A rift between Gov. Jerry Brown and the board overseeing the nation's largest public pension fund over rising liabilities tied to longer retiree life expectancies highlights a concern about how decisions are made at an agency with tremendous influence over state finances.
The board of the California Public Employees' Retirement System will meet Tuesday to begin considering how to address the costs associated with retirees living longer, but it already has indicated that it will ignore the governor's request to tackle the problem immediately.
Pension-reform and taxpayer advocates in California say this outcome isn't surprising considering the composition of the CalPERS board, which is dominated by public employees who will benefit from the pension system or those who are appointed by Democratic officeholders who receive significant campaign contributions from government labor unions.
They say such an arrangement, common across the U.S., can encourage rosy investment projections and low contribution rates.
"You have people who are not disinterested," said Joe Nation, a Stanford University public policy professor and former Democratic state lawmaker who studies pension systems. "Unfortunately, the incentives are really misaligned."
Of the 12 members on CalPERS' board, nine are due to collect public pensions from the agency they oversee. The board, which has one vacancy, has no independent taxpayer representative or an independent investment expert. The "public representative" appointed by the Democratic leadership in the Legislature is president of a grocery and food industry workers union.
CalPERS' board has the power to unilaterally set contributions rates for the state, cities and other government entities.
Brown wants the board to use that power to start boosting contribution rates this year. Instead, the board has indicated it will follow a staff recommendation to wait two years before increasing contributions from public employees and the government entities that pay into the pension system, then phase in those increases over a five-year period.
Advocates for reforming the public pension systems say increasing contribution rates often means less take-home money for government workers, a move employee-dominated boards might be loath to make.
"A labor-heavy retirement board might be choosing numbers that are in their favor," said Carole D'Elia, executive director of the Little Hoover Commission, a state watchdog agency.
State government, which is among the pension fund's contributors, would see its annual costs to the system rise from $3.8 billion to $5 billion at the end of the five-year period. Brown has called CalPERS' delay unacceptable.
"No one likes to pay more for pensions, but ignoring their true costs for two more years will only burden the system and cost more in the long run," Brown wrote in a letter to the board.
In a written statement, CalPERS said it must consider the ability of government agencies and employees to pay more for pensions before hiking rates. The board's president and vice president declined to comment.
Across the country, dozens of boards tasked with overseeing state public pension funds are controlled by people who will receive the pensions, according to 2010 data collected by the National Association of State Retirement Administrators. Public employee representatives say this ensures they have an active role in creating a secure retirement and prevent politicians from raiding funds for short-term interests.
"There's actually no evidence that the (CalPERS) board has failed in their fiduciary duty," said Dave Low, chairman of Californians for Retirement Security, a coalition of more than 1.5 million public employees. "In fact, there's a lot of people with financial experience on Wall Street who got us in the mess we're in now."
Board decisions about how much state and local governments should pay for pensions have long-term implications for their budgets. CalPERS, which oversees retiree benefits for almost 1.7 million members, has $45 billion in unfunded liabilities. Nationwide, the estimate for unfunded liabilities for public pensions is $1 trillion, according to a report released last month by the State Budget Crisis Task Force.
Under pressure to reform public pensions, lawmakers in Ohio, New Hampshire, Oregon and Alabama all reduced the influence of labor or added financial experts on their pension boards during the last decade.
Research into how the composition of pension boards affects investment success is inconclusive, said Anek Belbase, a researcher at the Center for Retirement Research at Boston College. One study examining 1990 data found pension systems with more retirees on their board had lower investment yields, but that and other studies missed key variables and do not prove a link, Belbase said. His organization plans to research the issue more extensively.
San Jose, where the mayor has been pushing a statewide ballot initiative to reform public pensions, approved changes to its two pension boards in 2010 and added independent experts.
The changes also removed City Council representatives and required employee representatives to have financial expertise. The pension fund has been managed more conservatively since then, said Michelle McGurk, a spokeswoman for Mayor Chuck Reed.
Recent attempts by Brown and a state lawmaker to add independent financial experts to the CalPERS board have failed.
Luke Bierman, a Northeastern University law professor, said the most important function of a pension board is to make sure retirees get the payments to which they are entitled.
"Their sole responsibility is for the beneficiaries," he said. "This is not a state enterprise."
CalPERS' board is composed of six retired or active employees elected by workers, three political appointees and four state department heads. The board president is a window glazer and former school bus driver, while the vice president is a financial analyst for Bay Area Rapid Transit.
Californians would have to vote on any changes in board composition because of a union-backed constitutional amendment approved by voters in 1992.
Brown tried and failed to add two independent financial experts to the board as part of his 2011 pension-reform package. The idea re-emerged in the state Legislature, but lawmakers recently watered the proposal down. The current version of the bill would require board members to develop their own financial education policy, which the board says it is already planning to do.