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Pension deal reflects Democratic, union ties
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SACRAMENTO (AP) — Union leaders grumbled this week when Gov. Jerry Brown released a compromise deal with Democrats to scale back pension benefits for the state's public employees, but it was far less than a resounding victory for the Democratic governor.

While Brown and Democratic leaders hailed the deal as sweeping and substantial, the governor failed to get critical elements that he previously said were needed to better protect taxpayers for years to come.

The deal will increase the retirement age for new employees, eliminate numerous abuses of the system and require workers who are not contributing half of their retirement costs to pay more. Missing were three pillars of the 12-point proposal Brown announced last October.

There is no hybrid system that includes a 401(k)-style plan so public employees would bear some of the investment risk, as private-sector workers do. Nothing was done to reduce skyrocketing health care costs promised to current workers when they retire. And there will be no independent members or guarantee of independent financial expertise on the union-dominated board of the state's main pension fund.

The changes also will not be embedded in the state constitution, meaning they can be altered by majority vote of a future legislature.

In negotiating a deal that falls short, Brown faced political constraints endemic to California politics, particularly for Democrats.

The governor and the Democratic legislative leaders with whom he negotiated are beholden to the financial and organizational support of the public employee unions that stand to lose the most if benefits are scaled back.

This year, Brown faced added pressure of his own making: He needs the unions' support for Proposition 30, his November ballot proposal to temporarily raise the state sales taxes and income taxes on higher-income earners to help ease California's budget crisis.

While Brown and Democratic lawmakers removed some provisions that were most onerous to public employee unions, labor groups still complained about the changes, calling them an overreaction to an economic crisis caused by risky actions on Wall Street.

Many pension-reform advocates credit Brown for getting far more than any other governor in recent memory, although they cautioned that the legislative package approved Friday is just the first step to what they believe must be a major overhaul of the entire system.

"It would have been moving a mountain," said Marcia Fritz, president of the California Foundation for Fiscal Responsibility, a lobbyist for pension reform. "A leader can only do so much with what he has at the moment. My feeling is that (retiree) health care just would've been too much."

She said voters may find the changes insufficient.

The chief actuary of the California Public Employees' Retirement System preliminarily pegged the savings for that pension system as high as $60 billion, but others remained skeptical that the deal will do much to reduce the long-term liabilities.

Rob Lapsley, president of the California Business Roundtable, cautioned that the latest reforms may address as little as 5 percent of the state's overall pension problem. The state's two main pension funds — CalPERS and the California State Teachers' Retirement System — are at least $165 billion underfunded.

California currently spends about $1.5 billion in medical care for state government retirees, almost 2 percent of general fund spending. That's up from $560 million a year a decade ago.

"I think that the governor worked hard to try and get some reforms that matter, but for the reforms that will have the greatest long-term impact, the unions are not going to let it happen," Lapsley said. "The unions, this is their fundamental mission, to protect pension benefits and to get as many gains as possible for their members, but to get it at the public's expense."

Reform advocates say additional concessions are needed from current workers, but those must be negotiated through collective bargaining because the courts have consistently protected existing retirement benefits for government workers. Any savings from the pension changes for future employees will not be realized for decades.

Lapsley said the only real pension reform will be come at the ballot box, as happened in San Jose and San Diego, where voters in June overwhelmingly approved measures to scale back benefits. The business group has already reached out to Brown about the possibility of partnering with him on a future pension initiative, he said.

Unions might be wiser to take their medicine in the state Legislature, said Thom Reilly, a professor at San Diego State University and author of the book "Rethinking Public Sector Compensation: What Ever Happened to the Public Interest?"

"The Democratic legislators may very well feel they're protecting a key constituent, but private citizens will take it to the ballot and their remedies will be much more draconian and much more punitive," he said.

One of Brown's stated goals, adding two independent members to the CalPERS board, would require voter approval because its current structure was put in place by a 1992 union-led ballot initiative. Proposition 162 gave the fund exclusive authority over management and investments, putting the interests of retirees ahead of taxpayers.

The board has been criticized for using overly optimistic investment returns in its projections, which could mask the amount needed to fully fund retirement obligations. When he rolled out his pension-reform plan in October, Brown was emphatic about the need for change on the board.

"Retirement boards need members with real independence and sophistication to ensure that retirement funds deliver promised retirement benefits over the long haul without exposing taxpayers to large unfunded liabilities," he said then.

David Crane, who was economic adviser to former Gov. Arnold Schwarzenegger, a Republican, said the only way to change how pension funds are governed is to have a majority of their board made up of people who are financially savvy and independent.

"In other words, not be pension beneficiaries," he said.

Brown defended the deal as a historic achievement, noting the complexity of state pension laws and the difficulty of addressing an issue that affects so many parties.

"This takes pensions back to the Reagan era, and maybe a little before. So we've taken a great leap," he told reporters Friday as the Legislature was voting on the package. "We don't send a rocket ship to Mars here in Sacramento. We take reasonable steps. But this is one of the biggest steps that I've ever seen taken with so many contentious parties and opposition."

In addition to its public pension liability, California faces an estimated $60 billion unfunded liability for health and dental benefits promised to current and retired state employees. That does not include retiree health care obligations owed to city, county and public school employees.

Brown did succeed in addressing some practices that have allowed public employees to inflate their retirement benefits.

The package includes a cap on annual pension payments for new employees at $110,100 for most workers and $132,120 for employees not covered by Social Security, such as teachers and some public safety workers. New employees are required to contribute at least half their pension costs, and those employees who do not already split the cost will be required to negotiate payments up to 50 percent.

It also increases the retirement age for most new employees by two years to qualify for the same level of benefits available now and ends a practice known as "spiking," in which employees are given big raises during their last year of employment to inflate their pensions.

Republicans noted that all the changes can be undone by a future Legislature, which they described as a significant hole in the pension deal.

"Future legislatures can roll back any sort of changes that are made to pensions," said Sen. Mimi Walters, R-Lake Forest. "I'm in my eighth year in the Legislature, and I've seen it done repeatedly."