By Dale Kasler
Published: Tuesday, Dec. 15, 2009 – 12:00 am | Page 3A

Setting up a possible fight between Gov. Arnold Schwarzenegger and the Legislature, the CalPERS board is about to approve a moderate increase in the state’s annual contribution to the pension fund.

The rate hike is at least $1 billion lower than what Schwarzenegger wants to pay.

Schwarzenegger says the state should pay off CalPERS’ multibillion-dollar investment losses as quickly as possible rather than defer the cost. But some state employees unions say the Republican governor really wants to pay more so he can build political support for his proposal to reduce pension benefits.

After months of talks with CalPERS staff, Schwarzenegger aides signaled earlier this month they want the state’s pension contribution to jump to somewhere between $4.5 billion and $4.8 billion in the next fiscal year – an increase of up to 50 percent.

The California Public Employees’ Retirement System could have gone along with Schwarzenegger’s wishes. The Legislature could not have blocked the big rate increase since CalPERS has the power to set contribution levels.

Instead, in a report issued Monday by supervising pension actuary David Lamoureux, the CalPERS staff recommended the state’s contribution rise to $3.5 billion. That’s an increase of $200 million, or about 6 percent.

The CalPERS board is scheduled to vote on the recommendation Wednesday. The governor controls three seats on the 13-member board.

By opting for a smaller rate hike, CalPERS opens the door for a budget brawl in the Legislature. With the deficit already pegged at $20.7 billion by the Legislative Analyst’s Office, Democrats who control the Legislature could try to block Schwarzenegger’s efforts.

David Crane, a Schwarzenegger adviser, said Monday his boss still believes in contributing at the higher level.

“It’s important for people to pay their bills on time,” he said.

The CalPERS staff recommendation is in line with a similar plan, adopted in June, for school districts and local governments that belong to the 1.6 million-member pension system.

Following a record $56 billion investment loss in the latest fiscal year, CalPERS created a mechanism to “smooth” out the pain by keeping rate hikes modest in the early years.

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