Major move under way to change CalPERS’ board

Assemblyman Marc Levine, D-San Rafael, an upset victor last fall in a new election process, has introduced a bill containing Gov. Brown’s stalled proposal to restructure the CalPERS board, adding financial expertise and loosening labor control.

The proposal to change the board, which needs voter approval because of a labor-backed initiative in 1992, would double the number of gubernatorial appointees to six, matching the number of labor representatives.

“In the past, the lack of independence and financial sophistication on public retirement boards has contributed to unaffordable pension benefit increases,” said the 12-point pension reform proposed by Brown in October 2011.

The proposal said pension boards need members with “independence and sophistication” to ensure that retirees receive promised benefits “without exposing taxpayers to large unfunded liabilities.”

CalPERS sponsored legislation, SB 400 in 1999, that gave state workers a major retroactive pension increase. A deep pension cut in 1991 was rolled back. Retirees received a 1 to 6 percent increase in their pensions.

Highway Patrol pensions increased 50 percent, setting a costly bargaining benchmark for local police and firefighters that critics say is unsustainable. All of this, CalPERS erroneously said, would be paid for by investment earnings, not costing taxpayers “a dime.”

CalPERS also pushed for increases in local government pensions authorized by AB 616 in 1991, offering to inflate the value of pension fund assets to help pay for the increased cost of higher pensions.

Labor unions tend to regard CalPERS as their creation. A forerunner of the current state worker unions, the California State Employees Association, played a key role in a 1930 ballot measure authorizing the creation of the retirement system.

“CalPERS would not have started without the state workers who formed the CSEA,” said a history of the California Public Employees Retirement System published by CalPERS in 2007.

The big pension fund has used its presumed shareholder clout to aid union struggles, recently in a Houston janitor strike. A CalPERS push for better “corporate governance” to improve shareholder earnings is regarded by some as labor intrusion.

A labor-backed initiative, Proposition 162 in 1992, responded to a “raid” on CalPERS funds under former Gov. Pete Wilson with an amendment to the state constitution that strengthened public pension boards.

In the current pension debate, a line in the ballot pamphlet argument for the initiative stands out: “Taxpayers will be socked if huge future tax increases are needed to pay back tomorrow the funds politicians loot from public pension funds today.”

The initiative made providing pension benefits a higher priority than minimizing employer and taxpayer costs. Pension boards were given sole control of administration, investments and actuarial services.

Wilson had obtained legislation allowing the governor to appoint the CalPERS actuary. The initiative restored CalPERS board control of the powerful actuary, who sets annual pension contribution rates that must be paid by government employers.

As a guard against attempts by state and local government elected officials to seize control, the initiative requires the approval of voters in the area served by the retirement system to change the number or selection of pension board members.

The Levine bill, AB 1163, directs the secretary of state to put the provisions of the bill on the ballot in the next statewide election. The State Personnel Board representative on the 13-member CalPERS board would be replaced by the governor’s finance director.

The governor would appoint two additional members who have “financial expertise” and are “independent” with no personal, family, financial or organizational ties to the pension system.

The expanded 15-member board would continue to have three other gubernatorial appointees (the Human Resources director and life insurance and local government officials), six elected by employee groups, a legislative appointee and the state treasurer and controller.

“True independence and expertise may require more,” the governor said in his pension reform proposal. “And while my plan starts with changes to the CalPERS board, government entities that control other public retirement boards should make similar changes to those boards to achieve greater independence and greater sophistication.”

San Diego and San Jose, where voters approved major cost-cutting retirement reforms last June, had already made similar changes in the boards of their troubled independent pension systems.

The 13-member San Diego board has seven independent financial experts as recommended by auditors and a blue-ribbon panel. A majority of the San Jose pension boards are independent financial experts under a city council policy adopted in 2010.

Brown’s proposal to reform the CalPERS board was not included in a bill last year, AB 340, that contained most of his 12-point plan. The other omission was a “hybrid” for new hires combining a smaller pension with 401(k)-style investments.

Arguing that pension reform would assure voters his tax increase on the November ballot would not be misspent, the governor got union sign off on higher employee contributions and sharply lower pensions for new hires.

If that kind of political leverage could not get CalPERS board reform through the Legislature, passage this year may be even more difficult. Levine introduced the bill on his own initiative.

He defeated former Assemblyman Michael Allen, D-Santa Rosa, a lieutenant of Assembly Speaker John Perez, D-Los Angeles, who was expected to become chairman of the Assembly public employees retirement committee.

After Allen’s district was split by a new non-partisan commission, he moved his residence from Sonoma County to San Rafael in Marin County. He defeated Levine in the Democratic primary, but lost in the new “top two” general election.

Allen far outspent Levine, a San Rafael city councilman. But Levine received funding from ag groups and, some think, the votes of most Republicans, who had no candidate of their own in the runoff between the top two primary vote-getters.

The governor has half of the appointments to the 12-member board of the California State Teachers Retirement System, which lacks the power to set employer contribution rates, needing legislation instead.

Brown filled two seats with independent financial experts: Michael Lawson and Paul Rosenstiel. But the governor has left three seats on the CalSTRS board vacant for more than a year.

“We’re certainly aware of the vacancies,” Evan Westrup, a Brown spokesman, said via e-mail, “and like all appointments, our focus is ensuring the best possible candidates have an opportunity to service. That dictates our timing.”

Does the governor support Levine’s bill to restructure the CalPERS board? “Generally, we do not comment on pending legislation,” said Westrup.

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Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/