State Controller John Chiang dropped a political bomb the other day, although he was so quiet about it, one could say it was a stealth bomb.
Chiang added public pension systems to his already large fiscal database. One chart reveals that their “unfunded liabilities” – the gap between assets and liabilities for current and future pensions – exploded from $6.3 billion in 2003 to $198.2 billion in 2013.
Moreover, that startling number assumes that pension systems will see asset earnings of about 7.5 percent a year – a number that some are beginning to see as unattainable.
Los Angeles’ city pension system dropped its assumed earnings, called the “discount rate,” last week. The board of California’s second largest pension system, covering teachers, was told last month by a panel of experts that its 7.5 percent assumption is likely to be under 7 percent for the next decade.
If a 7.5 percent discount rate, which is also used by the giant California Public Employees’ Retirement System and many local systems, is too high, the current $198.2 billion debt in Chiang’s report is, in reality, much higher.
The debt rose as pension funds’ earnings plummeted during the recession and new benefits kicked in, despite dramatic increases in mandatory contributions.
State and local governments’ contributions nearly tripled between 2003 and 2013, from $6.43 billion a year to $17.5 billion, while those of employees nearly doubled, from $5.2 billion to $9.1 billion.
The unfunded liability problem hits cities the hardest because of their high payrolls. Many have seen their retirement tabs quadruple, such as the 2003-13 increase from $98 million a year to $375 million for Los Angeles’ city police and fire pensions.
Three California cities have declared bankruptcy in recent years, in large measure due to pension debts, and the judge in Stockton’s case declared those debts may be reduced in bankruptcy, although he didn’t compel Stockton to do so.
There’s even another cloud on the situation – a retreat from aggressive investments that fund managers had pursued in hopes of meeting or exceeding high earnings assumptions.
CalPERS is ending its association with highly speculative hedge funds, emulating other systems’ retreat into more predictable, although potentially less lucrative, investments.
Chiang’s new numbers should not be surprising.
Fifteen years ago, in a spasm of abject irresponsibility, then-Gov. Gray Davis and the Legislature pumped up pension benefits for state employees on blithe, unsupported assurances from a union-friendly CalPERS board that high investment earnings, not taxpayers, would cover the cost. And many local governments blindly followed suit.
Davis was rewarding unions that helped him get elected in 1998. Now the piper must be paid, and the cost is very steep.