Schwarzenegger Backs Public Pension Reform

Published June 1, 2005

California Gov. Arnold Schwarzenegger (R) continues to promise public employee pension reform but has backed away from a proposal to move public employees out of traditional pensions and into a “defined contribution” plan.

On April 7 Schwarzenegger announced that a ballot initiative, proposed by Assemblyman Keith Richman (R-Granada Hills) to move California’s public employees into a defined contribution system, was flawed. The governor made the decision after Attorney General Bill Lockyer (D) determined the wording also would have stripped employees of death and disability benefits.

Police, firefighters, and other public employees adamantly opposed the proposal and bombarded the governor’s office with complaints.

Schwarzenegger said he remains committed to bringing California’s public pension system in line with private-sector practices but does not want to strip away death and disability benefits.

Millions of private-sector workers have defined contribution retirement plans, such as 401(k) plans, that allow them to decide how much money to contribute and how to invest it. Contributions are tax-deferred and often matched by employer contributions. A person’s retirement income depends on his or her contribution and investment decisions.

Governor Goes to Lawmakers

At an April 7 news conference, Schwarzenegger pledged to work with state lawmakers for a legislative fix. If agreement cannot be reached, he said, he would back a revised ballot initiative to accomplish the change to a 401(k) system. That initiative could appear on ballots in June 2006.

Richman began floating the idea for an initiative last fall, and in December 2004 he introduced the proposal. He said he did so because the California public employee pension system has more than $20 billion in unfunded liabilities, and some communities, including San Diego, are nearly in bankruptcy trying to meet their share of pension obligations.

“The problem of unfunded liabilities is so widespread it requires a statewide approach,” Richman said. “The important point is the need to keep pressure on for pension reform. The governor has made clear that he plans on having an initiative on the June 2006 ballot no matter what. Whether it goes through the legislative process or is placed on the ballot directly through signatures on petitions from voters, the governor has made clear he wants to address the pension crisis.”

Private Employers Flee Pensions

Private employers have moved away from traditional defined benefit pensions, which pay a guaranteed retirement benefit based on factors such as years of service and wage history, because the costs and complexity of such plans have soared.

According to the federal Pension Benefit Guaranty Corporation, which insures pension plans, the number of traditional single-employer pension plans dropped from 112,208 in 1985 to 29,651 in 2004. Most of those plans were replaced by 401(k) defined contribution plans.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.