CalPERS to resume seeking an additional $700 million in tax money

Reporting from Sacramento —  California’s troubled, giant public pension fund is preparing to seek an additional $700 million from the state and school districts, after postponing a decision last month because of concerns about the state’s massive budget deficit.

The staff at the California Public Employees’ Retirement System is recommending the increase, and the pension fund board is set to reconsider it Tuesday. Several board members — including state Treasurer Bill Lockyer, who questioned the move last month — now are in favor of it.

Board President Rob Feckner, when asked whether the increase would be approved, said, “I think it probably will. It’s the right thing to do for the system.”

Lockyer asked for a delay last month so actuaries could look again at the increase in light of the state’s projected $19.1-billion budget deficit for 2010-11.

The pension fund’s poor investment record over the last few years has forced it to ask for more contributions from the state and school districts to meet its obligations in the coming years. On Tuesday, the fund had $198.3 billion in assets, down 24% from a peak of $260.4 billion on Oct. 31, 2007.

At least three factors are prompting CalPERS to make its already financially strapped member agencies seek more of their taxpayers’ money:

The country’s largest public pension fund lost about a quarter of the value of its portfolio of stocks, bonds, real estate, private equity and commodities during the severe recession of 2008-09.

On top of that, a new study shows that CalPERS retirees are living somewhat longer and drawing more monthly pension checks.

Third, there has been a jump in the number of eligible employees deciding to retire.

After weighing those factors, CalPERS actuaries concluded that it would be all right for the fund to go ahead with the hike because it wouldn’t overly affect the state’s general fund. The general fund, currently at $86 billion, pays for major state programs, including health and welfare, education and public safety.

The $700-million CalPERS increase under consideration would boost employer contributions from the state and schools to about $5 billion in 2010-11.

However, the state’s nonpartisan legislative analyst’s office now estimates that the increase would cost the general fund only $184 million more than the current year. The rest of the $700 million would come from other state funds that don’t affect the state deficit.

The “clarification” has persuaded Lockyer to support the proposed employer contribution increase, said spokesman Joe DeAnda.

“The impact on the general fund seems to be considerably less than the numbers that had been thrown out there, so he’s more comfortable,” DeAnda said. “And even those numbers might be overestimated” if, a year from now, the state’s total payroll turns out to be smaller than expected.

Arguments by CalPERS’ attorneys also convinced Lockyer of the need to require the state and about a thousand local school districts to pay more. Suspending a needed pension contribution could be interpreted as an illegal borrowing by the state of money that belongs to CalPERS’ 1.6 million active workers and retirees and their family members, the lawyers said.

What’s more, the lawyers warned that board members could be in violation of their fiduciary duty to protect CalPERS if a vote to put off contributions weakens the pension fund’s financial condition.

CalPERS officials are walking a fine line when they try to come up with the lowest possible increase in the state and school employer contributions, warned Marcia Fritz, president of the California Foundation for Fiscal Responsibility, a pension reform group that is considering sponsorship of an initiative to pare retirement benefits for future state workers.

“They’re trying to back into what they think they can afford,” she said. “There’s a lot of pressure to use aggressive assumptions to minimize the contributions and shove the cost to the future.” Those tactics in the past have included assumptions that people will die younger and earn less and that future inflation will be lower and investment returns higher than they actually turn out to be, she said.

Though Gov. Arnold Schwarzenegger shares many of Fritz’s concerns, he is backing the proposed hike in CalPERS contributions. The request for an increase, he has said, underscores the need for pension reform to rein in escalating annual demands on taxpayers to support California’s costly retirement system.

“We all must face up to the reality that pension promises are debts, that those debts are much greater than reported and that pretending they don’t exist won’t make them go away,” said Schwarzenegger spokeswoman Andrea McCarthy. “The Legislature needs to take note, because every single day they don’t act to reform pensions is a day that adds to that debt.”

In a letter last week to state Senate leader Darrell Steinberg (D- Sacramento), Schwarzenegger threatened not to sign a new state budget unless it overhauls the pension system.

The governor said he is negotiating with bargaining units of 19 of the 21 state worker unions to bring down spiraling pension costs. But, he said, he still needs approval from the Legislature to find more savings.

Schwarzenegger wants to reduce some benefits for newly hired state workers, require employees to increase their own retirement contributions by 5% and calculate retirement payments based on the average of the three highest years of pay instead of the single highest year.

The financial squeeze is hitting CalPERS — a market-leading investor and crusader for better corporate governance — at the same time that is being rocked by a scandal involving alleged influence peddling by former officials. One former board member earned tens of millions of dollars steering multibillion-dollar investments to certain private equity and real estate fund managers.

The allegations, first raised by a CalPERS internal probe, have made the fund a target of investigations by the California attorney general’s office and the U.S. Securities and Exchange Commission.

The attorney general’s probe already has resulted in a fraud lawsuit filed against former board member Alfred R. Villalobos and former Chief Executive Federico Buenrostro Jr.

The two say they did no wrong and have vowed to vigorously fight the complaint.

marc.lifsher@latimes.com