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Pension Reform Deal Reached
Union Agreement Aids Budget Process
By Kate Folmar, Mercury News Sacramento Bureau
June 28, 2004
SACRAMENTO - Breaking through a critical logjam to passing a $103 billion budget, top lawmakers and officials with the largest state employees union Sunday agreed to reform employees' pensions.
The reform -- along with funding for local governments, education and social services -- had been the last hurdles to delivering a budget in time for Thursday's start of a new fiscal year. Top lawmakers and the governor's representatives concede that meeting that deadline is impossible, but hope remains that a budget can be finished by week's end and signed by the governor soon after.
That means the state will again blow its budget deadline -- as it has eight times in the last decade. And Republican Gov. Arnold Schwarzenegger, who has racked up an impressive string of victories in his fledgling governorship, will not deliver on a key promise.
For about an hour Sunday evening, Schwarzenegger and party leaders from both legislative houses met privately. They ultimately embraced pension changes that were proposed by Assembly Speaker Fabian Núñez, D-Los Angeles, and Assemblyman Darrell Steinberg, D-Sacramento. Bargaining representatives of the California State Employees Association had endorsed the plan Sunday afternoon.
The agreement could clear the way for the state to issue a $900 million bond for its pension payments, something that had been subject to legal challenge.
``If it's fine with the administration and fine with the workers, who am I to nay-say it?'' said Senate President Pro Tem John Burton, D-San Francisco, after the closed-door meeting. ``I think it's a very good deal for the state.''
The plan could save the state $2.6 billion over 20 years, said a senior administration official. That's about half the savings the governor initially proposed.
``Is it as far as we wanted to go? No,'' said Assembly Republican leader Kevin McCarthy of Bakersfield. ``Is it something? Yes.''
Under the plan, current employees give up nothing. But new hires who do not work in public safety would not receive a state pension match -- ranging from 16 to 17 percent of their salary -- for their first two years on the job.
The new employees could contribute 5 percent of their salary to an interest-bearing, tax-free account for those two years. After that, they could take that money for whatever they wanted and enter the state pension system as a first-year employee. Or they could use that money to ``buy'' their first two years of service, meaning they would enter the pension plan as a third-year employee.
The governor, his representatives said, agreed to consider other unspecified contract concessions in return.
The proposal could save $59 million in the coming budget year -- and more than $2 billion over 20 years -- if 75 percent of new employees opt not to ``buy'' their first two years of services.
Officials contend that's a reasonable, or even conservative, assumption because few employees have taken advantage of past programs that allowed them to buy their way from a limited pension to a more generous one.
Likewise, they argue that many new employees are young and might want to cash out the savings they accumulate to buy a home -- meaning the state pays nothing for those two years.
But, Senate Republican Leader Dick Ackerman of Tustin acknowledged, the state's actuarial assumptions have been wrong before.
``The figures are probably wrong every year,'' Ackerman said. ``You work with the best guesstimates you have.''
Schwarzenegger needed to win the union concessions to head off a legal challenge that threatened the balancing of his proposed budget.
The Howard Jarvis Taxpayers Association had challenged the governor's plan to sell bonds to cover its pension obligation. The group dropped the challenge with the governor's assurance that he would reform the system.
Still outstanding in the budget talks are resolutions on: funding for local government, higher education, kindergarten-through-12th-grade education and social services. Democrats are fighting proposed cuts to the universities and social services.
Rob Stutzman, the governor's spokesman, said that Schwarzenegger had no ``specific plans'' to mark the beginning of a new fiscal year without a budget.
But, he said, ``when the deadline comes and goes July 1, make no mistake about it, we'll make clear that the governor has been prepared to sign his proposed budget bill for the past couple weeks.''
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