JEFFREY BROWN: Now, in a weak economy, what may be a ticking time bomb for many states, cities and towns: hundreds of billions of dollars in pension liabilities that are currently underfunded.
In California, Governor Arnold Schwarzenegger warned just this week that his state will need billions more from the federal government for basic operations, even as longer-term pension requirements loom.
"NewsHour" correspondent Spencer Michels reports.
SPENCER MICHELS: When 86-year-old John Canfield retired 22 years ago from his California state job, he was making about $50,000 a year. As a senior engineer, he had designed highway bridges used by thousands of Californians.
JOHN CANFIELD: I designed structures all over the state of California. And I take great pride in that.
SPENCER MICHELS: Today, with yearly increases for cost of living, his state pension totals about $63,000. That's more than the average for state workers because Canfield was one of the higher-paid employees.
JOHN CANFIELD: I feel that I earned that retirement pay. I considered it a contract between me and the state of California.
SPENCER MICHELS: For decades, retirees like Canfield drew their pay with little notice. But now that taxpayers in California and other states are being asked to pony up for underfunded government pension plans, a lot of questions are being asked about the amounts pensioners earn, the way pension funds are invested, and about how the pension boards themselves are being run.
David Crane, special economic adviser to Governor Arnold Schwarzenegger, worries that, unless those questions are answered, pension spending will eat away at key state-supported programs. They already have diverted $3.3 billion from the state budget, a figure that is rising.
DAVID CRANE, special economic adviser to California Governor Arnold Schwarzenegger: We are diverting, really, billions of dollars from the University of California and health and human services to pay off pension promises that were made decades ago or even just a decade ago.
SPENCER MICHELS: Since Crane and other reformers cannot change what current workers or retirees will earn -- those are covered by contract and court orders -- he wants to change benefits for future employees.
DAVID CRANE: Bring those levels down to at least the levels they were before our legislature increased them 10 years ago, in 1989, or reduce current employee compensation for employees today.
SPENCER MICHELS: But Marcia Fritz, says, other rules need changing as well. A CPA who runs a pension reform group, she says high pensions in California and other states are often the result of spiking the final year's pay, by adding in car allowances or selling back unused vacation days.
MARCIA FRITZ: In lieu of pay increases, people -- the unions will say, well, then give us a few more days of vacation or a few more days off. And then they don't take the days off. They accrue it, so that taxpayers have to cough up the money to cash it out. And then that also goes into their final pay for pension purposes.
SPENCER MICHELS: Fritz is putting together a ballot measure to stop that. She has posted lists of public retirees making more than $100,000.
The ones that drew the most attention were four retired officers of the San Ramon Fire District near San Francisco. They were said to be collecting over $245,000 each, more than what they earned while working.
Fire Chief Richard Price says, those pensions are deserved.
RICHARD PRICE, fire chief, San Ramon Valley, California: These are top-level managers who are administering large districts, a large number of employees, large budgets, like any CEO running a corporation of similar size.
SPENCER MICHELS: Now under pressure, the fire board has come up with new rules to curtail what some see as pension abuses.
RICHARD PRICE: My retirement and the retirement of the managers of this district are considerably lower now than they would have been before our board took these actions.
SPENCER MICHELS: David Low, a union lobbyist who serves on the governor's pension committee, endorses such reforms, especially for managers. But he thinks the notion that the pension fund is in trouble because of high payouts is misleading.
DAVID LOW: The reality is, is, the majority of the police and firefighters get a reasonable and fair benefit for putting their lives on the line. And they're not going out with these huge pensions.
SPENCER MICHELS: The California Public Employees Retirement System, CalPERS, agrees. It pays benefits amounting to $10 billion a year to 400,000 retirees.
Pat Macht is director of external affairs.
PATRICIA MACHT, director of external affairs, California Public Employees Retirement System: Seventy-five percent of the folks that retire with us get about $36,000. We have folks like bus drivers, school workers who get less than $1,000 a month.
SPENCER MICHELS: Low instead blames the rise and fall of the stock market, since most of those CalPERS payouts come from investments made with money contributed by employees and their employers.
Those investments had been doing so well that employer contributions were curtailed. But, in 2008, the fund lost a third of its value. And that's when the state had to pony up more than $3 billion.
It was a wrongheaded investment strategy, according to governor's adviser David Crane. He says CalPERS, as well as pension funds elsewhere, had been too optimistic.
DAVID CRANE: All public pension funds have done this, is assume very high, fantastical rates of returns, far in excess of what stock markets historically have returned and bonds have historically returned. And, by doing that, they induced governments to put away less than was necessary when the promises are made.
SPENCER MICHELS: Some critics also allege, CalPERS and other funds made risky investments in hedge funds urged on by middlemen who got a cut. Still, CalPERS argues, it has no trouble paying retirees what they have been promised.
PATRICIA MACHT: We take in more than enough cash. We're in a really strong position to meet our benefit payroll.
SPENCER MICHELS: But Crane says, that's not the point. It's the state, not CalPERS, that has to come up with the pension money. And, next year, it will need increased contributions because of the investment losses.
DAVID CRANE: CalPERS could lose every penny tomorrow. And these people, the beneficiaries, wouldn't be at risk, because we're on the hook for those payments, regardless of how well or how poorly pension funds do.
So, it doesn't make sense to even ask them whether they're solvent. Their assets are insufficient to meet our liabilities. And the net result is, they're underfunded, and we are going to have to come out of our general funds to make those payments.
SPENCER MICHELS: The debate over public pensions will only get more intense as the legislature takes up reductions in benefits, as Marcia Fritz's group tries to qualify a ballot measure to curtail abuses, and as unions fight to retain benefits they think may be in jeopardy because of the zeal to reform.