Report: 2-tier state pension plan won't happen

SACRAMENTO — California will not impose a two-tier pension system promising lower benefits to future state workers as part of any wide-ranging deal to solve its $26.3 billion budget shortfall, The Sacramento Bee has learned.

The controversial proposal by Gov. Schwarzenegger has been shelved in budget talks, but options for cutting pension costs are expected to be discussed in coming months.

Schwarzenegger's plan never was intended to affect existing employees, whose pay has been cut nearly 15 percent through three unpaid furlough days per month.

Carroll Wills, of California Professional Firefighters, applauded the decision to move slower on pension reform, saying that it made no sense to jam a proposal through the Legislature with "a fiscal gun pointed to its head."

"The pension discussion, to the extent it needs to take place, (should) be a deliberative process of the Legislature," said Wills, who contends that a two-tier system of benefits pays employees unequally for equal work.

Also Tuesday, the governor told state employee unions his administration would cut an additional 2,000 jobs. Layoffs won't take effect until September.

The state's finances took another hit when Moody's Investor Services downgraded California bonds to near-junk status, from A2 to Baa1, and placed the state's credit rating on watch for possible further reductions. Moody's said the budget deadlock had put constitutionally required payments to bond holders at risk.

The state's budget hole, exacerbated by the recession, grows about $25 million every day that no deal is struck. The governor and top four legislative leaders resumed talks Tuesday after taking Monday off.

The economic slowdown has hit the pension system hard, sending investment income plummeting and sparking pressure to alter defined benefits that are more lucrative than are typically offered in private industry.

Creation of a two-tier system was not expected to save money immediately, but it was hailed by Schwarzenegger as a long-term way of freeing about $95 billion in state funds over 30 years.

"Everyone knows the sooner we reform pensions, the sooner we can save resources for other programs," said Aaron McLear, Schwarzenegger's spokesman.

Schwarzenegger unveiled his proposal for a two-tier pension system June 27, but it was opposed by Democratic leaders and ultimately tabled, according to multiple sources.

Senate President Pro Tem Darrell Steinberg of Sacramento, when the issue arose last month, said pension reform "deserves real consideration in the Legislature, but it's not right to jam it into a budget agreement in (the final) hours."

Schwarzenegger officials countered last month that the issue was relevant to budget negotiations because it could ease fiscal pressures potentially created in coming years by Democrats' failure to cut enough from operational costs now.

Specifically, Schwarzenegger's retiree proposal for future state workers would:

Alter the pension formula to ensure lower benefits or longer public service. For example, most state workers who are not public safety employees now may retire at age 55 with a pension totaling 2 percent of their salary multiplied by the years worked. The new formula would pay that benefit at age 60.

Compute pensions for peace officers, firefighters and California Highway Patrol officers based on the highest three years of compensation, rather than the highest single year.

Remove the current "floor" before which state employees must contribute to their pensions. For example, most state workers must contribute 5 percent of their salary to the pension system, but their first $513 of monthly earnings is not assessed.

Provide lifetime health care benefits only for retirees who have worked 25 years. Currently, the state pays 50 percent of retiree health insurance costs for employees with 10 years of service. The percentage rises annually, to 100 percent for 20-year employees.

Schwarzenegger's proposal would lower the state's contribution for retiree health care benefits from 100 percent of the average HMO premium to an amount that matches the contribution for active state employees — generally 85 percent of the insurance premium.

David Crane, a special adviser to Schwarzenegger on jobs and economic growth, has said the pension system's unfunded liability could total several hundred billion dollars if no changes are made.

Tuesday's layoff announcement follows a previous round of 4,600 pink-slip notices, but it is unclear how many workers will lose their jobs because many have an opportunity to move into special-fund posts that weren't covered by the layoffs.

Some of the job cuts will come through attrition, said Victoria Bradshaw, the governor's Cabinet secretary.

The Associated Press contributed to this report.