Dan Walters

Growing retirement costs are hitting new state budget hard

California's pension agency sees money in water storage

CalPERS tries to make a splash with water bank investment north of Los Angeles.
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CalPERS tries to make a splash with water bank investment north of Los Angeles.

California’s rapidly growing public employee retirement costs weigh heavily on the 2017-18 state budget now being fashioned, but their impact is only partially revealed in budget documents.

Gov. Jerry Brown’s proposed budget does tell us that the state has $205.9 billion in “unfunded liabilities” for pensions and health care for state and University of California employees and adds, “These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns and the adoption of more realistic assumptions about future earnings.”

The budget also reveals that the state’s mandatory “contributions” to the California Public Employees’ Retirement System “are on track to nearly double from $5.8 billion … in 2017-18 to $9.2 billion … in 2023-24.”

However, it doesn’t add a very necessary caveat – that the projection is based on CalPERS hitting an investment earnings benchmark which is probably too high after years of “poor investment returns.”

In other words, the state would be very fortunate if it was paying out only $9.2 billion in 2023-24.

Brown proposes some steps he says will whittle down the unfunded retiree debt – a $169 million payment to slightly reduce the University of California’s $15.1 billion pension debt and a controversial plan to borrow $6 billion for an extra payment to CalPERS.

The pension loan would come from a state fund that invests money state agencies don’t immediately need and, Brown contends, would more than pay for itself by moderating future pension contributions.

The Legislature’s budget adviser, Mac Taylor, is looking askance at the proposal, saying it needs more study.

Teachers’ pensions are also having a serious impact on the budget, albeit indirectly, because the state provides about three-quarters of schools’ financing.

The California State Teachers’ Retirement System has, like CalPERS, run up huge unfunded liabilities in recent years. Both systems have less than two-thirds of the money they need to cover all promised pensions – once again assuming that they meet earnings projections that may be much too high.

A couple of years ago, Brown and the Legislature enacted a CalSTRS rescue plan that ramps up contributions from the state, teachers and school districts, with the heaviest impact on the districts.

In 2016-17, CalSTRS is collecting $9.7 billion from these sources, and that’s projected to grow to $10.9 billion in 2017-18, with $700 million of the increase falling on districts.

But that’s not all. CalPERS is also hitting school districts with major contribution increases for non-faculty employees.

“Total district pension contributions are expected to increase by about $1 billion (in 2017-18),” the Legislative Analyst’s Office calculated. Local school officials complained that Brown’s initial budget increased their financing by just $744 million, meaning they would have to divert operating funds to pay for pensions.

Brown’s revised budget boosted school money by another $1-plus billion, thanks to higher tax revenues, but a big chunk wouldn’t be paid until 2019, which could still force schools to cut other spending next year to pay for pensions.

All of these burdens will grow. Not only are the state’s pension costs scheduled to nearly double by 2023-24 – once again, assuming CalPERS hits its earnings targets – but CalSTRS’ bite on school districts is projected to rise from $4.7 billion in 2017-18 to $7 billion by 2020-21, plus another $2.5 billion for CalPERS.

Those are very big numbers, because it’s a very big problem.