By Ed Mendel
December 13, 2010

In the last year of Governor-elect Jerry Brown’s previous term as governor, 1982, he signed two bills that dipped into CalPERS reserves, taking a total of $433 million to help balance the state budget.

Last week the incoming governor’s finance director, outlining a budget shortfall that could be $28 billion during the next 18 months, put pensions at the top of a mountain of long-term debt.

“The first is pension liabilities. Much has been discussed about our pension liabilities,” Ana Matosantos told a budget forum televised on CalChannel and webcast over the Internet.

“Basically, estimates prepared by the pension fund (CalPERS) and the teachers’ retirement fund (CalSTRS), we have $100 billion liability,” she said. “Other estimates have it as high as $500 billion.”

Numerologists looking for a portent of the pension reversal might note how the number of years that have passed since Brown’s first term, 28, is a reversal of the last two digits of 1982.

But more seriously, legislation in 1982, a year with a wide range of pension legislation, seems to have foreshadowed, or even laid the groundwork, not only for much of the current public pension problem, but for what some think is a solution.

—It was the first year in which state worker labor unions, authorized by legislation five years earlier, bargained for pay. Critics say the unions, dominating many pension boards, would go on to negotiate overly generous pensions now said to be “unsustainable.”

—An unsuccessful legislative ballot measure, Proposition 6, tried to allow bond-based pension funds to increase stocks from 25 to 60 percent of investments. Then Proposition 21 in 1984 completely removed the stocks cap. Later CalPERS and others would say pension increases could be paid for by stock-fueled investment earnings, not taxpayers.

—The taking of CalPERS reserves in 1982 was structured, in part, to boost the budget for other worker programs. When Gov. Pete Wilson’s budget in 1991 took $1.8 billion from CalPERS, unions called it a “raid” and got voter approval of Proposition 162 a year later. The initiative gave pension boards total control of funds and strengthened their power to set annual rates that must be paid by government employers.

—Brown’s 1982 budget proposed lower pensions for new state employees, arguing that CalPERS and Social Security gave some retirees more income than they earned on the job. Budget legislation authorized lower pensions, but whether that happened is not clear in available records. Now “two-tier” benefits and higher worker contributions are the most common attempt to curb soaring pension costs.

Legislation in 1982 also authorized the California State Teachers Retirement System to create its own investment unit and to obtain a new headquarters building. CalSTRS investments had been handled under contract by the larger California Public Employees Retirement System.

In the nearly three decades since Brown left the corner office in the Capitol, a visible sign of the growth of the nation’s two largest public pension funds is their impressive new buildings.

CalPERS moved into a new $81 million building in 1986, followed by a $265 million expansion in 2005. The one million-square foot complex covering four city blocks was said by the expansion contractor to be the most expensive building, per square foot, ever erected in Sacramento, topping the earlier CalPERS building.

Last year CalSTRS moved into a $276 million, 409,000 square foot landmark building on the Sacramento River, a 13-story office tower atop a five-story garage. Nearby parcels also purchased by CalSTRS in 2006 near the height of the real estate boom could be used for offices and condos.

In 1982, part of an urgency measure to help balance the state budget for the fiscal year ending on June 30 reduced the state payment to CalPERS by $179 million for three months.

A similar amount, $179 million, was transferred from the CalPERS reserve to the CalPERS fund, replacing the cut in the state contribution. The budget for the new fiscal year that began July 1 used $254 million in CalPERS reserves to finance state spending.

Much of the amount was spent on the increased cost of health and dental insurance, overtime and shift differential salary adjustments, and a $50 per month reduction in employee CalPERS contributions instead of a salary inflation adjustment.

The CalPERS “reserve for deficiencies” in 1982 was nearly $1 billion. The current $100 billion unfunded liability mentioned by Matosantos at the forum is the shortfall over the next three decades projected by the pension funds.

The pension funds use their earnings forecast, currently about 7.75 percent a year, to offset or “discount” the projected debt. But some economists contend that the earning forecasts are overly optimistic and conceal massive debt.

The economists argue that a lower risk-free bond earnings rate should be used because public pensions are risk-free, guaranteed by the taxpayer. Stanford graduate students, using a 4.1 percent bond rate, calculated that state pension funds have a $500 billion shortfall.

The outgoing governor, Arnold Schwarzenegger, obtained legislation in October requiring, among other things, that CalPERS include a debt calculation using a risk-free discount rate when setting annual state payments.

The Governmental Accounting Standards Board is considering adopting a blended discount rate for pension funds. Any part of long-term debt not covered by the earnings forecast from a diversified investment portfolio would be measured at the risk-free rate.

A trio of Republican congressmen, including Darrell Issa of Vista and Devin Nunes of Tulare, introduced a bill this month requiring state and local governments to calculate pension debt at the risk-free rate if they want to sell tax-free bonds.

A New York Times business columnist, Floyd Norris, argued last week that a rule change requiring corporate pensions to report larger debts encouraged the private sector to switch from pensions to 401(k)-style individual investment plans.

“Now something very similar may be in store for public sector employees, thanks in part to the Republican victories in last month’s Congressional elections,” Norris wrote.

Brown takes office next month in an atmosphere of alarm about public pensions, driven in part by huge investment losses in the stock market crash two years ago that require much higher employer contributions to begin replacing the losses.

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