California is great at making pension promises, but a dismal failure at properly funding them. The most recent annual report released by the California Public Employees’ Retirement System shows that, as of June 2016, CalPERS was more than $138 billion in debt. The teachers’ retirement system (CalSTRS) is nearly as bad, with $96 billion in debt. Even with a couple of really good years in the stock market, pension debts have grown.
The California system of overpromising and underfunding is failing taxpayers, public employees and retirees and wreaking havoc on California’s finances, including those of cities like Sacramento. And the giant CalPERS and CalSTRS pension debts ensure more of the same for decades to come.
As government contributions to CalPERS and CalSTRS soar, policymakers pull funds from important public services such as education, public safety and transportation to cover the pension cost increases.
The first pension domino fell in 1999, when the state Legislature granted retroactive pension benefits without paying for them. Since then, many factors have contributed to the pension debt, including chronic underfunding and relying on the stock market with unrealistic assumptions for investment returns. Quite simply, California has relied on kicking the can down the road for someone else to deal with at a later time.
These falling dominoes have taken CalPERS from a surplus of $33 billion in 1999 to a pension debt of more than $138 billion in just 17 years. CalSTRS also had a surplus in 1999. The debt numbers got worse in 2017, but won’t be published officially until next year.
The local picture is not much better, according to data released through Stanford University in October. Funded in part by a nonprofit that advocates pension reform and conducted by Joe Nation, a former Democratic assemblyman who is now with the Stanford Institute for Economic Policy Research, the study found that the city of Sacramento has more than doubled its contribution to CalPERS in the past nine years, going from $42.4 million in 2008 to $88.2 million in 2017. Sacramento’s pension costs are expected to reach about $150 million by 2022.
So what does this cost taxpayers? A lot. As government contributions to CalPERS and CalSTRS soar, policymakers pull funds from important public services such as education, public safety and transportation to cover the pension cost increases. According to Nation, Sacramento’s higher pension contributions have likely reduced the city’s share of expenditures on police, transportation, neighborhood services, and convention and cultural services. By 2029, city pension expenditures will likely crowd out an additional $53 billion, requiring more taxpayer services to go on the chopping block.
Crowd-out isn’t unique to Sacramento – it’s happening throughout all of California as cities, counties and school systems must shift funding from other services and programs to cover pension costs. Local governments have a responsibility to provide essential services that protect the safety, health, welfare and quality of life for their citizens. These services will continue to be reduced as pension debt and pension payments skyrocket.
Taxpayers aren’t the only losers. Public employees and retirees, too, have drawn the short end of the stick. Pity the workers and retirees from Loyalton and the East San Gabriel Valley Human Services Consortium who lost a large chunk of their pensions when their employers couldn’t keep up with CalPERS’ bills. That can and will happen again as growing pension costs threaten the solvency of public employers, putting at risk the retirement hopes of many workers and retirees.
How many more billion-dollar dominoes are going to fall before California takes action to repair the fiscal damage caused by too many years of overpromising pension benefits to government employees and underfunding our obligations to pension plans? Enough is enough. California’s taxpayers and public workers deserve better.
Former San Jose Mayor Chuck Reed chairs the Retirement Security Initiative, a national, bipartisan advocacy group for pension reform; firstname.lastname@example.org.