Gov. Arnold Schwarzenegger, calling current benefits "unsustainable," proposed a sweeping reduction in pension and retiree health benefits for new state workers.

His plan would give new employees the same pensions received by state workers before a major benefit increase a decade ago, saving the state an estimated $74 billion over the next three decades.

The new state workers would have to work 25 years, instead of 20, before receiving maximum retiree health coverage that would pay 85 percent of the average HMO premium, instead of the current 100 percent, saving the state $19 billion.

The proposal by the Republican governor over the weekend is one of a series of "structural reforms" he is seeking as he negotiates with the Democratic-controlled Legislature to close a $24 billion state budget gap.

"Retirement promises made to state employees amounting to hundreds of billions of dollars of unfunded debt threaten to consume growing portions of the state general fund and squeeze out funding for higher education, welfare, environmental protection and more programs," said a two-page outline of the governor's proposal.

The plan would not help close the current budget gap. But the "give back" in employee benefits seems almost certain to draw strong opposition from public employee unions allied with Democratic legislators.

"State employees have already given up more than a month's pay per year to help solve the state's budget crisis," said Doug Crooks, a spokesman for SEIU Local 1000, the largest state worker union representing 95,000 employees.

"To rob them of their pensions that they have worked so hard to achieve is excessive and unfairly singles them out," he said.

Crooks said the governor is requiring state workers to take two "furlough" days off without pay each month and is threatening to order a third. Over a year, he said, 24 furlough days is the equivalent of all the work days in a typical month.

The governor's proposal would give new state hires the pension formula that was in effect before SB 400 in 1999 increased benefits. It would be a return to a lower "tier" of benefits pushed through earlier in that decade by former Republican Gov. Pete Wilson.

SB 400 was sponsored by the labor-friendly California Public Employees Retirement System as Wilson was replaced by Gray Davis, who became the first Democratic governor in 16 years.

The Schwarzenegger administration, and other critics, point out that CalPERS told the Legislature that the SB 400 benefit increase would not require an increase in state pension contributions.

"Everyone was assured that returns from the investment would more than cover the costs of the increased benefits, which were applied retroactively," Dave Gilb, Personnel Administration director, said in a letter to CalPERS earlier this month.

"Look what happened instead," Gilb wrote. "Our costs have increased over five times since then, from $464 million in 1999 to $3.3 billion in 2009-10."

Much of the increase is due to big swings in investment earnings as the stock market rises and falls. State contributions to CalPERS, $1.2 billion in 1997-98, fell to $157 million in 2000-01 as the market boomed.

In the wake of a stock market crash last fall that devastated pension funds, CalPERS has approved a "smoothing" plan to ease rate increases for its 2,000 local government pension systems. Schwarzenegger opposes a similar plan for the state, saying it shifts costs to future generations. (See Calpensions 18 Jun 09: "CalPERS softens hit on local governments").

The governor cited the big increase in state contributions to CalPERS, from $157 million to $2.5 billion, when he briefly backed a proposal in 2005 to shift new state and local government hires to a 401(k)-style individual investment retirement plan.

Pensions were not included in Schwarzenegger's four "Year of Reform" initiatives rejected by voters in November 2005: state spending, redistricting, teacher tenure and union dues.

Now the governor thinks he has another chance to push for changes in pensions and a number of other areas as he moves toward the end of his final term in office next year.

"At the same time we cannot make this budget just about cuts," Schwarzenegger is quoted as saying in the outline of his pension proposal. "There are also great opportunities for structural reform ... So let's use this crisis as an opportunity."

Pensions. The Schwarzenegger proposal would return most state workers (the "miscellaneous" category) back to the "2 percent at 60" formula. The pension is 2 percent of final compensation for each year served. So, for example, a worker retiring after 30 years at age 60 would receive 60 percent of final pay.

The current SB 400 formula for miscellaneous workers is "2 percent at 55," giving a worker retiring at age 55 after 30 years a pension of 60 percent of final pay.

The governor's proposal would change the formula for state firefighters and the Highway Patrol from 3 percent at age 50 to 3 percent at 55. He would repeal a bill, SB 183 in 2002, that expanded the higher-benefit safety category to include milk inspectors and billboard inspectors and others.

In addition, employee contributions to their pensions would be increased by removing a "floor" that exempts the first part of the salary, $513 for miscellaneous workers, from the employee contribution.

In the miscellaneous category, workers contribute 5 percent of their salary and the state contribution is 16.9 percent of salary.

Firefighters and the Highway Patrol contribute 8 percent with a state contribution, respectively, of 25.8 percent and 28.4 percent.

The governor's proposal to remove the "floor" is expected to save the state $65 million a year and a total of $2 billion through 2040.

Retiree health care. The changes proposed by the governor are said to be a response to recommendations made last year by the governor's Public Employee Post Employment Benefits Commission chaired by Gerald Parsky.

The state is expected to pay about $1.36 billion for retiree health care this fiscal year. But no money has been set aside to pay for care promised to current workers when they retire.

The "unfunded liability" is estimated to be $48 billion over the next 30 years. The governor's proposal would cut spending on retiree health care to reduce the unfunded liability in several ways.

Currently, state retirees can choose a basic health plan that covers all costs except co-payments when they use services, usually $15 for an office visit or $5 for generic prescription drugs. Most active workers pay more for health coverage.

The outline of the governor's proposal says the state's contribution to health care for a retiree would be changed "from 100 percent of the average HMO premium to match the contribution required from the state in the case of active employees (generally 85 percent of premium)."

The change is expected to trim $19 billion from the 30-year unfunded liability. The outline says that requiring an additional five years of work to be eligible for maximum retiree health care would trim a whopping $49 billion.

Workers currently become eligible for 50 percent of retiree health coverage after 10 years and, in 5 percent annual increments, 100 percent after 20 years. The proposal would require 25 years to receive the new maximum benefit.

A proposal to save money through competitive bids would give the state "the authority to purchase health care from a provider other than CalPERS, giving the state instead of CalPERS the ability to determine plan design and levels of premiums."

The savings are expected to be $180 million in the new fiscal year that begins this week, increasing next year to $323 million with an annual growth rate of 3 percent.