I’ve always been curious how California’s Legislature allowed public employee pension programs to get out of hand. Until the late 1990s, the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS) and local variants including the Marin County Employees’ Retirement Association (MCERA) were fully funded and fiscally sound.
Today, almost every Golden State governmental agency — including schools — faces massive debt to pay off legally binding pension promises. An unfunded liability is the disparity between the amount of a pension plan’s obligations and its assets’ current value.
Anything short of 100 percent funded implies that when the piper needs to be paid, taxes will need to rise to cover the deficit or public services are diminished.
There’s no free lunch for schools, since 2014’s AB 1469 diverted money that once would have gone for smaller class sizes and teachers’ raises to pension deficit reduction. At least our grandchildren may see some relief, since the legislation’s goal is to be fully funded by 2046. Prudent municipalities are following the same path, gradually paying down pension debt at the high cost of deferred street repair and fewer police.
Money being fungible, no matter what school tax proponents say, funds derived from those ballot measures are used to offset the negative impacts of diverting existing funding to pensions.
It started in 1999, when CalPERS proposed that as America was enjoying good times (the big question then was how to spend the Clinton federal surplus) it was only fair that public employee retirements be enriched. Thanks to an IJ reader, I’ve reviewed CalPERS’ old written broadside, “Addressing Benefit Equity: The CalPERS Proposal,” which explains how nothing could go wrong.
As William D. Crist, then president of the CalPERS board, said, “This is a special opportunity to restore equity among CalPERS members without costing a dime.”
Who can resist undefined “equity” at no cost?
Why would Michael Flaherman, chair of CalPERS’ Benefits and Programs Administration Committee, mislead the Legislature when saying, “This package does not in any way threaten the soundness of the CalPERS fund”? A better question is, why did the Legislature accept his word and why did Gov. Gray Davis sign SB 400, the resulting pension-enhancing legislation?
Optimism was the in the air when CalPERS guaranteed “certain aspects of the benefit equity proposal will be funded by excess assets.” In 1999, some plans were actually overfunded. CalPERS’ black letter promise: “No increase over current employer contributions is needed for these benefit improvements” and the “CalPERS fund will remain fully funded.” No ifs, ands or buts. Their statements are firm and definitive. They were also dead wrong. Starting with the 2008 Great Recession, “excess” assets evaporated.
Fast-forward 20 years. Today, CalSTRS is only 63 percent funded. That’s a $107 billion unfunded pension liability for teachers and support staff. CalPERS faces $400 billion in unfunded retirement costs including $254 billion in pension liabilities and $147 billion for retiree health care. Those Marin agencies belonging to MCERA, our home-grown pension scheme, face $425 million in unfunded debts.
California isn’t an outlier. The Pew Charitable Trust reports the national average is 66 percent of public retirement obligations are unfunded. Only four states — New York, South Dakota, Tennessee and Wisconsin — have at least 90 percent of long-term pension commitments funded. It’s not a red-blue divide. Democratic-led states tend to over-promise their unionized employees and GOP-run states penny-wise, pound-foolishly shortchange necessary funding to keep current taxes low.
In California, an unskeptical Legislature dominated by Democrats aiming to please their key constituency — public employee labor — eagerly accepted CalPERS’ misinformation and abysmally inaccurate actuarial assumptions. Today and for years to come, Californians will pay the price.