California Republicans Zero in on Public Pensions

* Pension reform a top priority for California Republicans

* Democratic governor needs GOP votes for tax measure

* Public pension costs, obligations of national concern

By Jim Christie

SAN FRANCISCO (Reuters) - California Republicans, who could hold hostage a state budget proposed by its new Democratic governor, are drafting demands for supporting it, including the controversial issue of public pension reform.

Governor Jerry Brown needs at least a handful of Republicans to vote for the cornerstone of his budget plan, a ballot measure to extend tax increases that expire this year.

Mass protests by Wisconsin government workers were sparked in part by plans to raise employee contributions to pensions, and state, city and county governments nationwide are struggling with financing retirement systems.

California, the most populous U.S. state, faces tens or even hundreds of billions of dollars of unfunded pension liabilities in future decades.

Republicans, who are the minority in California's legislature, intend in coming days in private meetings to firm up their conditions for cooperation on the tax measure. One demand will be an overhaul of funding arrangements for the state's public pensions to reduce the burden on its finances.

"Almost everybody's wish list has some form of pension reform," Republican state Senator Tony Strickland told Reuters Tuesday.

Strickland said it is unclear when Republicans will reach consensus on pension reforms to put before Brown, who wants lawmakers to reach a budget deal by March 10 and prepare a tax measure for the June ballot.

Under Brown's proposed budget, revenue from tax extensions combined with more than $12 billion in spending cuts would help cover a deficit topping $25 billion through mid-2012. His plan is advancing in the legislature after committee approvals last week.

California's pension politics are gaining steam as Republicans in Congress consider a bill to require more pension obligation disclosure and discuss whether to let states declare bankruptcy. That could allow states to renege on pension payments.

Meanwhile, Fitch Ratings last week joined Moody's Investors Service and Standard & Poor's Ratings Services in saying it would heighten scrutiny of pensions and their costs to public finances.

MENU OF PENSION OPTIONS

Brown, sworn in last month, has said California's pensions must be fair to both public employees and taxpayers, which Republican lawmakers have interpreted as a willingness to negotiate pension reforms.

Even before he took office, top Democrats had conceded the states's public pensions were unsustainable, helping former Republican Governor Arnold Schwarzenegger win pension concessions from some state workers late last year.

The concessions included less generous formulas for pension payouts, requiring increased contributions from workers toward their retirement accounts, and higher retirement ages.

Some Republicans would settle for similar changes across the state's work force. Others, however, want to replace traditional pensions with retirement accounts similar to 401(k) plans common in the private sector.

The activist group California Pension Reform has another option -- capping how much public agency employers could contribute toward existing and new employees' future pensions.

Dan Pellissier, the group's president, said he hopes to find a Republican to tout in caucus a constitutional amendment to cap employer contributions to pensions for most public employees at 5 percent of their salaries. Contributions for public safety workers would be capped at 7 percent.

Under Pellissier's plan, public employees would match their employers' contribution but could boost individual contributions above it if they choose.

"This week is when you'll see the issues put on the table," Pellissier said. "It's a matter of bringing things to a head.

(Reporting by Jim Christie; Editing by Andrew Hay and Eric Walsh)