Dan Walters

Reality penetrates California’s public employee pension system, but not far enough

It’s very rare, but always welcome, when reality intrudes on political decision making.

Thus, it’s noteworthy that overseers of the nation’s largest pension trust fund, the California Public Employees Retirement System (CalPERS), last month reduced – albeit reluctantly – its projection of future earnings by a half-percentage point.

With earnings on investments the last two years barely exceeding zero, CalPERS has been compelled to sell assets to make its pension payments, which far outstrip contributions from state and local governments and their employees.

Reducing the “discount rate” to 7 percent will force employers, and perhaps employees, to kick billions of more dollars into the system to slow the growth of CalPERS’ “unfunded liabilities,” as the $150-plus billion debt is termed.

However, the extra contributions generated by lowering the discount rate will not erase that debt, which is likely to keep growing if CalPERS’ investment earnings continue to fall short, as many economists expect.

In fact, CalPERS’ own advisers see a prolonged period of relatively low earnings and say the system shouldn’t count on more than 6.2 percent.

Rationally, the discount rate should have been lowered by at least another full percentage point. But CalPERS already has increased its mandatory contributions by 50 percent to make up for investment losses during the Great Recession and other factors, and cutting the discount rate to 6 percent would probably mean bankruptcy for a number of local governments, particularly cities.

All in all, therefore, while reality did make a rare visit to the CalPERS boardroom, its impact fell well short of what is needed to make the public employees’ pension system actuarially sound.

If it’s not economically or politically possible to finance the pension promises made to state and local government employees, the system’s only hope for solvency may lie in reducing those promises.

It’s long been assumed that a 1955 state Supreme Court decision, termed the “California rule,” makes it legally impossible to do so, but one recent appellate court decision indicates that the rule is not as sacrosanct as it appears.

The decision stemmed from a lawsuit filed by unions in Marin County, seeking to overturn a ban on “pension spiking” that Gov. Jerry Brown and the Legislature enacted as part of a very mild pension reform in 2012.

Were the state Supreme Court to ratify that decision, it could allow public employers to guarantee their workers pension benefits already earned, but reduce benefits from future employment.

The state’s powerful public employee unions loathe the notion, but it may be the only way for CalPERS – and locally managed pension systems as well – to avoid insolvency themselves without imposing insolvency on government employers.

That’s the reality.