What is CalPERS? We explain in one minute
Median pension costs for local governments grew nearly six times as much in California as the rest of the country over a decade, according to new data compiled by a UC Berkeley professor.
Median pension costs went up $7,022 per employee in a selection of cities and counties in California from 2007 to 2016, compared to a national median increase of $1,216, Sarah Anzia, an associate professor of public policy, said Wednesday in Sacramento.
The rising pension costs have consumed an increasing share of local government revenues, absorbing an additional 2 percent of general revenues over the 10-year stretch in California compared to a national median of 0.7 percent, according to Anzia’s data.
“Local government is being affected by high pension costs,” Anzia said. “It’s not in the future, it’s now.”
Anzia analyzed spending of 442 local governments around the country, including some from every state and 26 cities and counties in California.
Her results are in working paper form, and have yet to be peer-reviewed for publication in an academic journal. But she suggests her results could fill a gap in public policy debates, since most researchers have focused on pension plans and their performance rather than on local government impacts.
“This dataset is unlike any that existed before, and it is uniquely suited to the task of assessing the on-the-ground experiences of American cities and counties,” she wrote in the paper.
She found correlations between pension cost increases and union activity and collective bargaining, which is more common in California than many other states.
From 2007 to 2016, per-pension costs for local governments with less than 50 percent union membership increased by a median $740, while those with more than 50 percent increased by a median $2,950.
CalPERS administers pensions for many local governments in California along with state workers’ pensions. Like most pensions around the country, CalPERS doesn’t have enough money to cover all of its current and future obligations to public workers. The $377 billion fund, the nation’s largest, has about 70 percent of the assets it would need to pay all those obligations, leaving it with what is known as an unfunded liability.
Many of those obligations won’t come due for decades, and that distance has spurred disagreement among academics and policymakers over how urgent the underfunding is.
“California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and an unwillingness to plan prudently,” California’s Little Hoover Commission reported in 2011, after the Great Recession had deeply affected CalPERS’ funded status.
In 2014, another group of researchers concluded unfunded pension liabilities and financial problems in Detroit and Illinois didn’t signal a broader crisis.
“The question is whether cities across the country are about to topple like dominoes — and whether pensions are the problem. The answer, the authors write, appears to be ‘no’ on both fronts,” according to a study abstract.
Anzia said she doesn’t fall into either camp, but hopes her data can make the pension debate more tangible for a broader audience.
“It stands to affect everyone who relies on local government service provision, including police and fire protection, refuse collection, public parks, libraries, and county court systems,” she wrote of increasing pension costs. “Rising pension expenditures are already changing the landscape of local government, and the findings here suggest that the future of local government may look very different than the past.”
Part of the uncertainty about the future lies in pension funds’ expected rates of return on their investments. When the funds don’t make as much money in a given year as expected, and the shortfall isn’t made up in extra payments from employers, employees or another source, the unfunded liability grows.
CalPERS in 2016 started reducing its target return-on-investment rates from 7.5 percent. The fund returned about 6.7 percent this year, falling short of a new 7 percent target.
The changes mean local governments pay more to make the fund more financially sound in the long run.
Last year, the League of California Cities surveyed 170 local governments about their pension contributions, finding that most cities expected their contributions to increase by at least 50 percent by 2024, to an average of 15.8 percent of general fund budgets.
Anzia on Wednesday suggested CalPERS should reduce the target rate even more, a change she said would give local governments a more realistic picture of the costs of their pensions.
Her study was funded by the Laura and John Arnold Foundation, the Berkeley Institute for the Future of Young Americans and the Institute for Research on Labor and Employment.