Getting your
Trinity Audioplayer ready...California lawmakers are poised to raise already unaffordable public employee retirement benefits — doubling down on a mistake 27 years ago that has helped drive up taxpayer pension costs by more than eight-fold.
This time, state legislators have a quarter century of painful experience to consider and have been warned of the multi-billion-dollar price tag of new increases.
But with a lack of historical perspective due to term limits and facing powerful labor union influence, state legislators from both parties seem destine to repeat the mistake of the past.
It was in 1999, when California’s largest pension system was flush with cash, that Gov. Gray Davis approved a massive expansion of public pension benefits. The change enabled state and local government employees to stop working at an earlier age and collect more retirement pay.
The California Public Employees’ Retirement System assured that, thanks to “booming stock market and investment strategies,” there would be no cost to taxpayers. CalPERS insisted there would be no need for state and local governments to pay more to fund the increased benefits.
It was fantasy.
First there was the dot-com bubble. Then came the Great Recession. As a result of increased benefits and investment losses, state and local government annual contributions to CalPERS have jumped from $1.6 billion in 1999 to $26.7 billion this fiscal year**. **After adjusting for inflation, real costs have ballooned by a factor of 8.3.
That unsustainable spike has siphoned away money to fund, for example, street repairs, public transit and health care services for the needy.
Modest reforms
It would have been even worse if Gov. Jerry Brown had not insisted in 2012 on modest changes to temper pension costs for new employees.
Now, at the behest of police and firefighter unions across California, state lawmakers are pushing through legislation to unwind parts of Brown’s changes.
Affecting workers hired since 2012, Assembly Bill 1383 would raise the salary limit well-paid public employees of all professions could use to calculate their pensions and increase retirement benefits for police and firefighters.
And, under the bill, public safety workers could negotiate for benefits providing retirement at age 55 with a pension that starts at 90% of full salary and adjusts annually for inflation.
The bill could increase costs to state and local governments by more than $8 billion in today’s dollars for just current workers covered by CalPERS, according to the pension system’s estimate.
That doesn’t begin to calculate the increased price tag for future employees’ pensions. Nor does it account for the shortfall created if CalPERS’ historically bad investment forecasts once again fail.
Moreover, while CalPERS is the largest pension system in the state, the legislation would similarly affect some other public retirement systems, including 20 county systems across California.
The bill, introduced by Assemblymember Tina McKinnor, D-Inglewood, received bipartisan approval of 70 of the chamber’s 80 members and is currently awaiting action this week in the Senate Appropriations Committee.
Bill coauthors from the Bay Area include Assemblymembers Dawn Addis, Patrick Ahrens, Anamarie Avila Farias, Damon Connolly and Liz Ortega, and state Sens. Dave Cortese and Tim Grayson.
Devastating effect
Legislators seem oblivious to the devastating effect of pension costs on local governments. While employees contribute to their pensions, it’s the employers, the taxpayers, who shoulder the biggest burden.
In the Bay Area, consider the effect on three local governments recently or currently seeking tax increases.
According to CalPERS, the employer share for pensions in Oakland is about $263 million this fiscal year; Santa Clara County about $874 million; and BART about $148 million.
Put another way, according to CalPERS, for every dollar of salary, Oakland must contribute an estimated 51 cents for pensions; Santa Clara County 34 cents; and BART 31 cents. (In some cases, employees contribute a small portion of the employer share.)
The costliest pensions are for police and firefighters, for which Oakland employer contributions work out to an estimated 71 cents for every dollar of payroll; Santa Clara County 66 cents; and BART 84 cents, according to CalPERS.
Statewide, making up for investment shortfalls of the past accounts for nearly two-thirds of this year’s $26.7 billion taxpayer burden for CalPERS pensions. That’s because of the way employers’ pension payments are structured.
The first component of the payments, known as the normal cost, is the calculation of how much the public agency and employees must contribute to ensure there are sufficient funds after investment returns to pay pensions when a worker retires.
The calculation of the normal cost relies on CalPERS’ estimate of future investment returns. But if a pension system’s estimate proves overly optimistic, the shortfall, called the unfunded liability, becomes a debt that the state and local governments must pay off with decades of amortized payments.
Unlike the normal cost, the payments on the unfunded liability are solely the responsibility of the employer — the taxpayers. That creates a perverse incentive for employee labor unions to advocate for high investment return forecasts that provide lower normal cost payments. If the returns don’t pan out, it’s taxpayers, not workers, who are on the hook.
Trying to climb out
That’s exactly what has happened over the past quarter century at CalPERS, which is run by a labor-friendly board that sets the investment return forecasts. The 1999 assurances that investment returns would cover the costs of the massive pension benefit increase were absurd.
When the Great Recession hit, the system plunged within two years from being 101% funded to meet its pension obligations to just 61% of needed assets. CalPERS has been climbing out of that hole ever since.
And, even with the steep payments and record stock market returns, CalPERS as of June 30 had just 85% of the funds needed to meet the future pension obligations workers have already earned. Actuaries agree that pension systems should be striving for 100% funding.
A bursting tech bubble or a market downturn for other reasons would drive down that funding level. Indeed, it’s questionable whether CalPERS could withstand another 40-percentage-point drop in funding like it experienced during the Great Recession.
Yet, McKinnor’s bill would immediately increase normal costs. And, based on CalPERS’ history of bad market forecasts, the bill would likely lead to greater payments for unfunded liabilities, according to a Senate staff analysis.
State lawmakers have already dug a huge pension hole for taxpayers. It’s time to stop digging.
Daniel Borenstein is editor-at-large for the opinion section.