It's The States' Turn To Play `Raid The Pension Fund'

Elnora E. Hoyt could barely contain her anguish. Her voice quavering and hands waving, the frail-looking 77-year-old retired school secretary pleaded with the 13-person board of the giant California Public Employees' Retirement System. "I'm trying desperately to stay independent," she says, ticking off her monthly bill for groceries, mortgage payments, and health insurance. "I had 57~ left over last year." Jim Coan, a former union leader and state engineer, put it more bluntly: "I paid taxes for 40 years to support California," he bellowed. "Now, my money is subject to raiders."

One by one, nearly two dozen retired California state workers came to a government auditorium in Sacramento to decry what they see as the pillaging of their life savings. Only this time, it is California Governor Pete Wilson, and not a junk-bond-wielding financier, who intends to do the looting. Faced with the need to close a $14.3 billion state budget gap, Wilson is looking longingly at the $1.6 billion surplus sitting in the CalPERS coffers (BW--July 1). And he is hardly alone. With states everywhere grappling with ballooning deficits, governors and legislators are scrambling to tap employee pension funds or cut back on contributions to avoid more painful budget cuts or tax increases.

INSTANT SURPLUS. Wilson's blatant money grab is easily the most controversial. But in states as disparate as Texas, Alabama, and Maine, government bean-counters are poring over their pension funds' books to look for extra cash or to delay payments to their funds. New York went a step further, altering the method of funding its $50 billion in employee pension funds. Overnight, the state created a $9 billion surplus by postponing contributions until much later. That will cut by $600 million the amount the state must contribute to its workers' pensions over the next two years.

It could also leave the state vulnerable in the future. "When that paper surplus is run down, the state will owe billions" to the fund, says a spokesman for New York's Civil Service Employees Assn. The CSEA has filed suit to stop the change, charging that, by law, surpluses are to be used to benefit state workers, not close the state's budget gap.

State officials, though, say that they have little choice. Maine Governor John R. McKernan Jr., faced with a $1.2 billion deficit, decided against added layoffs or slashing medicaid and health care programs. Instead, he wants to defer $133 million that had been earmarked for state pension fund contributions over the next two years. In North Carolina, even a boost in the cigarette tax, the lowest in the U. S., won't close the state's $1.2 billion deficit. That almost certainly means retirees won't get a cost-of-living increase this year--for the first time in 20 years. California officials predict that 22,105 state employees could be laid off if Wilson can't tap the pension funds.

Such a threat is an example of the politicization of pensions. Another way of playing politics is to attempt, as both Wilson and Republicans in the Texas legislature have done, to shift control away from independent pension boards. "This amounts to a naked grab for power," asserts California Treasurer Kathleen Brown, who would lose her board seat under Wilson's plan. "It goes against everything fiduciary representatives seek to protect."

The politicians have a precedent: West Virginia has been dipping directly into its pension funds for loans to finance teacher pay hikes. Cities are doing it, too: Nearly insolvent under the weight of a $129 million deficit, Philadelphia met its payroll from January to March by borrowing $75 million from pensions for Pennsylvania teachers and city workers. "In a perfect world, you wouldn't want to do this," says city assistant budget director Margaret C. Van Belle, but it's better, she says, than missing paychecks or debt payments.

'SAFE UNTIL TOMORROW.' The Philadelphia funds were paid back with interest. But other pension plans won't be so accommodating. Unions in California will probably file suit if the state legislature approves Wilson's planned raid. Protests by Alabama state employees stalled a plan there to reduce its $150 million budget shortfall by scaling back fund contributions. Not that the state has given up. "We think we're safe until tomorrow," says David G. Bronner, chief executive officer of Alabama's retirement system.

Bronner, like his colleagues in other states, is watching California closely. A Wilson victory would embolden not just governors. Just 10 days after the California proposal went public, New York City Mayor David N. Dinkins floated a plan to save that cash-strapped city several hundred million dollars this year by stretching out pension payments.

Washington will soon enter the fray. Representative Edward R. Roybal (D-Calif.), chairman of the Select Committee on Aging, is investigating Wilson's plan, which he calls an attempt to "divert the retirement savings of workers and retirees and leave them with empty promises." Elnora Hoyt knows the feeling. And if some of the country's deficit-plagued states have their way, she could have a lot of company.

Before it's here, it's on the Bloomberg Terminal.