The nation’s largest pension plan continues adding to state and local taxpayers’ $93 billion debt.
The question now is whether the board of the California Public Employees’ Retirement System will stanch the bleeding. Or will it continue to laden our children and grandchildren with higher taxes and reduced public services because of its failure to properly fund the retirement system now?
On Monday, Chief Investment Officer Ted Eliopoulos will release CalPERS’ investment earnings for the fiscal year that ended June 30. We know roughly what he will say because he foreshadowed it last month.
“We’re likely to be flat, which is a nice way of saying zero, more or less,” he warned the CalPERS board. Goose eggs. Zilch. No return on investment.
That’s bad news for a pension system predicated on assumed long-term average annual returns of 7.5 percent. That’s especially bad for taxpayers who must make up the shortfall. While San Jose’s plans are self-financed, most Bay Area counties and cities are in CalPERS.
But one year does not make a trend. For that, Eliopoulos noted CalPERS’ average annual return over the past 10 years was about 5 percent. And looking forward, he said, a CalPERS consultant forecasts only 6.4 percent for the next decade.
Eliopoulos sees rough roads ahead.
“The coming three- to five-year period really is shaping up to be a challenging market environment for us,” he said. “… It is going to test us.”
That should greatly concern directors of a pension system that a year ago had only 73 percent of the assets it should have. After Monday’s announcement, that number likely will be reduced further.
The pension system last reported its shortfall in 2014 at $93 billion, more than four times what it was a decade earlier. Since then there have been two consecutive fiscal years of poor earnings. The debt is more now.
To understand why all this matters to current and future taxpayers, let’s review how California’s public employee pensions are funded.
Each year government workers earn additional future pension benefits. To fund that, employees and employers make contributions. That money and investment earnings should cover workers’ pensions when they retire.
The critical variable is the investment earnings. The higher the forecast return, the less money workers and employers are required to contribute up front. But if investment returns fall short, employers (the taxpayers) must cover the difference.
That’s exactly what’s happened at most public pension systems across the country, including CalPERS.
The problem is exacerbated because CalPERS’ board is dominated by labor representatives and labor-backed politicians susceptible to worker pressure to keep the investment return forecast high.
The resulting lower up-front contribution leaves more money available for workers’ raises. But it adds to the pension system debt.
Yet the political gamesmanship continues at CalPERS, as the board overrides recommendations of its professional staff. In 2011, the board kept its assumed return rate at 7.75 percent, ignoring its actuary’s recommendation to lower it. In 2012, the board lowered the rate to 7.5 percent; the actuary had recommended 7.25 percent.
The board is scheduled to next reset the investment return rate assumption in 2018. It’s ridiculous to wait. In the meantime, if Eliopoulos’ warnings pan out, the pension system will pile more debt onto taxpayers.
It’s time for CalPERS staff to recommend lowering the investment assumption as soon as possible, and for the board to act on it.
Yes, that would mean some pain now. But it would avoid a lot more later. Moreover, it would be the fair thing to do. Future taxpayers should not be stuck with debt for current labor costs, including the price of pension benefits.
Speaking in June, Eliopoulos seemed to subtly plead with board members to hear the staff’s concerns.
“We listen to the stakeholder comments that come here, and I think … we are strengthened by the transparency that we have,” he said. “But we also need to focus on the work that we have in front of us and stay disciplined to our strategies.”
In other words, it’s fine to hear from labor unions and other interested parties. But, in the end, you need to make sure you shore up this pension system.
Daniel Borenstein is an East Bay Times columnist and editorial writer. Reach him at 925-943-8248 or dborenstein@bayareanewsgroup.com. Follow him at Twitter.com/BorensteinDan.
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