Facing tough times, governors in four states hope to save more than $3 billion by cutting state pension contributions for the coming fiscal year.
While many governors have yet to present their budget proposals, early signs are there will be a bumper crop of proposals that pare state contributions to public pension funds. Those under consideration for the fiscal year beginning July 1, 2002, include:
* California Gov. Gray Davis proposed deferring $2 billion in contributions to CalPERS and CalSTRS to help plug a $12.5 billion budget deficit, although the delay in the CalPERS contribution already has been challenged in court by two employee unions.
Under a deal reached last December with the $147 billion California Public Employees' Retirement System, Sacramento, the governor would defer $1.07 billion in contributions over the next 30 years, paying 8.25% interest and enhancing inflation protection for retirees. The governor also wants to postpone $948 million in contributions to the $100 billion California State Teachers' Retirement System, Sacramento, in exchange for increased contributions to the system's new supplemental retirement scheme.
* Florida Gov. Jeb Bush recommended reducing pension contributions to the Tallahassee-based Florida State Board of Administration's fund by $1.06 billion, following a $600 million cutback last year. Gov. Bush argues that the $95 billion fund's surplus has nearly quadrupled to $14.5 billion in July 2001 from $3.8 billion three years previously, and money is needed to fund other state and local needs.
* Kentucky Gov. Paul Patton is expected to propose on Jan. 22 a $30 million cut in the contribution to the $6 billion Kentucky Employees' Retirement System, Frankfort. The fiscal year 2002 contribution is predicted to total $116 million, and actuary William M. Mercer, Inc. has recommended a state contribution of $123 million for the next year. The expected cut, likely to affect the system's underfunded Medical Insurance Trust, has fund officials "extremely concerned," said William P. Hanes, general manager. The Kentucky Association of State Employees, Frankfort, is contemplating legal action, said Charles B. Wells, executive secretary-treasurer. But Jim Ramsey, state budget director, said the state pension system is 125% funded, and Kentucky is one of only nine states that does any pre-funding of its health benefits.
* Vermont Gov. Howard Dean is expected to propose a pension contribution to the $1.1 billion Teachers' Retirement System, Montpelier, below the $23.2 million recommended by its actuary, Buck Consultants. Trimming the contribution is "typical of the governor, even in good times," said state Treasurer James. H. Douglas. The $1 billion State Employees' Retirement System is expected to receive the $9.3 million urged by actuaries, said Mr. Douglas, who sits on the boards of both funds.
Doesn't always work
The picture isn't all bleak. Many state pension executives report their expected contributions are unscathed. And just because a governor proposes cutting a pension contribution doesn't mean it always works that way.
Jane Swift, acting governor of Massachusetts, in November vetoed a $134 million contribution to the Pension Reserves Investment Trust, Boston, as part of the state's long-overdue budget process for the fiscal year that started last July 1.
Battling with the Democratic-controlled Legislature on how to close a $1.35 billion budget shortfall, the proposal by Ms. Swift, a Republican, would have delayed full funding of the $26.8 billion PRIT plan by 10 years until 2028, said Dominick Ianno, spokesman for the executive office of administration and finance.
But the Legislature overrode her veto amid concerns that cutting the contribution would have cost the state an estimated $8 billion over the long haul, said Charles Rasmussen, spokesman for Thomas M. Finneran, speaker of the state House.
"You don't want to balance your operating budget on the back of your pension fund," said Michael Travaglini, first deputy treasurer, a Democrat. "You should make some tough decisions now" instead of increasing the burden on future generations, he said.
Instead, the state will contribute $912 million to PRIT in the current fiscal year.
The political risks of proposing pension deferrals can be quite substantial. Already, California Gov. Davis is being assailed by members of both parties and by state employee unions.
Richard Chivaro, chief counsel for state Controller Kathleen Connell, a Democrat, said the controller finds the 8.25% interest rate the state will pay CalPERS for the delayed contribution "highly offensive."
State finance department officials estimate the cost of deferring the $2 billion in contributions and making benefit improvements will be $10.3 billion over 30 years.
Fortunately, the governor has an opt out; he can withdraw the proposals by June 1 if he finds a better deal elsewhere.
Two state employee unions have sued CalPERS in state court in Sacramento, alleging the retirement system failed to provide adequate notice that the matter was going to be discussed at the board's Dec. 19 meeting.
The California Association of Professional Scientists, Sacramento, which filed suit against the CalPERS Board of Administration on Jan. 7, said the action represents a bailout of the state. "This is a raid of the PERS system by the Davis administration aided and abetted by the PERS board pure and simple," said Thomas Napoli, union president, in a release.
CalPERS spokeswoman Pat Macht denied the contribution deal was a raid. She noted the system agreed to the deal, which will pay CalPERS 8.25% interest as well as an improved inflation protection benefit for retirees that is valued at $1.6 billion.
Ms. Macht also noted that California's open meetings law allows agencies to take action on 48-hour notice in the event of an emergency. She said the deal with the governor had been struck on Dec. 17, two days before the board's meeting.
The California State Employees Association, Sacramento, filed a similar suit against CalPERS on Jan. 14, although the union at one point was involved with pension deferral discussions.
The union alleged that the state Department of Personnel Administration had offered to provide annual pay increases of 2.5% by deferring the CalPERS contribution but said the payback would be for a relatively short period of time. Later, the state agency struck a 30-year deal with CalPERS without giving the union a chance to negotiate over the change, union officials charged.
Union President Perry Kenny said the union had qualms about delaying any contribution, and the size of the deal was far less than the $1.1 billion the state may postpone.
The governor's proposal to defer $948 million in pension contributions over two years to CalSTRS is less well formed. While the governor's budget proposes boosting contributions to CalSTRS' new supplemental defined benefit plan, negotiations have not yet taken place with teachers' fund officials.