Lawmaker Seeks to Privatize State Pensions

Declaring rising pension debt a “ticking time bomb,” a California legislator proposes converting public employee retirements from a traditional defined-benefit system to the 401(k)-style plans held by most American workers.

Employees hired by a public agency after July 1, 2007, would automatically be enrolled in the new contribution plan proposed by Assemblyman Keith Richman (R-Northridge). The plan would make pension payments for public agencies more predictable and potentially lower costs, he said.

Although the measure would not affect the 1 million workers now employed by the state, local governments and school districts, Richman expects the bill to meet stiff resistance from public employee unions and majority Democrats when introduced to the Legislature on Monday.

Union leaders say Richman’s proposal would make pensions less secure and could leave retirees with insufficient income in their old age. Democrats on the Assembly pension committee could not be reached for comment.

But in the past they have been reluctant to support even modest changes. When state Sen. Tom McClintock (R-Thousand Oaks) in the last session attempted to repeal a pension boost for several hundred state workers, he was blocked by the Democrat majority.

Gov. Arnold Schwarzenegger’s administration later ruled that the workers did not qualify for the fatter pensions.

If nothing is done about the flood of pension debt, Richman warns, the effect on public safety, education, health and other services could be disastrous.

In 2004, state and local governments dipped into general funds, borrowed money or delayed payments to cover more than $3 billion in unfunded pension liabilities.

Experts believe the debt will continue rising for several years, Richman said.

“I recognize the political realities,” Richman said. “But to a large degree this should not be a partisan issue. Money that is going to meet pension obligations is money that is not going to healthcare for the underserved, for education or for affordable housing.”

The governor, who is proposing his own sweeping reforms for the coming year, has asked for information on Richman’s proposal but has not yet taken a position, said Daniel Pellissier, Richman’s chief of staff.

Schwarzenegger’s backing would increase the bill’s chances of making it through the Democrat-controlled Legislature, Pellissier said. The Howard Jarvis Taxpayers Assn., Cal-Tax and local elected officials have offered their support, Pellissier said.

“We would hope the Legislature would have the backbone to work with us on this issue,” Pellissier said. “But we are not certain, and we have strong reason to believe that they will kill it off as they have other reforms in this area.”

Because Richman’s bill would amend the state Constitution, it would be subject to approval by voters. Richman said he hoped to get bipartisan cooperation on the language before putting it on the 2006 primary ballot.

If the Legislature killed the bill, Richman said, he would bypass Sacramento and go directly to voters, a tactic that has worked well for Schwarzenegger.

Critics accuse Richman of trying to make a name for himself because he intends to run for state treasurer in 2006.

Pellissier agreed that Richman wants the treasurer’s job, but he said that was not why the legislator was taking on the pension issue.

“Governments will still be facing pension deficits even if he wasn’t a candidate for treasurer,” Pellissier said.

Pensions for most of California’s public employees are administered by the $165-billion California Public Employees Retirement System. A handful of governments operate their own retirement systems.

Under Richman’s proposal, those publicly governed systems would be replaced by private fund managers who would, for a fee, assist employees in managing their portfolios.

At a news conference Friday, Sacramento union leaders were concerned enough over Richman’s plan to rebut what they called “myths” about pension funding and payouts.

They said the media exaggerated the impact that recent improvements in pension benefits have had on retirement costs. They also accused the media of exaggerating instances of pension abuse by some individuals.

Pension funding has always been cyclical because it relies heavily on the stock market’s performance, said Steve Szalay, spokesman for the California State Sheriff’s Assn.

Although some reforms may be necessary, the constitutional amendment proposed by Richman is too far-reaching, Szalay said.

“We want to carefully look at these plans and address reform on a comprehensive and professional basis,” Szalay said. “We think knee-jerk efforts shouldn’t get any support at all.”

Defined-benefit plans, guaranteeing a set monthly amount for life, were the standard for American workers in the ‘60s and ‘70s. But in recent years, the private sector has moved increasingly toward defined-contribution systems.

In 1992, 58% of family heads participated in a defined-contribution plan, according to a 2004 report by the Employee Benefits Research Institute. That percentage increased to 79% by 2001, according to the institute.

In 401(k)-type systems, the employee has greater control over investments. But the worker also shoulders the risk when returns fail to meet expectations.

Traditional pensions, by contrast, guarantee a monthly payment and require the employer to make up the difference if funding falls short.

Governments have been a bastion of defined-benefit stability and with good reason, union leaders say.

“You’re talking about teachers, police, firefighters, scientists and elected officials,” said Hank Kim, executive director of the National Conference of Public Employee Retirement Systems. “In terms of public policy ... defined-benefit plans promote job security and improve recruitment.”

Richman said his goal was not to impoverish public retirees but to improve the fiscal health of public agencies for the long run. For instance, his staff members said, the state’s $2.5-billion pension bill was projected to grow to $3.5 billion by 2009 unless something was done.

“If you are really looking at solutions to long-term structural problems, this has to jump up on the plate,” Pellissier said.