Today's topic: How much of a fiscal hazard to California does the state's pension system present? Won't CalPERS recover most of the money it has lost this year once the economy recovers?

Without reform, get ready for fiscal disaster
Point: Marcia Fritz

Market losses, higher pensions and a mass of new retirements expected within the next few years are hitting the California Public Employees Retirement System (CalPERS) all at once. The fund value today is $191 billion. If you subtract the portion needed for current retirees and survivors, just $50,000 remains for each active worker. It's not enough.

Warn your members, Scott, not to expect CalPERS to recover most of the money it lost once the economy recovers. The flood of money into housing caused real estate values to soar, causing the overconsumption that propped up the stock market. Stock prices have bounced back a bit recently only because many companies improved their earnings by cutting labor costs, not by increasing sales.

This is the recovery. At a board meeting in July, CalPERS' chief investment officer, Joseph Dear, admitted that investment returns would likely not be in the ranges the fund has historically assumed and that he expects lower returns to persist for several years. Gov. Arnold Schwarzenegger proposes legislation to require annual plain-English reports that show what happens to pension costs if actuaries' assumptions on future market returns fall short. Transparency is vital so everyone understands future risks before new benefits are negotiated.

But what else should we do? Budgets are already strained by falling revenues. Some expect retirement costs to eventually consume a whopping 25% of general-fund operating budgets. Cutting positions doesn't help, as those who lose their jobs first are generally younger workers whose pension costs are lower. Encouraging early retirements and granting extra service years to older workers worsens the problem. Pension funds have to be replenished, and services must be cut in the future to pay for these arrangements. Issuing bonds to plow dollars into pension funds is risky.

In short, bolder action must be taken now. Here's what we can do:

- Stop paying cost-of-living increases to retirees. Social Security recipients and military retirees will not receive COLA increases this year. We are paying CalPERS retirees their COLA increases when inflation was flat last year. Why?

- Employees should pay at least one-half of what the employer contributes. The average state worker pays less than one-third of what the employer pays. Why? Many public employers in California pay the employee contributions in addition to the employer-financed contribution. Why?

- Most important, adopt uniform second-tier benefits for all new public-safety and non-public-safety workers. Many safety workers receive more after retiring than when they worked. Why? More than half of non-safety workers receive Social Security benefits in addition to their pensions, yet their formulas are the same as workers who aren't covered by Social Security. Why? Some workers are allowed to cash in accrued sick leave and vacation pay and have that count as wages for pension purposes. Others aren't allowed to do this. Why? Employees in many nonhazardous jobs qualify for higher safety pensions. Why?

When Ronald Reagan was president, the federal government successfully adopted less costly second-tier defined benefits for safety and non-safety workers hired after 1983. The Federal Employees Retirement System has worked well for more than two decades. Why can't California do the same?

Marcia Fritz is vice president of the California Foundation for Fiscal Responsibility.


Pension-collecting retirees stimulate the economy
Counterpoint: Scott Adams

Marcia, CalPERS is a fiscal benefit, not a hazard to the state.

Pension plans such as CalPERS are sustainable over the long term and can meet their obligations in bull or bear markets. The governor's pension task force, made up of seven Republicans, four Democrats and one independent, agreed that California's pension plans benefit the state while providing for a secure retirement.

We can expect CalPERS to use its investment savvy to continue outperforming the market in the future and to begin to earn back a good portion of its losses. It's been done before. Following the market losses of 2001-02, CalPERS assets fell from $180 billion to $130 billion. By 2007, CalPERS recovered and reached $260 billion in assets and was able to meet 100% of its benefit obligations.

If investment returns cannot address pension obligations, bargaining agreements on benefits and contributions will likely cover the rest. Public employees all across the country are pitching in and doing their part.

Marcia, you complained Thursday about benefits received by California Highway Patrol officers: "These pensions include survivor benefits and guaranteed cost-of-living increases as well." Does your organization really want to eliminate survivor benefits and a COLA increase for spouses and children of fallen officers?

Today you refer to Reagan's elimination of pensions for federal employees as great policy. As a former federal employee without a pension, the returns on my 401(k)-style Thrift Savings Plan (TSP) resemble most Americans' retirement plans. Right now, they're awful.

Under this plan, life was good during the tech-bubble glory days of the 1990s. By 2002, however, a large chunk of those retirement savings had vanished. Some money was eventually recovered only to evaporate thanks to the current meltdown. As things now stand, there is no way anyone could retire on this TSP plan. If that's your idea of a success story, heaven help us.

Historically, 75% of CalPERS' pension benefits are covered by investment returns. The remaining 25% comes from employee and employer (or taxpayer) contributions. That's a good deal for taxpayers. CalPERS is one of the few stable economic engines in California's sour economy. It has money to invest in California start-up businesses, real estate, community development and infrastructure.

Pension payments to more than 400,000 CalPERS retirees have a positive economic impact in every community. These retirees don't need government assistance, and they use their pensions to spend money and stimulate the economy. A recent study by the National Institute on Retirement Security found that pension benefits kept 1.35 million American households off public assistance in 2006, saving taxpayers $7.3 billion in welfare payments.

The real tsunami facing government budgets is not pension obligations, but the wave of baby boomers facing retirement with decimated 401(k)s, little or no home equity and only Social Security income.. Instead of trying to tear down a program that works for so many, California (and Congress) needs to look at new plans to improve retirement security for everyone.

Scott Adams is a pensions and investments analyst with the American Federation of State, County and Municipal Employees.