SACRAMENTO, Calif. (AP) — A rift between Gov. Jerry Brown
and the board overseeing the nation’s largest public pension fund over
rising liabilities tied to longer retiree life expectancies highlights a
concern about how decisions are made at an agency with tremendous
influence over state finances.
The board of the California Public
Employees’ Retirement System will meet Tuesday to begin considering how
to address the costs associated with retirees living longer, but it
already has indicated that it will ignore the governor’s request to
tackle the problem immediately.
Pension-reform and taxpayer
advocates in California say this outcome isn’t surprising considering
the composition of the CalPERS board, which is dominated by public
employees who will benefit from the pension system or those who are
appointed by Democratic officeholders who receive significant campaign
contributions from government labor unions.
They say such an arrangement, common across the U.S., can encourage rosy investment projections and low
contribution rates.
"You
have people who are not disinterested," said Joe Nation, a Stanford
University public policy professor and former Democratic state lawmaker
who studies pension systems. "Unfortunately, the incentives are really
misaligned."
Of the 12 members on CalPERS’ board, nine are due to
collect public pensions from the agency they oversee. The board, which
has one vacancy, has no independent taxpayer representative or an
independent investment expert. The "public representative" appointed by
the Democratic leadership in the Legislature is president of a grocery
and food industry workers union.
CalPERS’ board has the power to unilaterally set contributions rates for the state, cities and other
government entities.
Brown
wants the board to use that power to start boosting contribution rates
this year. Instead, the board has indicated it will follow a staff
recommendation to wait two years before increasing contributions from
public employees and the government entities that pay into the pension
system, then phase in those increases over a five-year period.
Advocates
for reforming the public pension systems say increasing contribution
rates often means less take-home money for government workers, a move
employee-dominated boards might be loath to make.
"A labor-heavy
retirement board might be choosing numbers that are in their favor,"
said Carole D’Elia, executive director of the Little Hoover Commission, a
state watchdog agency.
State government, which is among the
pension fund’s contributors, would see its annual costs to the system
rise from $3.8 billion to $5 billion at the end of the five-year period.
Brown has called CalPERS’ delay unacceptable.
"No one likes to
pay more for pensions, but ignoring their true costs for two more years
will only burden the system and cost more in the long run," Brown wrote
in a letter to the board.
In a written statement, CalPERS said it
must consider the ability of government agencies and employees to pay
more for pensions before hiking rates. The board’s president and vice
president declined to comment.
Across the country, dozens of
boards tasked with overseeing state public pension funds are controlled
by people who will receive the pensions, according to 2010 data
collected by the National Association of State Retirement
Administrators. Public employee representatives say this ensures they
have an active role in creating a secure retirement and prevent
politicians from raiding funds for short-term interests.
"There’s
actually no evidence that the (CalPERS) board has failed in their
fiduciary duty," said Dave Low, chairman of Californians for Retirement
Security, a coalition of more than 1.5 million public employees. "In
fact, there’s a lot of people with financial experience on Wall Street
who got us in the mess we’re in now."
Board decisions about how
much state and local governments should pay for pensions have long-term
implications for their budgets. CalPERS, which oversees retiree benefits
for almost 1.7 million members, has $45 billion in unfunded
liabilities. Nationwide, the estimate for unfunded liabilities for
public pensions is $1 trillion, according to a report released last
month by the State Budget Crisis Task Force.
Under pressure to
reform public pensions, lawmakers in Ohio, New Hampshire, Oregon and
Alabama all reduced the influence of labor or added financial experts on
their pension boards during the last decade.
Research into how
the composition of pension boards affects investment success is
inconclusive, said Anek Belbase, a researcher at the Center for
Retirement Research at Boston College. One study examining 1990 data
found pension systems with more retirees on their board had lower
investment yields, but that and other studies missed key variables and
do not prove a link, Belbase said. His organization plans to research
the issue more extensively.
San Jose, where the mayor has been
pushing a statewide ballot initiative to reform public pensions,
approved changes to its two pension boards in 2010 and added independent
experts. The changes also removed City Council representatives and
required employee representatives to have financial expertise. The
pension fund has been managed more conservatively since then, said
Michelle McGurk, a spokeswoman for Mayor Chuck Reed.
Recent attempts by Brown and a state lawmaker to add independent financial experts to the CalPERS board
have failed.
Luke
Bierman, a Northeastern University law professor, said the most
important function of a pension board is to make sure retirees get the
payments to which they are entitled.
"Their sole responsibility is for the beneficiaries," he said. "This is not a state
enterprise."
CalPERS’
board is composed of six retired or active employees elected by
workers, three political appointees and four state department heads. The
board president is a window glazer and former school bus driver, while
the vice president is a financial analyst for Bay Area Rapid Transit.
Californians
would have to vote on any changes in board composition because of a
union-backed constitutional amendment approved by voters in 1992.
Brown
tried and failed to add two independent financial experts to the board
as part of his 2011 pension-reform package. The idea re-emerged in the
state Legislature, but lawmakers recently watered the proposal down. The
current version of the bill would require board members to develop
their own financial education policy, which the board says it is already
planning to do.
Copyright 2014 The Associated Press. All rights
reserved. This material may not be published, broadcast, rewritten or
redistributed.