Schwarzenegger taking aim at California public DB plans

SACRAMENTO, Calif. — California Gov. Arnold Schwarzenegger's plan to force all new public employees to join defined contribution plans would mark the beginning of a long and slow death for the state's public defined benefit plans.

Combined, public funds in California have more than $450 billion in assets, according to Money Market Directory, whose statistics Pensions & Investments updated.

The proposal would affect the nation's first- and fourth-largest pension funds — the $182.3 billion California Public Employees' Retirement System and the $118.6 billion California State Teachers' Retirement System, both based in Sacramento. All public defined benefit plans in the state would be closed to new employees, although existing employees could continue to participate.

It also would transform every public fund in California run by a state agency — including cities, counties, utility districts and possibly the $39 billion University of California Retirement Plan.

Public pension executives contend California's public defined benefit plans would become insolvent eventually, leading to liquidation of such asset classes as private equities and real estate.

"It would change the investments (and) the liquidity posture, and would cause the plan to become insolvent, costing the government more money," said Mark Saladino, Los Angeles County treasurer and trustee of the $33 billion Los Angeles County Employees Retirement Association, Pasadena.

Executives at CalPERS and CalSTRS don't expect immediate changes to their funds' asset allocations, officials said in e-mailed responses to questions.

The proposed California Public Employee Defined Contribution Plan would create a bonanza for external money managers.

Mr. Schwarzenegger is throwing his weight behind a constitutional amendment filed in December by Republican state Assemblyman Keith Richman that would freeze entry to all existing public defined benefit plans in California.

Separately, the Howard Jarvis Taxpayers Association, Sacramento, submitted a parallel ballot initiative to the California attorney general's office last week that would bypass the Legislature altogether. If the initiative — which also has Mr. Richman's backing — picks up 600,000 signatures, it will appear on a state ballot.

The unprecedented measure would leave the decision on how to administer and invest assets to local agencies. Thus, individual agencies could decide whether to run their systems separately — or even centralize assets with CalPERS. But odds are the lion's share of the assets will go to mutual fund companies.

Opponents also say switching to a DC plan wouldn't create any budget savings, only increase costs of running a retirement system.

Mr. Saladino added: "Any pension system that is closed to new members will have a gradual reduction of contributions into the system, yet payments to retirees will continue." Both he and Mr. Richman plan to run for state treasurer in 2006, but on opposite tickets.

Closing defined benefit plans would force them to be more liquid, said Clare Murphy, executive director of the $12 billion San Francisco City & County Employees' Retirement System. "The pension trust is not set up in perpetuity," Ms. Murphy said. "If it would be closed, liquidity would be required."

"There would be more restrictive investment options; it would not occur instantly, but over time. Ten, 15, 20 years from now, there would be very substantial changes," Ms. Murphy said.

The boards of both the Los Angeles County and San Francisco pension funds are expected to take positions on the governor's plans at meetings scheduled later this month.

Kirsten McIntyre, spokeswoman for CalSTRS, said: "We have concerns about (a defined contribution plan) being the sole source of retirement income."

Despite the hue and cry, this is not the first time the issue of switching to defined contribution plans has come up in California.

In 1996, Assemblyman Howard Kaloogian failed to get legislation passed that would have given CalPERS' participants a choice between staying in the defined benefit plan or moving assets to a new defined contribution plan.

But the Richman/

Schwarzenegger proposal is far more sweeping than Mr. Kaloogian's or any other public defined contribution moves in the country. That's because the new California proposal mandates that all defined benefit plans be frozen, and does not give new participants a choice between DB and DC.

In his State of the State address Jan. 5, Mr. Schwarzenegger said the state's pension system is "another financial train on another track to disaster." The state's pension contributions have soared to $2.6 billion from $160 million in just four years, he noted.

The governor favors Mr. Richman's proposal, which, under a new revision, would cap employer contributions between 6% or 9% of pay for most government employees. The proposed constitutional amendment does not specify how much workers could contribute to the new plans, or how the plans would be administered or invested.

The proposal would affect all government employees hired after July 1, 2007. Existing employees would have the option of switching into the new plan, including transferring their defined benefit assets.

The California Legislature is expected to take up Mr. Richman's proposal in a special session being called by the governor. If his bill is adopted, it would go to the voters for approval. But the bill's supporters don't expect the Democratic-controlled Legislature to pass the bill.

H.D. Palmer, spokesman for Mr. Schwarzenegger's finance department, did not return calls seeking details of the governor's proposal.

But opponents — led by CalPERS officials and labor leaders — argue that defined contribution plans are far more expensive to run than defined benefit plans. They also contend defined contribution plans offer lower benefits.

Rob Feckner, acting president of CalPERS, said in a news release the initiative is "a slap-dash effort to rush onto the law books a defined contribution plan that will be disastrous for everyone."

Research from CalPERS shows that defined contribution plans do not provide an adequate retirement for most public workers. Moreover, workers might not have as many investment options and are likely to face higher fees for managing their accounts than they would in a defined benefit plan.

According to the CalPERS data, administrative costs of defined contribution plans are typically 2% of assets, vs. 0.18% for CalPERS, the nation's largest defined benefit plan.

CalPERS' research also shows that 80 cents of each $1 in a defined benefit plan is paid out in benefits, vs. 50 cents in a defined contribution plan. For benefit payments to be the same, contributions would have to increase substantially, according to the National Conference on Public Employee Retirement Systems, Washington.

Some union leaders suggested the governor's defined contribution proposal piggybacks on President Bush's plan to privatize Social Security. "This is the California version of Social Security privatization," said Carroll Wills, a spokesman for the California Professional Firefighters. "The governor has chosen a highly partisan approach."

Others hinted at a backlash toward CalPERS for its activist corporate governance positions. In December, then-President Sean Harrigan lost re-election as the CalPERS representative of the State Personnel Board. Mr. Harrigan has blamed business interests and the governor for his defeat, although the governor's spokesman has said Mr. Harrigan is paranoid.

Jon Coupal, president of the taxpayers' group, said CalPERS' "social engineering" policies were a factor in his organization's ballot initiative.

Meanwhile, opponents of a shift to public defined contribution plans worry that participants are not prepared to manage their own retirement assets.

"You're putting so much risk of the stock market onto each individual person, they become in danger of losing retirement protections," said Art Pulaski, executive secretary of the California Labor Federation, AFL-CIO, Oakland.

"It's a hard thing to make the public understand about our pension systems, and why we need them," said Fred Nesbitt, executive director of NCPERS.

Chief of Bureaus Joel Chernoff also contributed to this story.