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 coCalifornia State Teachers' Retirement Systemn 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.