California’s immense pension dilemma

California Capitol. Photo by Anne Wernikoff for CalMatters

By Dan Walters | | 

California’s public employee pension dilemma boils down to this: The California Public Employees Retirement System has scarcely two-thirds of the money it needs to pay benefits that state and local governments have promised their workers.

Moreover, CalPERS’ official estimate that it is 70.8% funded is based on an assumption of future investment earnings averaging 7% a year, which probably is at least one or two percentage points too high. In the 2019-20 fiscal year that ended June 30, CalPERS posted a 4.7% return and over the last 20 years it has averaged 5.5% by its own calculation.

Were the earnings assumption dropped to a more realistic level, the system’s “unfunded liability” — essentially a multi-billion-dollar debt — would increase sharply from the current $160 billion to at least $200 billion.

There are three ways to resolve the debt dilemma: Earn higher returns, require government employers and employees to pay more, or reduce future benefits. CalPERS is pursuing the first two but a recent state Supreme Court ruling makes the third virtually impossible.

The court had an opportunity to revisit the “California rule” — an assumption, based on past rulings, that once promised, future pension benefits cannot be revised downward.

The case involved pension reform legislation sponsored by former Gov. Jerry Brown, particularly a ban on manipulating benefit calculations. Some unions said that the California rule protected “pension spiking,” but the justices, while ruling it doesn’t apply, also declared, “we have no jurisprudential reason to undertake a fundamental reexamination of the rule.”

So reducing future benefits is now off the table, which leaves improving investment earnings and increasing contributions as the only options for avoiding an eventual meltdown.

CalPERS has been pursuing a more aggressive policy, contending that without it, the system can’t achieve its 7% goal. It has proposed to borrow up to $80 billion to expand its investment portfolio and make direct loans to corporations or government entities. However, last week’s abrupt resignation of chief investment officer Ben Meng, architect of the strategy, leaves it in limbo.

Basic economics tell us that pursuing higher investment returns means taking higher risks of failure. Direct lending also increases the risk of corruption, which has infected CalPERS in the past.

That’s why a pending CalPERS-sponsored bill is troublesome. The measure, Assembly Bill 2473, would exempt details of CalPERS loans from the state’s Public Records Act, making it much more difficult for watchdogs and journalists to sniff out insider dealing.

Meanwhile, CalPERS’ demands for more money from state and local governments is hitting their budgets even harder these days because tax revenues have been eroded by the COVID-19’s recession. They force employers to dip into reserves, shift funds from other services, ask their voters to raise taxes or even borrow money to pay pension debts.

The latter involves what are called “pension bonds,” issued on an assumption that their interest rates will be less than the 7% percent rate by which CalPERS inflates unfunded liabilities — a practice known in financial circles as “arbitrage.”

Many local governments issue arbitrage bonds, despite the obvious risks, and recently, a hybrid form emerged in Torrance, a small Southern California city.

Torrance is leasing its city streets to a city-controlled entity called the Torrance Joint Powers Financing Authority, which will issue $350 million in bonds to pay for the lease. The city will use the bond money to pay down the city’s $500 million pension debt while making payments to the authority so it can service the bonds.

The bottom line: The city is pawning its streets to pay for pensions. That’s not healthy by any definition.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to Elk Grove News is a media partner of CalMatters. 



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1 comment

JD said...

I'm going to go out on a limb and say that Dan "I never met a public employee that I didn't hate" Walters would really like to throw as many public employees into poverty as possible. Or worse, make them work to death. Why should we make the goal to retire with dignity when we can make it the virtue of working ourselves to death? And, it would be even better for his investments if we all died sooner rather than later!

Of course he's frustrated that benefits can't be reduced. Do you think he cares about the burden of medical expenses and the burden of just being able to afford a decent retirement as public employees retire? No! Why should he? He's looking out for his own pocket book and if he has to destroy the well being of thousands of public employees, so be it!

Of course, Dan could advocate for revisiting Prop 13, which severely undercut public funding, and thus the employers ability to pay into pensions. Dan could also advocate for making the wealthiest few Californians pay their fare share of taxes for similar reasons. But of course he won't do that, because then he'd have to pay too. He could also advocate for defunding law enforcement so more of that revenue can pay pensions and other municipal services. But he, no doubt, benefits from police brutality like most wealthy elites in the ruling class.

No, I'm sorry, but I don't buy Dan Walters "concern" over the cost of pensions one bit. He's just another wealthy elite looking to starve and dismantle the public sphere. His concern is over how "out of control" pension costs will effect his pocket book and the pocket books of his wealthy friends.

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