For the past year, Gov. Arnold Schwarzenegger has warned that CalPERS was heading over a cliff and pawning off its financial problems on future generations.

Now he wants to borrow $2 billion from the California Public Employees' Retirement System to help fix this year's state budget.

The governor's plan represents an apparent about-face – and raises questions about the long-term costs. The last time the state borrowed from CalPERS, it had to pay the pension fund $400 million in interest. More borrowing would surely bring more interest expense, experts said Friday.

CalPERS is obliged to "treat the loan as they would any investment," said Keith Brainard, research director at the National Association of State Retirement Administrators.

Schwarzenegger's proposal comes after he belittled CalPERS for implementing a formula that blunted the impact of its huge 2008 investment losses, pushing some of the burden into future years.

The formula is a "very expensive loan," his economic adviser David Crane said in December.

Crane had no comment Friday on the loan proposed by Schwarzenegger, saying budget talks are "private discussions." The governor's press office also declined to comment.

While the plan remains sketchy, the Republican governor's idea is tied to his efforts to permanently cut benefits to 1999 levels for new hires. Then-Gov. Gray Davis signed a bill raising benefits in 1999.

Sources said CalPERS would be repaid with savings from the benefit cuts, estimated by Schwarzenegger at $93 billion over 30 years.

CalPERS pays $11 billion a year in retirement benefits. While it's still coping with the effect of the 2008 market crash, its assets total $208 billion, making it a target for budget negotiators. Schwarzenegger says the two sides are $4 billion apart.

"It may be politically expedient," said Brad Barber, a pension expert at the University of California, Davis. "It may be easier to get it out of CalPERS than it is to raise taxes or cut programs."

Despite CalPERS' funding problems, "I would guess that … they don't have immediate cash-flow problems," said Jack VanDerhei of the Employee Benefit Research Institute in Washington.

Schwarzenegger's campaign to cut benefits kicked into high gear after CalPERS lost $56 billion in the fiscal year ending in June 2009. He called the pension fund unsustainable and said CalPERS needed to face up to its shortcomings.

CalPERS relies largely on investment income but also gets contributions from the state, employees and participating local governments. CalPERS has the power to set the employers' contributions, and it increased the state's share for this fiscal year to $3.9 billion, up from $3.3 billion.

Crane had said the contribution should have gone higher. The more money CalPERS has, the quicker it can start to recoup its losses, he said.

But critics said Crane's real motive was to build support for Schwarzenegger's crusade to cut benefits.

Six unions have agreed to pension fixes, but the powerful SEIU Local 1000 hasn't yet made a deal.

CalPERS will review the loan idea "with our fiduciary duty to members and employers in mind," said spokesman Brad Pacheco.

Borrowing from pensions isn't unheard of. Virginia lawmakers this year cut $620 million from the contribution to the state's pension, to be repaid at 7.5 percent interest.

Barber said CalPERS would have to insist on a "fair market" return on a loan, likely pegged to the rate for California general obligation bonds.

The 30-year bonds pay about 5 percent. Short-term notes pay less than 2 percent.

When the state borrowed from CalPERS in the early 1990s, it was later ordered by the state Supreme Court to repay at 8.75 percent. The interest came to $400 million, for a total of $1.36 billion.

The 8.75 percent matched CalPERS' forecast then of its annual investment returns. The current forecast is 7.75 percent.

State workers, leery of CalPERS loaning money to the state, said the governor is trying to have it both ways.

"He wants pension reform, but yet he wants to borrow from the same fund he says is broken," said Tom Dailey, a state transportation department worker in Stockton.

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Call The Bee's Dale Kasler, (916) 321-1066. Read his blog on the economy, Home Front, at http://blogs.sacbee.com/ real_estate/. Jon Ortiz of The Bee Capitol Bureau contributed to this report.

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