CalPERS investment officer explains impact of British exit from EU
One day last week, Daniel Borenstein, a columnist for newspapers in the Bay Area News Group, published a critical analysis of the California Public Employees’ Retirement System’s long-term finances.
A few days before, CalPERS had reported a measly 0.61 percent return on its $300 billion investment portfolio, the second year of flat earnings.
Borenstein pointed out that it now has “a record $139 billion shortfall” in what it needs to cover promised pensions for public workers and “that’s $46 billion more than just two years ago.”
Given what CalPERS’ investment staff sees as a prolonged period of modest earnings, Borenstein sharply criticized the trust fund’s overseers and politicians for their head-in-the-sand assumption that higher earnings will close the gap.
By doing so, officials are saddling future generations of Californians with countless billions of dollars in ever-growing pension debt whose costs will crowd out spending for more important services.
On the same day, Michael Fitzgerald, a columnist for the Stockton Record, published a column about his City Council’s decision to reopen a library even though it violated a long-range austerity budget that the city had enacted to extract itself from bankruptcy.
Earlier in the week, yours truly had also penned a column about CalPERS’ long-range financial peril, and later in the week, wrote another that highlighted chronic, long-term problems in the Unemployment Insurance Fund.
All of these journalistic efforts last week had similar themes: the tendency of public officials at all levels to ignore their decisions’ long-term consequences.
The unemployment insurance problems are rooted in a 2003 decision by then-Gov. Gray Davis, facing a recall election, and legislators to boost unemployment benefits by nearly 50 percent without raising payroll taxes to pay for them.
CalPERS’ problems stem not only from overly optimistic earnings projections, but a 1999 decision by Davis and legislators to sharply increase state pension benefits – retroactively – based on those rosy assumptions, and the subsequent lemminglike decisions by local officials to embrace the state’s pension increases.
Rising pension costs, in fact, were major factors in Stockton’s bankruptcy and those of two other cities.
Fitzgerald laid Stockton’s budget-busting library decision on Mayor Anthony Silva, who is facing a tough re-election this year. “We have had enough talk and heard enough excuses,” Silva said as he pushed for reopening the library. “It’s time to move forward.”
That’s the problem in a nutshell. Politicians – state, local and federal – seek instant gratification regardless of the long-term effects, often running up debt, including unfunded pension liabilities, that shifts the burden to future generations.
The state borrowed $10 billion from the federal government to cover unemployment insurance benefits when the recession hit, and the feds are slowly recouping it with higher taxes on employers, but the Unemployment Insurance Fund still lacks the reserve it needs to cope with a future recession.
Gov. Jerry Brown is the only major California politician who seems to understand the folly of disregarding long-term consequences, but he’s scarcely been a purist. He’s paid only scant attention to the CalPERS crisis, has ignored the unemployment insurance deficit, and when pressed by legislative leaders for more spending in the 2016-17 budget, agreed to borrow money for jail construction so he could meet their demands.