The CalPERS board today approved a modest increase in the state's annual contribution to the pension fund, setting aside protests from Gov. Arnold Schwarzenegger's administration.

Schwarzenegger wants the state's payment to CalPERS to jump by at least $1 billion next year, to begin paying down the fund's big investment losses. But because the CalPERS board chose to raise the rate by only $200 million, Schwarzenegger will now have to hash the issue out with the Legislature, where the Democrats appear reluctant to go along with the higher payment.

Schwarzenegger's plan would put additional strain on a budget that's already estimated to be $20.7 billion in the red.

Some labor leaders say Schwarzenegger wants the higher payment to dramatize his argument that pension costs are unaffordable - and benefits for newly hired workers should be reduced. Schwarzenegger's aides say they merely think the bills should be paid as soon as possible.

If CalPERS had gone along with Schwarzenegger's wishes, the Legislature would be powerless to block the $1 billion increase; CalPERS has sole authority to raise its rates. But now the Legislature can block Schwarzenegger's plan.

"They're basically telling (Schwarzenegger), 'You can go out on the plank by yourself,'" said Marcia Fritz, who is leading an independent initiative to reduce pension benefits for new hires. Her group hopes to place the initiative, which is similar to the governor's plan, on next November's ballot.

She dismissed the smaller rate hike as an "easy-pay plan."

The CalPERS board approved the smaller rate hike with one "no" vote, from Greg Beatty, representing Schwarzenegger's Department of Personnel Administration.

CalPERS officials defended the smaller rate hike, which is similar to what hundreds of local governments and school districts will receive. Ron Seeling, CalPERS' chief actuary, said adopting Schwarzenegger's plan would hamstring future governors by committing them to higher annual costs.

"To be frank, we've got a governor with one year left," he told the board.