SAN FRANCISCO — California has a
pension-debt problem, with a combined unfunded liability sitting
close to $1 trillion, according to estimates.
Advocates of reform
believe a lawsuit pending before the California Supreme Court could
open the door for real change. But it’s a crisis that’s going to
require parties on both sides of the issue to pitch in, one expert
Joe Nation, a public policy professor at Stanford
University, told the
Northern California Record that aside from legislation in 2012
that made small changes to benefits for future public employees, the
state’s response to crushing pension debt is limited. But it’s
felt most acutely in local governments.
tremendous financial pressures, I think, in large part because of
these pension costs,” Nation said. “An economic downturn — even
a mild one — could be enough to sink many. You could see a lot of
governments who simply say, ‘You know what, we don’t want to do
this. but we’re going to file for bankruptcy.’”
public-employee union leaders aren’t willing to make concessions.
But that could change if the state Supreme Court upholds a ruling
that pensions are not “immutable.” According
to court documents, a three-judge panel in the Court of Appeals in
the 1st Appellate District concluded
that while a public employee has a constitutionally protected right
to a pension, that right extends only to a “'reasonable' pension.”
And the legislature is permitted to alter benefits for existing
employees — not just future employees.
Gaining the ability to
modify benefits for current employees is crucial, Nation said.
“If that happens, in my opinion, it’s
the only way to save the system,” he said.
Naturally, not all
lawmakers agree. State Rep. Freddie Rodriguez (D-Pomona), chairman of
the General Assembly’s Public Employees, Retirement and Social
Security Committee, told the
Northern California Record he sees the California Public
Employees Retirement System — or CalPERS, the state's largest
pension fund — making “tremendous progress” in reducing its
debt since the recession.
“CalPERS alone saw its funded status
drop 40 percent during a two-year period,” he said. “It will take
time to recover fully from those sorts of losses, but I’m confident
in the management of CalPERS and believe that they will continue to
work to reduce their unfunded obligations.”
Meanwhile, Sen. Mike
Morrell (R-Rancho Cucamonga), vice chair of the Senate Public
Employment and Retirement Committee, took on a tone of alarm.
are at great risk of passing on debt to future generations that may
never be fully payable. It is a burden that our children and
grandchildren should not have to bear,” Morrell told the
Northern California Record.
But it’s not just taxpayers who will
“Without overhauling the system,
individuals who worked hard for years and played by the rules to save
for their futures will also have their financial security
jeopardized,” Morrell said.
How it got this far
said there are several factors that, put together, explain the
situation in which California has placed itself.
like CalPERS dole out pension benefits based, in part, on what rate
of return they assume they’ll get on the invested money. In
December, the CalPERS Board of Administration voted to lower its
assumption from a 7.5 percent rate of return to 7 percent over the
next three years. In the event that the fund performs poorly, the
state, schools and public agencies have to make up the difference. The
burden shifts to taxpayers.
Nation said that, while this is a good
step at setting a realistic expectation of how much the fund will
grow — which, in turn, gives a fuller picture to the public about
how much benefits will cost — activity over the last 10 years shows
that the actual rate of return is much lower.
assuming 7.5 percent, but only earned about 3.3 percent. So their
financial hole got deeper and deeper,” he said. “So, one thing
they’ve done wrong, I think, and they continue to do, is they
continue to assume that they’ll earn more than what’s realistic.
And the big problem is all these future benefits are based on the
assumption that you’ll earn 7.5 percent. It’s not as though
they’ve earned 7.5 percent and set aside the money.”
likened it to a gambler guaranteeing he’ll win the round of
Second, CalPERS’ methods tend to kick the can down the
road. The fund’s policy calls for amortizing — or paying back the
unfunded liability — over 30 years.
“The method they use is
all about delaying costs and heightening costs, frankly,” Nation
Ken Churchill, a contributor who tackles pension policy at
the California Policy Institute, compared the 30-year amortization to
taking 30 years to pay off a credit-card debt. In November 2015, he
that CalPERS previously amortized the debt over nine years. Like with
a mortgage, paying back the unfunded liability over nine years would
require higher regular payments, but result in less interest, meaning
a lower cost overall.
Like Nation, Churchill wrote that this
simply pushes the problem on without solving it.
“Worst of all,
by doing this CalPERS is passing a mountain of debt, higher taxes and
fewer services onto our children and grandchildren,” he
Third, Nation sees it as problematic that pension systems
in the United States are overseen by boards controlled by public
employee unions and politicians who are their friends.
don’t make tough decisions,” he said.
Lastly, he pointed to
legislation that passed in California in 1999, known as Senate Bill
400. The bill increased benefits to public employees and even applied
the improvements retroactively. For example, he said, a safety
employee, such as a firefighter or police officer, can retire after
30 years and receive 90 percent of their base pay for the rest of
“It really gave away the store,” Nation said. “No
one really understood the math — no one paid attention to it.”
a Los Angeles Times report
on pensions published in September, SB 400 was sold as a measure that
wouldn’t increase costs for state taxpayers because the fund would
grow enough to cover the difference.
“They were off — by
billions of dollars — and taxpayers will bear the consequences for
decades to come,” the Times reported.
What to do
happens next depends greatly on the Supreme Court.
he was surprised by the appellate court’s departure from case law,
“which have been clear that benefits for existing state employees
cannot be reduced without giving a corresponding offsetting benefit
He said he hopes the Supreme Court’s
conclusion will align with this historical perspective.
think it is too early to speculate what actions might take place if
the Supreme Court rules otherwise,” he said.
If it upholds the
appellate court’s ruling, it could spur on more productive
negotiations with unions, Nation said.
“I think the most
important thing that will happen is employee union groups are going
to say, ‘OK, this is not a sure bet any more. Pensions actually can
be reduced. We need to sit down and talk.’ That’s what I hope
happens,” he said. “If the court does end up there, it will
change the dynamics of that process. And help save the system.
“There’s simply no way to climb out of this financial hole
that we’re in without some sort of reduction in pension benefits
accrued in the future.”
To tackle the mounting debt, Morrell
said the problem needs to be examined from every angle, including
through the courts. He added that experts have recommended increasing
employee contributions. He criticized Democrats who want to raise
taxes to pay for pension obligations because he thinks higher taxes
mean more people will leave the state.
In the state senate, he
expects to see greater scrutiny of CalPERS’ “flawed”
assumptions about its rate of return.
“Since I have been
watching CalPERS, it seems they have missed their economic forecast
on returns almost every year. I have rarely, if ever, seen CalPERS
meet its previous target return of 7.5 percent. It has been a
known problem for years, yet they repeated the same forecast again
and again, missing their targets by a wide range,” he said. “We
need better people to manage the money of those who have worked to
save for retirement.”