Schwarzenegger calls for two-tier state pension system

SACRAMENTO BEE

Published Tuesday, Jun. 30, 2009

California public employee unions already reeling from pay cuts have been dealt a new blow by Gov. Arnold Schwarzenegger – a push to lower pension and retiree health care benefits for state workers hired after today.

Schwarzenegger's call for creation of a two-tier system of retiree benefits was part of a package of proposals submitted to Democratic leaders Saturday in tense negotiations over the state's $24.3 billion shortfall.

The plan would not affect existing state employees.

The governor previously had imposed about a 9 percent pay cut on state workers by requiring two unpaid furlough days per month. Last week he threatened to add a third furlough day unless a budget deal was struck immediately.

"Attacking hard-earned pensions, on top of a pay cut, does not solve the crisis," said Yvonne Walker, president of Service Employees International Union Local 1000.

"The governor should go after larger dollars that will make an impact now, by closing corporate tax loopholes and putting a stop to $34 billion in wasteful vendor contracts," Walker said in a written statement.

Senate President Pro Tem Darrell Steinberg said he is willing to consider pension changes but will not be ramrodded by the governor.

"The entire issue of pension reform deserves real consideration in the Legislature, but it's not right to jam it into a budget agreement in (the final) hours," Steinberg said.

Aaron McLear, Schwarzenegger's spokesman, said the pension and retiree health care proposals for future state workers were necessitated by Democrats' rejection of about $5 billion in program cuts sought by the governor.

"What the Democrats have said up to this point is, 'We don't want to eliminate (some programs targeted by Schwarzenegger), and we don't want to make them run more efficiently – what we want to do is raise taxes to pay for them.' And that's unacceptable," McLear said.

Although the two-tier pension proposal would not save much money in the coming fiscal year, McLear said it is relevant to current budget negotiations because it could ease fiscal pressures potentially created in coming years by Democrats' failure to cut deeply enough into operational costs now.

Specifically, Schwarzenegger's retiree proposals for future state workers would:

• Alter the pension formula to ensure lower benefits or longer public service. For example, most state workers who are not public safety employees now may retire at age 55 with a pension totaling 2 percent of their salary multiplied by number of years worked. The new formula would pay that benefit at age 60.

• Compute pensions for peace officers, firefighters and highway patrol officers based on the highest three years of compensation earned, rather than the highest single year.

• Provide lifetime health care benefits only for retirees who have worked 25 years. Currently, the state pays 50 percent of retiree health insurance costs for employees with 10 years of service. The percentage rises 5 percent annually, to 100 percent for 20-year employees.

• Lower the state's contribution for retiree health care benefits from 100 percent of the average HMO premium to an amount that matches the contribution for active state employees – generally 85 percent of the insurance premium.

David Crane, a special adviser to Schwarzenegger on jobs and economic growth, estimated that the pension and health care proposals for future state employees could save taxpayers about $95 billion over the next 30 years.

"We'd still have one of the finest pension systems in the country," he added.

Crane said the proposals could free future funds for public programs. Democratic lawmakers have complained in recent weeks that the state's massive budget gap threatens to create gaping holes in the safety net for vulnerable Californians.

"I, for the life of me, cannot understand why people who care about the financing of those programs would not say, 'We heartily embrace this (proposal), the sooner the better,' " he said.

But Carroll Wills, spokesman for California Professional Firefighters, characterized the two-tier approach as "manifestly unfair."

"Essentially what you're talking about at its core is unequal pay for equal work," he said.

Crane said the state's current retirement system has an unfunded liability of up to several hundred billion dollars, depending upon future earnings, to finance pension and retiree health care benefits.

Keith Richman, a former Republican assemblyman who now leads a nonprofit foundation pushing for state pension reform, said it is unlikely that lawmakers would agree to substantial changes if they are not accomplished in budget talks.

"The criticism of Sacramento is that it always kicks the can down the road," he said.