California Pension Plan Would Vest 10 Years Later, to Cut $110 Billion

New California public employees would have to work 10 years longer to qualify for pensions under a plan by the state Senate’s top Republican to shave $110 billion off retirement costs over the next three decades.

Minority Leader Dennis Hollingsworth’s bill would require new employees to have 10 more years of service than current workers to get benefits at age 65. Police, firefighters and prison guards would have to work seven years longer before vesting. The bill would base retirement pay on the average of the highest three years of wages, instead of just the last year.

The proposal comes as California’s two public pension funds, the largest in the U.S. at $345 billion, say they may ask taxpayers for more money to support benefits already promised. The funds lost more than $100 billion in the economic crisis that led to the collapse of Lehman Brothers Holdings Inc. and a drop in global stock markets.

“The single biggest threat to California’s fiscal health is pension costs,” Governor Arnold Schwarzenegger, a Republican, said at a Sacramento press conference with Hollingsworth. “In California, we had the Internet bubble, then we had the housing bubble and I see in the future a pension bubble.”

Unfunded Liability

Three funds -- the California Public Employees’ Retirement System, or Calpers, the largest; the California State Teachers’ Retirement System, the second-biggest, and the University of California Retirement System -- are as much as $500 billion short of meeting future retiree benefits, according to an April 5 study by Stanford University’s Institute for Economic Policy.

The report recommended that the state decrease retiree benefits, increase future contributions from plan members and invest in less risky assets.

Taxpayers across the U.S. owe public school teacher retirement accounts about $933 billion, nearly triple the amount reported by the plans themselves, the Manhattan Institute for Policy Research said in a study April 13.

Calstrs, as California’s $132.5 billion teacher fund is known, had the largest unfunded liability at almost $100 billion, more than the $42.6 billion the system reported in January, according to the Manhattan Institute. Calstrs disputed the findings, calling the institute’s calculations “unrealistic accounting tricks.”

Schwarzenegger tried to put a measure on the 2005 statewide ballot to convert the public pension funds into 401(k)-type plans. He withdrew the proposal after police and firefighters said it would eliminate benefits for families of those killed on duty. Schwarzenegger last year recommended creating a lower level of benefits for new hires.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.