The latest numbers from the California Public Employees’ Retirement System show it failed to make enough money to meet its obligations in the last fiscal year. CalPERS is now more than $100 billion short of having enough money to pay pension obligations for government workers and retirees, despite massive increases in payments to CalPERS by state and local governments.
To better understand the current crisis, we must go back 17 years to when the fuse was lit. In 1999, the Legislature passed Senate Bill 400, which granted retroactive pension increases to state employees. Back then, CalPERS had a surplus and was able to persuade lawmakers that state pension costs would not increase for a decade because the benefits would be paid with investment earnings. CalPERS claimed that it could be done “without it costing a dime of additional taxpayer money.”
Of course, its prediction turned out to be dead wrong. We have been paying the price ever since, and it keeps on growing bigger and bigger.
The California State Teachers’ Retirement System is just as bad. In 1999, CalSTRS also had a surplus. As of June 30, 2015, it was in the hole by $76 billion. It’s gotten worse; they just haven’t told us by how much.
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Yet opponents of pension reform continue to tell us not to worry because the plans will earn 7.5 percent annually on their investments and all will be fine. That’s the party line that has been used to mislead legislators and the public since 1999.
We have created a system that is routinely and massively underfunding our obligations. With few exceptions, such as Fresno, other pension plans in California suffer from similar problems. Our accumulated debt for government employee retiree health care is nearly as large as the debt for pensions. Our failure to acknowledge the problem and to take reasonable remedial actions has run up an enormous debt that will not only burden current taxpayers, but future generations.
Our public employee union leaders say the solution is to raise taxes and cut services. That’s what we have been doing for years and no doubt more will have to be done. But it’s not enough.
Significant pension reform has to be part of the solution if our system is to become sustainable. First, all workers deserve secure retirements. Second, retirement benefits should be fair, sustainable and predictable for current and future public employees. Finally, benefits should be fully funded as they are earned, and incentives to underfund commitments should be eliminated. Following these principles will guide us toward achieving a sustainable pension system.
After 17 years of failure, it’s time for all stakeholders to get engaged in finding a solution, as has been done in other states, most recently Arizona.
Failure to act means more cities will go bankrupt as they run out of ability to raise taxes or to cut services to pay for benefits. By adopting real, meaningful reform, we can protect vital community services, safeguard the long-term solvency of public employee retirement systems and put California’s pension systems on the path to a sustainable future.
Chuck Reed, former mayor of San Jose, is president of the Retirement Security Initiative, a national advocacy group for pension reform. He can be contacted at email@example.com.