Gov. Arnold Schwarzenegger has privately proposed borrowing $2 billion from the state's giant pension fund to help bridge California's $19 billion budget deficit.

The plan would take the money as an advance against future savings from pension cuts, according to sources close to the negotiations who would not be identified because of the sensitive nature of the talks.

The Republican governor is demanding that lawmakers reduce pension benefits for newly hired state workers back to pre-1999 levels as part of any budget agreement he signs. The Legislature and Gov. Gray Davis that year authorized larger pension benefits under the assumption that investments would perform better than they have.

Reducing pension benefits to pre-1999 levels for new employees would save the state $93 billion over 30 years in payments to the California Public Employees' Retirement System, Schwarzenegger's office projects.

But the state would not save much in the current budget year. Under the governor's borrowing idea, the state would seek $2 billion upfront from CalPERS, backed by 30 subsequent years' worth of savings, sources said. The governor floated the idea earlier this month.

Schwarzenegger spokesman Aaron McLear would not comment.

Republicans and Democrats remain locked in a stalemate over whether to use higher taxes or spending reductions to reduce the last portion of a $19 billion deficit. With the impasse in its eighth week, negotiators are considering alternatives to generate savings, such as borrowing or deferring payments.

CalPERS has assets of roughly $207 billion, and one-third of its 1.6 million members are state workers. California is scheduled to pay $2.1 billion in general fund dollars – and $3.8 billion total – to CalPERS in the 2010-11 fiscal year.

There would be significant hurdles to Schwarzenegger's borrowing idea. Democrats would have to agree to change pensions, and they have been reluctant to do so unless labor unions reach contract agreements with the governor.

The CalPERS board, which includes Controller John Chiang and Treasurer Bill Lockyer, both Democrats, would also have to sign off on any arrangement to help the state with its deficit. CalPERS spokesman Brad Pacheco said CalPERS has not reviewed the proposal, adding, "If we did, we would look at it with our fiduciary duty to members and employers in mind."

State leaders have relied on CalPERS funds to balance the budget before. In 1991, Gov. Pete Wilson and lawmakers took $1.9 billion from Cal-PERS to help balance a then-record $14.3 billion deficit. Courts upheld that action, but the maneuver prompted public employee unions to put an initiative on the ballot in 1992 that gave the CalPERS board greater control and made it more difficult for the state to divert CalPERS funds.

In 1997, the California Supreme Court ordered the state to return $1.36 billion to the CalPERS system after state leaders diverted CalPERS payments to balance the budget in 1992 and 1993.

Democratic leaders have urged the governor to negotiate pension changes with labor unions representing state workers. Six of the state's 21 bargaining units have reached accords with the governor on pension and pay reductions.

Asked about state worker pensions, Assembly Speaker John A. Pérez, D-Los Angeles, said Thursday, "I'm not sure that we'll agree on every element of the governor's demands, but I think that we'll see pension reform that in the end we can all agree to."

For the first time in weeks, Pérez and Steinberg met with Schwarzenegger over lunch in Sacramento to discuss the budget. But all four legislative leaders and the governor have not met as a "Big Five" since June 14, 16 days before the fiscal year began.

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.

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