By Dale Kasler
dkasler@sacbee.com
Published: Monday, Oct. 11, 2010 – 12:00 am | Page 1A
Last Modified: Monday, Oct. 11, 2010 – 6:52 am

By winning a deal last week to scale back pension benefits for public employees, Gov. Arnold Schwarzenegger beat one of his most formidable opponents: CalPERS.

Schwarzenegger and his aides have hammered the California Public Employees’ Retirement System over the past 18 months, citing its steep investment losses and its role in raising pension benefits a decade earlier. The administration painted a portrait of a pension fund that refused to look its problems squarely in the eye.

The fact that CalPERS needed an extra $600 million from state taxpayers this year – to help it cope with its losses from 2008 – strengthened the governor’s hand. And experts said CalPERS was probably weakened politically by a bribery scandal that’s still unfolding.

In the end, the fund did not take an official position on the governor’s effort to reduce benefits. Spokesman Brad Pacheco said Friday that CalPERS is “pleased” that the parties reached “common ground.”

“I think it was probably inevitable,” said J.J. Jelincic, a CalPERS board member and employee who once led the California State Employees Association.

With the Legislature attempting to close a $19 billion deficit, the climate was ripe for pension reform, said Jack Pitney, an expert on California government and politics at Claremont McKenna College.

“The problems just became too vast to ignore,” Pitney said. “It became glaring that the benefits to public employees were a large part of the (budget) problem.”

The budget deal passed early Friday doesn’t just create a two-tier system that scales back pensions for newly hired workers.

It also imposes new reporting requirements on CalPERS, forcing the nation’s largest public pension system to explain itself to the governor, state treasurer and Legislature when it needs more money from taxpayers.

The fund will still be able to impose higher rates on the state without the Legislature’s approval. But for the first time, the pension fund will have to submit a report “in plain language” explaining its assumptions about investment returns, pension liabilities and other matters, according to the Governor’s Office. The state treasurer, who sits on the fund’s board, will have to offer an opinion on the CalPERS report.

“We fully support greater transparency,” Pacheco said.

Still, the legislation represents a rebuke of sorts to the $216 billion fund, which wields considerable clout on Wall Street and often gets its way in Sacramento.

CalPERS tilts toward union interests; six of the 13 members of its board are elected by current or retired public employees. Two other board members – the state treasurer and state controller – are often Democrats.

The pension fund hasn’t been shy about jousting with the Republican governor.

In 2005, opposition from CalPERS contributed to the demise of one of Schwarzenegger’s top proposals that year – a plan to turn the state’s pension system into a kind of 401(k) plan for new hires. In such a plan, common in the private sector, the financial risk is largely borne by workers, not employers.

But when pension change re-emerged this time, CalPERS was softened up – by the $56 billion it lost in the market crash and a bribery scandal. A state lawsuit says three former top CalPERS officials accepted gifts from a former pension fund board member seeking investments on behalf of his Wall Street clients.

“I would imagine that the various scandals and investigations … clearly weaken any institution,” said James Hawley, a pension expert at St. Mary’s College of California. “They didn’t have the muscle – or (decided) you pick your battles.”

Schwarzenegger is targeting retirement costs that have skyrocketed since the passage a decade ago of Senate Bill 400, which raised benefits. CalPERS was a big supporter of that legislation.

When the bill was signed into law by Schwarzenegger’s Democratic predecessor Gray Davis, CalPERS was rolling in money from a stock market boom and needed just $150 million in annual contributions from the state.

Critics have said CalPERS wasn’t forthcoming in warning that the burden on taxpayers could jump if the market faltered. David Crane, Schwarzenegger’s economic adviser, once called it a “flagrant case of nondisclosure” – a charge CalPERS denied.

This fiscal year, the state will pour $3.9 billion into CalPERS. That’s an 18 percent jump over the prior year – the legacy of the $56 billion lost by CalPERS in 2008.

The latest increase added fuel to the political fire. Crane tried – unsuccessfully – to goad CalPERS into raising the contribution even higher. He said the fund was in deep trouble, tethered to investment forecasts that were “ungrounded in reality.”

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