California's Pension Plan Safe For Now

JULY 2005 - Schwarzenegger Buckles Under Pressure - California Governor Arnold Schwarzenegger's attempt to scuttle that state's pension plan has suffered a major setback.

Schwarzenegger had announced that unless the California Legislature changed California's pension plan from its current defined benefit (DB plan) to a defined contribution (DC plan) before March of this year, he would gather enough signatures to put his reform bill before the voters as a binding referendum in a November special election (See March Voice).

However in April, under a barrage of criticism by public employee unions and retiree associations, both in California and other states, Schwarzenegger retreated by saying that it was better to craft policy via the Legislature instead of the ballot box. Since the California Legislature is not going to dump its retirement system members in a DC plan, which is equivalent to a 401(k)-style plan, this means that, for now at least, it's a dead issue.

Opponents, including our Association and the Massachusetts Association of Contributory Retirement Systems (MACRS) had feared that, if Schwarzenegger had won that battle, the fight would quickly spread to DB plans across the country.

"A great concern we have is that we know whatever happens in California tends to go to other states," said Fred Nesbitt, Executive Director of the National Conference on Public Employee Retirement Systems (NCPERS). "This is a national issue. To lose the battle in California would provide the impetus in other states."

"Politicians in other states have recently floated the idea of shutting their DB plans to new hires," said Association President, Ralph White. "At the outset of the Romney Administration, the possibility of introducing a DC plan to our state was in the wind, but received no support whatsoever from the Legislature."

DB supporters, like Nesbitt, are buoyed by the problems encountered by Schwarzenegger and by the weak public support that President George W. Bush has found in his push to partially privatize Social Security, a situation that DB supporters say is somewhat analogous to the battle over DB plans. "I hope what's happened in California, and with Social Security, will put a bit of a chill on this whole effort, " Nesbitt says.

"We've witnessed attempts to eliminate defined benefit plans in other parts of the country," said California Teachers' Retirement System Chief Executive Officer Jack Ehnes. "However, our Defined Benefit Program meets the retirement, disability and survivor benefit needs of our members and the public's need for experienced, able teachers at a reasonable cost. We have a strong, sound system and California's educators need it to stay that way."

Schwarzenegger's pension scheme would have affected every retirement system in his state, including the California Public Employee's Retirement System (CalPers), the nation's largest public system and the California State Teachers' Retirement System (CalSTRS), the third largest.

CalPers has about $180 billion under management and CalSTRS, $125 billion. Schwarzenegger's proposal eventually could have shifted control of $300 billion of investments from retirement board officials to money management firms and end state funding for retirement systems.

Schwarzenegger removed Sidney Adams from the CalPers Board after he publicly opposed the Governor's plan. He earlier ousted CalPers President Sean Harrigan from his seat on the fund's board. Harrigan, a labor union activist, said his ouster was orchestrated by Schwarzenegger to put business-friendly people on the CalPers governing board. Needless to say, Harrigan's opinion is shared by many.

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