State Loses Battle Over Withholding From CalPERS

In another rebuff of California’s budget-balancing maneuvers of the early 1990s, a state appeals court ruled Thursday that the state must pay about $1 billion that it withheld from its workers’ retirement plan at the time.

Lawyers for the state vowed to appeal the ruling to the California Supreme Court.

The 3rd District Court of Appeals, upholding a lower trial court, said the state should have paid $910 million to the California Public Employees’ Retirement System, or CalPERS, during the 1992-93 and 1993-94 fiscal years.

Those were the years when massive budget shortfalls prompted California to issue its first IOUs since the Great Depression. The state missed its quarterly pension contributions to CalPERS, which were typically in excess of $100 million, in order to balance the state budget.

Fund administrators sued the state and several top officials in 1994 to halt the practice. A Sacramento Superior Court judge sided with CalPERS in December 1994 and said it was owed more than $700 million, plus 8.75% interest and compensation for missed investment opportunities.

Thursday’s ruling upholding the lower court decision put the total in missed contributions at $910 million plus interest. But it made no mention of missed investment opportunities, which could have been sizable given the recent bull market in stocks.

The interest payments will come to about $90 million, bringing the total amount owed CalPERS to about $1 billion, the pension fund estimated. The interest penalty will continue to grow as the case is appealed. State officials will try to negotiate a repayment schedule if the appeal fails.

“We are gratified,” said Pat Macht, chief spokeswoman for CalPERS, the huge $108-billion pension fund for non-teacher public employees in California.

The three-member appellate panel rejected arguments from Gov. Pete Wilson’s administration that the budget policies did not violate constitutional safeguards.

Government retirees “have a contractual right to a sound retirement system and [the state’s] ‘in arrears’ pension financing unconstitutionally impaired that contractual right,” the appeals court ruled.

The retirement fund is currently in no danger, said a CalPERS spokesman.

If the state is forced to pay the $910 million, it may eventually dip into what is currently a budget surplus estimated at $748 million, analysts said.