California’s seemingly endless debate over public employee pensions may be approaching a climax.
The state’s voters will be asked to decide whether, as naysayers contend, pensions are too generous, forcing ever-higher pension trust fund contributions that are “crowding out” vital public services.
Two former city officials who fought local pension battles, San Diego Republican Carl DeMaio and San Jose Democrat Chuck Reed, filed a reform measure for the 2016 ballot Thursday, requiring voter approval for local pension enhancements.
Even before their announcement, the union-backed Californians for Retirement Security denounced the two as fronts for out-of-state right-wingers, indicating the pension battle will be loud and expensive.
The debate dates back 30-plus years, to when a union-backed ballot measure authorized the California Public Employees’ Retirement System to shift investments from ultra-safe bonds into potentially more lucrative, but also riskier, investments, mainly in stocks but also real estate and “private equity.”
Unions hoped that higher investment returns would finance higher pension benefits. For years, it seemed to work as they intended.
The effort culminated in 1999 with a huge pension benefit increase on assurances from CalPERS that high-flying investments would pay for them. But when recession struck a few years later, CalPERS lost tens of billions of dollars, forcing it to raise mandatory “contributions” from state and local governments to offset the losses and enhanced benefits.
Rising pension costs contributed to, or perhaps triggered, the bankruptcies of three cities. A federal bankruptcy judge in Stockton’s case declared that it could slash pension benefits if it wished, thus negating long-standing state law.
CalPERS has recovered some losses but still has less than 80 percent of the money it would need to pay for pension promises, especially since retirements of baby boomers are escalating and lifespans are increasing.
Those trends raise outflows and lower the ratio between active employees, who generate pension fund contributions, and retirees, who take money out of the system, prompting CalPERS to ramp up payments from employers even more.
Simultaneously, CalPERS is scaling back its riskier investments to regain stability and is slowly lowering its assumptions of future investment earnings, which will tend to increase unfunded liabilities even more.
Meanwhile, the Governmental Accounting Standards Board is insisting that those liabilities be listed as debts on government balance sheets, which could affect their credit ratings.
A mild pension reform enacted by Gov. Jerry Brown and the Legislature a few years ago will have little immediate effect on the situation, although it could have impact in the future.
The DeMaio-Reed campaign will argue to voters that only a tougher reform will prevent pensions from forcing intolerable cutbacks in public services and more bankruptcies.