Dan Walters

Opinion: Pension cost avoidance creates gaps

Dan Walters
Dan Walters

California’s perpetual political debate over public employee pensions usually focuses on the benefits themselves – whether they are fair compensation for those doing the public’s work or, conversely, too generous.

Pension benefits obviously played a big role, but by themselves did not create multibillion-dollar gaps in the California Public Employees’ Retirement System or other big state and local pension trust funds.

The more egregious error was the cowardly failure of politicians to pay for the benefits they were so eager to provide, pretending that high-flying investment earnings would cover them with no cost to taxpayers.

The classic example was Senate Bill 400, the 1999 measure that sharply expanded pensions for state workers – retroactively.

Then-Gov. Gray Davis and legislators found political cover in assurances, later proven false, from CalPERS that the new benefits would cost taxpayers nothing.

That scenario was repeated hundreds of times in cities and other local governments as unions pressed their governing boards to match the state. But CalPERS’ assurances collapsed when its investments were hammered in the recession and it raised mandatory contributions to cover its losses.

Had local officials ignored CalPERS’ false promises, acknowledged that the new benefits would be costly and modestly hiked pension fund payments to cover them, the later impact, including bankruptcy filings by three cities, might have been averted.

Ignoring pensions’ long-term costs has consequences, as illustrated by what it’s taking to close a $74 billion shortfall in the State Teachers Retirement System.

Governors and legislators dithered for years as the gap widened by millions of dollars a day. Finally, however, Assembly Bill 1469 was enacted this year, boosting contributions into STRS by school districts, teachers and the state to close the gap over 32 years.

However, because of the long delay in confronting the issue, and the decades-long closure plan, covering a $74 billion gap will actually cost $237.7 billion, according to a table drawn up by STRS. And school districts will pay over 70 percent of it as their pension costs ratchet up from 8.25 percent of payroll to 19.1 percent.

By design, the payments will phase in slowly, thus softening the political impact.

School districts will see only a tiny increase this year but by the end of the decade, the STRS chart shows, they will be paying nearly $4 billion a year extra into the trust fund, and the bite will eventually climb to as much as $9.4 billion a year.

Gov. Jerry Brown and legislators have overhauled school finance to sharply expand per-pupil spending, particularly on poor and “English-learner” students.

However, school officials are warning that closing the pension gap will slice deeply into those goals and some have formed a new organization, the “CalSTRS Funding Coalition,” to drive the point home.

Call The Bee’s Dan Walters, (916) 321-1195. Back columns, sacbee.com/dan-walters. Follow him on Twitter @WaltersBee.