.com