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Governor's Pension Deal Just New Way To Borrow
Daniel Weintraub, The Sacramento Bee.
July 1, 2004
Photo courtesy of IIASA
Over the past several weeks, hundreds of California state employees have been telephoning the governor's office and state legislators, bombarding policy-makers with more than 20,000 separate appeals in hopes of pressuring them to leave state workers out of any plan to bring the budget back into balance.
It looks as if Gov. Arnold Schwarzenegger got the message.
Schwarzenegger over the weekend cut a deal with Democrats in the Legislature and their public employee allies that prompted the union reps gathered for the negotiations to cheer when the governor came to address them at the conclusion of the talks.
They were applauding because Schwarzenegger abandoned his plan to roll back state employee pension increases granted during the administration of former Gov. Gray Davis.
In exchange for this capitulation, Schwarzenegger got the employee unions to agree to something that will cost their members nothing: allowing future hires to decide for themselves whether to participate in the state pension program during their first two years on the job. Instead of paying 5 percent of their salary into the pension fund, new hires will pay the same amount into a savings account in their name managed by the state. After two years, the workers will decide whether to keep that money under their own control or shift it into the pension fund to get retirement credit for their first 24 months on the job.
For those employees who opt out, the state won't have to contribute to the retirement system to cover their first two years in the work force. Depending on how many future workers take that option, taxpayers could save up to $2.6 billion in pension costs over 20 years, according to the governor's Department of Finance.
There is nothing wrong with that, as far as it goes. The employees get the freedom to keep control of more of their own money, and taxpayers save a little bit if new hires decide to take advantage of the offer.
The problems are what Schwarzenegger gave up to get that potential savings and what he plans to do with the money.
The governor, as part of the negotiations, dropped his proposal to require current employees to contribute an additional 1 percent of their salaries to their pensions. The higher contribution was supposed to make up for pension increases state workers received in 1999, when lawmakers who approved the raises were told they wouldn't cost taxpayers anything, because the pension fund was flush with earnings from the rising stock market.
Schwarzenegger also abandoned his proposal to reinstate a less generous, and less expensive, pension plan for new hires that was in place for most of the 1990s but was dropped in 1999.
On top of that, according to the union, Schwarzenegger agreed to stand aside and allow most state employees to receive a 5 percent pay raise in October. The raise, negotiated by Davis when he was governor, has been on hold because the state hasn't had enough money to pay it. Apparently Schwarzenegger has decided otherwise.
But that's not all.
According to the union, the governor also agreed to new, 5 percent raises for nurses in mental hospitals and state prisons, on top of any negotiated with other employees, and an extra 2 percent raise for teachers in the prisons.
Finally, Schwarzenegger, according to the union, agreed that the state will pay for the increasing cost of employee health care, plus a subsidy for workers in rural areas who don't have access to the less expensive HMO option offered to state employees in urban areas.
The governor's office won't confirm the details of his concessions, but union official Jim Hard listed them in a message to his members. "Congratulations," Hard told employees. "You won the pension fight!"
WHY would Schwarzenegger agree to all of this? One reason is that he was bargaining from a position of weakness. Most of the raises were set to go into effect, and he was almost powerless to prevent them, especially without the help of Democrats in the Legislature, who refused to lend a hand.
But another reason is that Schwarzenegger desperately needed a pension agreement as a fig leaf to go with his plan to borrow $900 million next year to pay the state's obligation to the pension fund.
Schwarzenegger wants to claim that the $900 million bond and the changes in the pension fund are linked. But by borrowing to pay the pension fund, Schwarzenegger is freeing up money that will be spent elsewhere, part of the ongoing gap between the state's expected revenue and its growing expenditures.
That borrowing is necessary because Schwarzenegger doesn't want to raise taxes and the Democrats who control the Legislature don't want to cut spending. Rather than fight that fight to an honest resolution, both sides have agreed to continue using the kind of gimmicks that got the state into its fiscal mess to begin with.
Schwarzenegger says he has a three-year plan to bring the budget back into balance. But if he keeps making progress at this rate, it will take him more like 30 years to get the job done.
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