SACRAMENTO, CA - With a looming budget deficit of $7.3 billion, California needs to adopt more cost-saving measures. Changing the state's pension system would be an excellent place to start.

California's Public Employees Retirement System (CalPERS) provides pensions to 1.4 million former state employees. These retirees receive benefits under a "defined benefit'' plan, where pension amounts are guaranteed by the state based on a combination of salary and years of service. Under this scenario, an employee with 30 years on the job, making $50,000 a year, can retire at age 55 and receive an annual pension of $30,000, or 60 percent of his or her original salary.

The state's public safety officers get an even better deal. At 50, they can retire with 90 percent of their working income. While these benefits are very attractive to state employees, the taxpayers are left with the bill.

CalPERS receives its funding from payroll contributions by both the employee and the employer (state agencies funded by taxes). Those funds are then invested in the stock market under the supervision of a 13-member board. Ideally, the returns on the invested funds should cover the promised benefits to retirees, leaving taxpayer dollars untouched. Recently, that has not been the case.

From 2001 to 2003, the investments under-performed and CalPERS suffered severe shortfalls, forcing taxpayers to pick up the tab. In 2004, CalPERS ran a deficit of $1.9 billion. The governor and the legislature are attempting to defer a portion of this by selling $800 million in bonds, a move that the Pacific Legal Foundation claims is unconstitutional.

While bonds may dull the pain, they won't change the reality that the CalPERS deficit consumed 1.7 percent of the state's budget. With projections stating that retirement related costs should increase by $1 billion over the next five years, things aren't looking good. The pension problem is worse for California's counties and cities.

The city of San Diego's pension system has only enough funds to cover 68 percent of its obligations. Contra Costa County allocates 11 percent of its budget to pensions, while the city of Bakersfield is at 14 percent. There are literally dozens of localities that face bankruptcy if something isn't done.

Last week, Assemblyman Keith Richman (R-Granada Hills) introduced a constitutional amendment to change how California's public pension systems operate. His plan would limit all new employees hired after July 1, 2007 to a "defined contribution'' pension plan. This 401k-like plan would require the public agency to match an employee's contribution up to a specified amount.

Rather than have the funds managed by the government, the individual employee would be able to invest these funds however he or she wishes. In addition, the pension would be portable, allowing the employee to take the plan with them if they move into the private sector.

A defined contribution pension system allows for fiscal stability. With the success of the investments placed squarely on the employee, the public no longer has to foot the bill during under-performing years. State and local governments would be unchained from pension deficit obligations, freeing up dollars to repay debt and balance the budget.

Next fiscal year's state budget deficit is estimated to be $7.3 billion. If California is ever going to dig out of its fiscal hole, budget reform must occur. The public pension system is an excellent place to begin.

Anthony P. Archie is a policy fellow in business and economic studies at the Pacific Research Institute in San
Francisco. He can be reached via email at aarchie@pacificresearch.org.