By Jon Ortiz
jortiz@sacbee.com
Published: Friday, Feb. 25, 2011 – 12:00 am | Page 1A

California’s state and local governments should roll back pensions for existing employees, dump guaranteed retirement payouts and put more of the burden for pension benefits on workers, a bipartisan watchdog commission said Thursday.

Any attempt to reduce pensions for current workers would prompt a legal battle royal. Still, the 12-member Little Hoover Commission concluded that government pension funds are in such dire financial straits that they’ll never right themselves without cutting into benefits for those working now. The proposal wouldn’t affect benefits drawn by current retirees.

“This is one of the toughest issues that we’ve taken on,” said Chairman Daniel Hancock shortly before the commission unanimously approved the 100-page report and its recommendations.

Sacramento politicians had anticipated the moment. While Democrat Gov. Jerry Brown has proposed a mix of taxes and cuts to close the state’s estimated $26.6 billion deficit, his budget doesn’t explicitly address pension changes, which would anger unions and would not save money immediately.

Republicans have criticized that as a glaring oversight. Senate Republican leader Bob Dutton of Rancho Cucamonga has said his caucus would offer some pension-reform ideas once the commission released its report.

“I’m probably going to lean pretty heavily on taking their recommendations,” he said.

Public employee unions counter that guaranteed pensions make up for government’s generally lower wages. They say the Little Hoover report and politicians like Dutton overstate the pension problem to pursue an anti-union agenda and undercut collective bargaining.

Six unions representing about 170,000 state workers have already agreed to contracts that offer lowered retirement benefits for new hires and increase what employees pay toward their pensions.

“Our members – who are taxpayers, too – bargained in good faith and reached an agreement including key pension changes and concessions,” said Brady Oppenheim, spokeswoman for the California Association of Psychiatric Technicians. “If there is a call for further concessions, it should come through the collective-bargaining process and be taken to the bargaining table.”

The report caps a year’s research and a series of hearings that included testimony from actuaries, union officials, pension reform activists, retirement board members, labor union leaders, public employees and others.

It notes that the state’s 10 largest public pension systems, including the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the University of California pension fund reported in 2010 a collective $240 billion spread between their obligations and assets.

“In another five years, when pension contributions from government are expected to jump 40 to 80 percent and remain at those levels for decades in order to keep retirement plans solvent, there will be no debate about the magnitude of the problem,” the report says.

Pension fund investment returns are supposed to cover the bulk of payments to retirees, but most haven’t yet rebounded from Wall Street’s meltdown in 2008.

CalPERS says investment earnings account for 64 cents of every dollar it takes in, while employers kick in 21 cents and employees pay 15 cents.

The commission recommends the employer/employee share be split equally.

Since reducing pensions for the next generation of employees won’t cut costs in the near term, the commission recommended the Legislature pass a measure that lets state and local governments freeze the pensions of current workers and move them into a less costly hybrid system.

For example, a 20-year government employee planning to retire in 10 years at age 63 with 2.5 percent of salary for each year of service would keep the money built up under that formula.

But once the pension is frozen, the employee would move into a three-legged program that keeps a much smaller guaranteed pension, a professionally managed 401(k)-style savings account and Social Security benefits.

Some public employee retirement plans already include all three. Plans for current state workers and retirees vary – some receive Social Security and can invest in personal retirement accounts.

The conventional wisdom is that public pension benefits are untouchable, constitutionally protected property that government has a contractual obligation to provide.

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