CalPERS Fund Faces Assault in Battle Over Pension Plans

By TOM PETRUNO

Sept. 22, 1996 12 AM PT

With $100 billion in assets and more than 1 million state and local government workers on its rolls, the California Public Employees’ Retirement System is a monolith that makes for an easy political target--easy to see, at least, if not to dent.

But the nation’s largest public pension fund now may be facing the most serious threat ever to its power, in the person of Republican Assemblyman Howard Kaloogian of Carlsbad.

He wants to open CalPERS’ “defined benefit” retirement system--which guarantees a preset, inexhaustible level of retirement income, though only for employees who stick around long enough--to competition with a “defined contribution” system that would give all California government employees far more control over the money paid into the fund on their behalf, and to how that money grows.

The debate that has ensued has more hot buttons than you can hit even with extra fingers. First off, this isn’t just about CalPERS, but eventually about every public pension fund in California, and there are many.

The constituencies--employees, taxpayers and bureaucrats, to name three--are huge and anything but disinterested: Younger govern-ment employees could potentially gain from Kaloogian’s idea, whereas older workers fear a drain on “their” assets; the employees’ unions fear a massive loss of power; mutual funds and banks see a potential gold mine in dollars that could be siphoned away from CalPERS; and the state and other government employers smell the possibility of significant cost savings--which would be applauded by a large segment of the public that sees government workers’ benefits as too rich anyway.

But often lost in the details is the big picture, what this would ultimately mean for government workers and for taxpayers: The former would be given more of an opportunity to succeed with their retirement savings, but also to fail. And if too many fail, unable at retirement to support themselves, taxpayers may be picking up the bill 10, 20 or 30 years from now.

Of course, the defined-contribution retirement plan concept isn’t new. They are best known as 401(k) plans in the corporate world, whereby employees decide how much they’re going to put away for retirement and in which investments, and employers then typically match (in full or in part) that contribution.

Corporate America has increasingly emphasized such plans over the last 15 years, usually as a supplement to traditional defined-benefit retirement plans that make companies solely responsible for employees’ retirement income. Some public employees, including some in California, also have been given access to 401(k)-style plans.

But for the most part, big public retirement funds such as CalPERS have remained defined-benefit in structure--meaning they are administered by the government entity, with benefits determined by rigid, complicated formulas, and with employees largely relegated to bystander status.

Assemblyman Kaloogian thinks public employees ought to have a choice of pension options, and his bill to force the issue got through the Assembly last spring, only to be stalled in the Democrat-controlled Senate. But he is pushing again this fall. He will hold a round of hearings, culminating in a joint Assembly-Senate hearing Nov. 17.

CalPERS now is roused. The fund held an all-day seminar in Sacramento on Thursday, during which a parade of consultants, along with Kaloogian, spelled out for CalPERS’ board the pluses and minuses of changing the system.

Kaloogian argues that CalPERS is “behind the curve,” that public funds in Oregon, Florida, Washington have already adopted new retirement plans. He accuses CalPERS of stonewalling his information requests earlier this year. He contends that the public labor unions have organized against him because, he says, they fear that a weakening of CalPERS’ authority over workers’ benefits also could eventually weaken the unions’ authority.

Kaloogian contends that he’s fighting for the majority of CalPERS members who, he says, end up forfeiting the benefits paid into the fund by their government employers. They forfeit because most employees--somewhere between 60% and 80%, he says, although CalPERS says the figure may be smaller--don’t stay in their jobs long enough to qualify for CalPERS benefits. For state employees hired after July 1, 1991, for example, it takes 10 years to become “vested,” or qualified for a pension. Many corporate 401(k) plans vest much faster.

“This is about choice and portability,” Kaloogian says. Why, he asks, shouldn’t younger government workers have the option of joining a pension plan that would allow them to take their money with them if they leave government, as many in today’s mobile society inevitably will?

He notes it is often the case that government employees are paid less than private-sector workers but that the government employees are told that better benefits make up for the pay disparity. Yet if they can’t claim those benefits--particularly a pension--what is the attraction of government work for younger people, Kaloogian asks.

At Thursday’s hearing, CalPERS’ board and staff both seemed at least sympathetic to the idea of change. Much of the discussion was about “hybrid” pension plans adopted in a few other states, giving employees options that include features of both defined-benefit and 401(k)-type plans.

Some hybrids, for example, allow workers to take with them the “present value” of accumulated retirement benefits if they leave early. Other plans give workers incentives to make their own investment choices with retirement dollars while guaranteeing a minimum benefit no matter what.

A key point to keep in mind here is that no matter what changes CalPERS might institute--on its own or at legislative gunpoint--government workers would decide which plan they want. And different workers would clearly make different choices.

There’s little reason, for example, for veteran workers nearing retirement to switch out of the current CalPERS defined-benefit system. On the other hand, younger workers--and anyone who figures he or she can invest money to earn better returns than CalPERS (which, for the most part, “indexes” its investments and thus can only hope to earn around the average U.S. stock market return over time)--might well opt for a defined-contribution plan.

And what about the cost to the state, and thus to taxpayers? Several CalPERS board members believe that’s Kaloogian’s real agenda. “Portability is a cover,” says board member Charles Valdes. “The true objective of Kaloogian is to shift [pension] liability” from the state to the worker.

In a 401(k) plan, after all, how well you invest your pension money will determine how well you live in retirement. If you come up short, your employer isn’t obligated to help you.

And because defined-contribution plans have only begun to supplant defined-benefit plans since the mid-’80s, we are in uncharted waters: Nobody knows how many defined-contribution plan workers nationwide will simply fail to save enough, or will use portability options to get their hands on their nest eggs early and then fritter them away.

Kaloogian doesn’t hide his disdain for CalPERS’ 1,000-person bureaucracy. “Look at this building,” he says of CalPERS’ Sacramento headquarters, a beautiful low-slung, hanging-gardens style affair. But Kaloogian insists that workers’ rights, not taxpayer savings, are his major priority.

But let’s remember that somebody, someday is going to have to pay for defined-contribution plan workers who come up short and can’t feed themselves. That’s not an argument for denying workers pension choices today, but it seems a very good argument for getting the debate over the future of CalPERS and other “paternalistic” pension funds out for the widest possible public discussion now.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Pension Plan Choices

Most major corporations sponsor both defined-benefit and defined- contribution 401(k) pension funds for their employees, whereas most large government funds are exclusively defined-benefit. Pension plan setups for funds with more than $1 billion in assets:

Defined benefit only

Corporate: 6%

Government: 81%

Defined contrib. only

Corporate: 4%

Government: 3%

Both types

Corporate: 94%

Government: 23%

Source: Greenwich Associates; numbers add to more than 100% because of multiple responses.

Who Tends to Fare Better Under Each Plan:

Defined Benefit