This fiscal year, June 2003-04, California will pay more to cover its state employee pension obligations. This rise - from $156 million three years ago to $2.2 billion now - is not due solely to benefits improvements, but primarily because CalPERS's investments in the financial markets have not earned enough to cover the state's obligation this fiscal year.
A minor part of these 2003-04 costs are benefit improvements aimed at correcting inequities in the pension plan provided state and classified school employees. (The improvements have a value going forward of about a 2 percent pay raise.) Previously, two state workers doing the same job would have been entitled to radically different benefits based merely on the date they started work. And the benefits lagged well behind those provided to most other public servants.

It is wrong to overstate the benefit improvement as the big reason for the increase. Even if that hadn't been made, the employer contribution for state workers still would have been on the order of $1.7 billion this fiscal year. A full 75.2 percent of the $2.2 billion cost this coming fiscal year is due to the market downturn and other factors. Benefit modifications represent $509 million or 24.8 percent of next fiscal year's obligation.
While critics of the increases may have sticker shock, paying more when the markets are down should be no surprise. The California Constitution established an employer-sponsored pension system in such a way that the longer the investment returns are high, the more likely the state will get a holiday from making contributions into the pension system. In times of investment losses, the state risks paying more.

CalPERS has a long and proud history of generating investment returns that saved the state money. In fiscal year 1996-97, the state's contribution to CalPERS was $1.2 billion. The next three years saw double-digit investment returns so that by fiscal year 2000-01, the state's pension contributions were down to $156.7 million - a difference of more than $1 billion. The state also covers pensions for classified workers in California schools. Investment returns were so robust, the state didn't have to pay a dime toward those pensions - saving the state another $1.27 billion over those three years.

During the years the state received a pension contribution holiday, CalPERS members still contributed 5 percent to 7 percent of their paychecks to the pension system.

After three straight years of negative investment returns in the United States, employer-sponsored plans everywhere are paying more. One survey showed that S&P 500 companies with defined benefit plans saw liabilities rise from $105 billion to $1.07 trillion, and those same employers are increasing their contributions by a reported 400 percent.

When the economy rebounds, the state should see its contribution adjusted downward. It is important to remember that over the last 20 years, CalPERS has saved the state and California's taxpayers billions of dollars. These savings more than offset the increased contributions the state will make this coming year.

About the Writer

Sean Harrigan is president of CalPERS, the state's pension system. He can be reached at sean_harrigan@calpers.ca.gov. Web site: www.calpers.ca.gov