Legislature Has to Deal with Pensions

Sacramento Bee, 7/20/12.

The dismal annual earnings reported by the state’s two largest pension funds, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, should be just one more reason for the Legislature to refocus its attention on pension reform.

CalPERS posted a disappointing 1 percent gain for the fiscal year that ended June 30, well below the 7.5 percent assumption. CalSTRS did only slightly better, earning just 1.8 percent on investments.

Public employee unions fighting for current pension benefits tend to dismiss bad earnings reports. They point out that CalPERS last year earned in excess of 20 percent and over the last two decades the fund averaged returns of 7.73 percent.

But does anyone really think we are going to return to the boom years of the mid-1990s, fed by fraudulent mortgage practices and unsustainable levels of debt and consumption? Numerous experts have urged retirement systems to take a more conservative approach to their investment forecasts.

Several trends are driving concerns about long-term public pension obligations. People are living longer, including public safety employees who get to retire at an earlier age. Combine that with the 1999 and 2001 pension boosts approved by state lawmakers and you have a recipe for potential financial ruin.

A report just released by the State Budget Crisis Task Force says that public employee pension systems are short by at least $1 trillion and possibly by as much as $3 trillion. In California, state and local pension systems combined face $135.8 billion in unfunded liability, according to the optimistic assumptions of their own actuaries.

Steve Maviglio, spokesman for unions who oppose pension reform, attempted to dismiss the task force’s findings, noting that its advisory board includes David Crane, an adviser to former Gov. Arnold Schwarzenegger and pension reform activist. That’s true, but the task force, assembled to examine the fiscal problems faced by states in the wake of the world financial collapse, includes a wide array of other distinguished members. These include former Federal Reserve Chairman Paul Volcker, former Secretary of State George P. Shultz, Alice Rivlin of the Brookings Institution and Joseph A. Califano, who served in President Jimmy Carter’s Cabinet.

Recent municipal bankruptcy plans in Stockton and San Bernardino and an earlier one in Vallejo were fueled in part by high public employee pay and overly generous retirement benefits. More sharp declines in pension fund investment returns mean that cities elsewhere will be under pressure soon to increase contributions to their retirement funds.

“The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” according to the task force’s report.

Given that very real danger, a rollback in future pension earnings for current workers may be needed and, in some cases, it could be the only way to protect jobs, preserve vital public services and rescue struggling cities. At minimum, the threat ought to motivate lawmakers to do something to enact meaningful reform and to do it before another city slides into bankruptcy.