Ask a Question -- Just Never Really Answer It

Tuesday, January 18, 2005

Ask a Question -- Just Never Really Answer It

President Bush's Social Security reform plan would surely be "dead on arrival" were it not for the strong public perception that the system is financially unsound. In California, the terminator is also dabbling in pension reform, but San Francisco Chronicle columnist Kathleen Pender explains what Schwarzenegger -- unlike Bush -- does not have working in his favor:
What's wrong with this picture?

This month, Gov. Arnold Schwarzenegger called the state's pension system "another financial train on another track to disaster" and proposed replacing the state's defined-benefit plans with a defined contribution for state employees hired after June 30, 2006. He also proposed a carrot and stick to entice current employees to opt out of the system ...

Yet last week, Moody's Investors Service gave the California Public Employees' Retirement System its highest, Aaa credit rating for a new business CalPERS is entering: Using its pension-fund assets to guarantee municipal bonds issued by states, counties and cities nationwide.

CalPERS' credit rating ... is considerably higher than the state's own single-A credit rating. It could theoretically result in the bizarre scenario of CalPERS insuring the bonds the state wants to sell to pay the money it owes to CalPERS.

... The California State Teachers' Retirement System, the other pension fund in Schwarzenegger's sights, has been insuring municipal bonds for a decade. It, too, gets triple-A ratings from Moody's and Fitch.

If the two pension funds are so strong, why does the governor hate them so?
Pender teases us by asking this question but never flat-out answering it. This isn't rocket science. Both CalPERS and the teacher retirement system impose certain costs on state government -- contributions that must be made on a semi-regular basis.

Since Schwarzenegger wants to improve the state's budget picture, these costs pose an obstacle. Within the political world, Arnold's approach is not a novel one: dump some of those costs on local jurisdictions. Later in the article, Pender explains:
For the teachers' system, the governor has proposed ending the state's 2 percent contribution and pushing it onto the school districts.

School districts, in turn, could pass that cost on to teachers through collective bargaining, "on the grounds that teachers need to take on a bigger share of the risk that defined-benefit plans bring," says Tom Lynn, a (Schwarzenegger spokesman) ...
Pender asked a very important question, but she forced her readers to search and sift for an answer.

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