Please ensure Javascript is enabled for purposes of website accessibility
Walters: California’s Immense Pension Mess
dan_walters
By Dan Walters, CalMatters Commentary
Published 4 years ago on
August 10, 2020

Share

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.

Dan Walters

Opinion

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.

CalPERS Has Pursued a More Aggressive Investment Policy

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.

The Bottom Line: The City Is Pawning Its Streets to Pay for Pensions

Meanwhile, CalPERS’ demands for more money from state and local governments are 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% 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 calmatters.org/commentary.

[activecampaign form=19]

RELATED TOPICS:

DON'T MISS

FEMA Worker Fired After Discriminating Against Trump Supporters in Hurricane Response

DON'T MISS

Trump’s Gains With Latinos Could Reshape American Politics. Democrats Are Struggling to Respond

DON'T MISS

Frustrated Americans Await the Economic Changes They Voted for With Trump

DON'T MISS

Actor Tony Todd, Known for His Role in the Movie ‘Candyman’ and Other Films, Dies at 69

DON'T MISS

Biden and Trump Will Meet in the Oval Office on Wednesday, the White House Says

DON'T MISS

Longtime Los Banos Leader Ahead in Controversial Race to Replace Incumbent Mayor

DON'T MISS

Wink, the Sweet One-Eyed Pup, Seeks a Forever Family

DON'T MISS

The Vance Walberg Era of Bulldog Basketball Begins With a Win Over Sac State

DON'T MISS

Millions Face Health Insurance Crisis as Trump Win Threatens ACA Subsidies

DON'T MISS

Newsom Uses a Stunt to Position Himself as a Leader of Anti-Trump Resistance

UP NEXT

In Deep Blue California, Voters Don’t Always March to Dem Drums

UP NEXT

How Harris Lost Will Be Her Legacy

UP NEXT

Trump, Musk and an American Masculinity Crisis

UP NEXT

Let’s Keep Innovative Partnerships Crucial to Combating Climate Change: Fresno Dairy Manager

UP NEXT

No Matter the Outcome, We Are the True Losers of This Election

UP NEXT

California’s Transition Off Carbon Fuels Could Be a Monumental Disaster

UP NEXT

Don’t Let Liberal Purity Elect Trump

UP NEXT

Newsom Provides Welfare to the Wealthy, Skimps on Anti-Homelessness Programs

UP NEXT

Independent Gen Zers Will Decide Elections From Now On

UP NEXT

America’s Political Divide Shifts from Economics to Education: Fareed Zakaria

Actor Tony Todd, Known for His Role in the Movie ‘Candyman’ and Other Films, Dies at 69

4 hours ago

Biden and Trump Will Meet in the Oval Office on Wednesday, the White House Says

4 hours ago

Longtime Los Banos Leader Ahead in Controversial Race to Replace Incumbent Mayor

6 hours ago

Wink, the Sweet One-Eyed Pup, Seeks a Forever Family

10 hours ago

The Vance Walberg Era of Bulldog Basketball Begins With a Win Over Sac State

10 hours ago

Millions Face Health Insurance Crisis as Trump Win Threatens ACA Subsidies

13 hours ago

Newsom Uses a Stunt to Position Himself as a Leader of Anti-Trump Resistance

1 day ago

CA Legislature Sets Record for Women in Office and Could See Historic Gender Parity

1 day ago

Trump to Target Iran’s Oil Trade in Renewed ‘Maximum Pressure’ Campaign

1 day ago

Over 2,500 Central Unified Students Receive Spirit Sweaters at 20th Annual ‘Warm for Winter’

1 day ago

FEMA Worker Fired After Discriminating Against Trump Supporters in Hurricane Response

A Federal Emergency Management Agency worker has been fired after she directed workers helping hurricane survivors not to go to homes with y...

3 hours ago

3 hours ago

FEMA Worker Fired After Discriminating Against Trump Supporters in Hurricane Response

3 hours ago

Trump’s Gains With Latinos Could Reshape American Politics. Democrats Are Struggling to Respond

3 hours ago

Frustrated Americans Await the Economic Changes They Voted for With Trump

4 hours ago

Actor Tony Todd, Known for His Role in the Movie ‘Candyman’ and Other Films, Dies at 69

4 hours ago

Biden and Trump Will Meet in the Oval Office on Wednesday, the White House Says

6 hours ago

Longtime Los Banos Leader Ahead in Controversial Race to Replace Incumbent Mayor

10 hours ago

Wink, the Sweet One-Eyed Pup, Seeks a Forever Family

10 hours ago

The Vance Walberg Era of Bulldog Basketball Begins With a Win Over Sac State

Search

Send this to a friend