Against Gov. Jerry Brown's wishes, the California Public Employees' Retirement System board voted today to phase in a higher cost to the state over two years rather than bill the state immediately in full.
In a letter to the board, Brown called that "not a prudent decision."
The disagreement was over the pace at which PERS is lowering its assumptions about future investment returns from 7.75 percent to 7.5 percent, called the discount rate. Such changes are intended to compensate for lower market returns. When the rate of return assumption goes down, governments must contribute more.
The PERS board agreed to phase in the change over two years at a onetime $137 million savings ($78 million general fund), but Brown had wanted the board to drop the discount rate immediately. In a letter he sent to the board today, Brown reasoned that despite the onetime savings, the delay would actually cost the state general fund $145.9 million over 20 years in higher interest costs.
Brown said in his letter he had included enough funding in his May budget proposal for the coming fiscal year to compensate for the lower discount rate.
"Your vote today to institute a phase-in period reinforces the same practice of prior years - to not pay our pension bills when due," Brown said in his letter. "Allowing the state to phase in the change to a 7.5 percent investment return will only increase costs and delay taking responsibility for our decisions."
Brown said it is his "intent" that the state pay the full share regardless of what the PERS board voted. But Democratic lawmakers, who have signaled they do not intend to cut as deeply into health and welfare programs as Brown proposed, may want to use that $78 million general fund savings to minimize budget reductions instead.
Altogether in 2012-13, the state is slated to spend as much as $3.9 billion in total funds and $2.2 billion in general funds toward state employee pension contributions, according to the Department of Finance.
Board President Rob Feckner responded in an e-mail, "We voted for the phase-in option to make things less painful for all employers during these difficult economic times. If the governor feels the state can make the payment in full, then I'll be happy to have someone come pick up his check today."
Post updated at 4:15 p.m. to include new quote from Feckner responding to Brown.
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