Davis Proposal to Defray Deficit Called Costly

Gov. Gray Davis’ proposal to pare $1.9 billion from the state’s budget deficit by delaying pension payments to state employees and teachers could cost Californians more than $10 billion over the next 30 years, administration officials said Tuesday.

In his proposed $100-billion budget, Davis offers a series of loans, cuts and other maneuvers in what he characterizes as a “balanced” spending plan for the fiscal year beginning July 1. One of his proposals to narrow the $12.5-billion deficit would have the Legislature skip payments for a year to the California Public Employee Retirement System, and for two years to the State Teachers Retirement System.

That proposal is designed to help Davis avoid raising taxes and cutting more deeply into programs in an election year. But the ultimate cost in interest and other payments is so steep that Davis administration officials hope to find less costly alternatives.

“If we can find something that’s cheaper, we’re interested in doing that,” Department of Finance Director Timothy Gage said.

Agreements struck with pension fund managers allow the administration to shelve the idea if Davis can find another solution by May--and some state lawmakers are urging that Davis do so.

“It is the political equivalent of a payday loan,” said Senate Republican Leader Jim Brulte of Rancho Cucamonga. “We think it is a horrible idea. If you’re born today, and you enter the work force 25 years from now, the taxes you pay will go to pay off Gray Davis’ 2002 budget.”

Assemblyman John Campbell (R-Irvine), the leading Republican on the Assembly Budget Committee, predicted that the proposal will die: “It is very expensive and it is messing in retirement systems. That has a political stigma.”

Davis proposes to skip $948 million in payments into the $97-billion teachers’ pension fund starting in April and continuing for two years. The state would defer for a year an additional $1.02 billion in payments into the public employees pension fund, the nation’s largest pension fund at $146 billion.

Managers of the state employee pension fund agreed to a deal in which the state pays what amounts to an interest rate of 8.25% starting in 2004 for the money. The rate reflects the pension funds’ average annual return on investments.

Another sweetener for the fund managers is Davis’ proposal to boost cost of living increases in pension benefits for current and retired state employees. He wants the state to grant annual increases equal to 80% of future inflation, rather than the current 75% level.

According to the Department of Finance, the cost of skipping $1.029 billion in state employee pension payments would be $6.93 billion over 30 years. Delaying the $948 million in payments to the teachers’ pension--including an 8% rate of return, plus other improvements in the retirement plan--would cost $3.42 billion over the same period.

Marty Morgenstern, who heads the state Department of Personnel Management and sits on the board that oversees the state employees’ pension fund, said the long-term cost “gives you pause, except that is the cost of money. It is like buying a house. Thirty years from now that amount of money will not be that much.”

The deal also affords the state “a nice opportunity . . . to provide retirees with some retirement protection” by raising their potential cost of living bumps, Morgenstern said.

However, Controller Kathleen Connell, a member of the boards that oversee the pension funds, denounced the 8.25% interest rate as “usurious.” She said the state could reduce its costs significantly by simply borrowing elsewhere for a shorter period, as little as a year.

Given the funds’ health, pension checks would not be threatened under the proposal, officials say.

However, two unions have sued the state employees’ pension fund. The suits allege that the board failed to give the public adequate notice before approving the proposal last month.

Other governors facing budget deficits have borrowed from pension funds--and unions have sued. Courts have ruled that the state can borrow from the funds so long as current and retired employees get commensurate benefits.

State employees’ unions have been among Davis’ strongest political supporters. But in recent months, as the Democratic governor has balked at granting significant pay hikes to at least some state workers, relations have become strained.

“We’re not trying to hurt the governor,” said Perry Kenny, president of the 140,000-member California State Employees Assn., which has sued. “We’re just trying to get the best for our members.”