Supplemental Pension Payments

In 1999, California’s Legislature and Governor enacted SB 400, a retroactive pension increase pushed by government employee unions. At that time, the state pension fund (CalPERS) based pension contributions from employees and employers upon an expected annual return of 8.25 percent. (The higher the expected return, the lower the required upfront contributions.) Advocates for the retroactive increase claimed that, because CalPERS could be expected to earn at that rate, the retroactive increase would not cost “a dime.”

In 2005 I was appointed to the board of CalSTRS, the schools pension fund, where I argued that state pension funds should base annual pension contributions upon a lower expected annual return or else schools, cities and the state would be hit by massive pension deficits down the road. (Both employees and employers make upfront contributions but only employers are responsible for pension deficits.) Pressured by agitated government employee unions, the State Senate removed me from the board in 2006.

CalPERS averaged 6.9 percent per year over the last 20 years, a great return but not nearly enough to make up for the lethal combination of a retroactive pension increase and chronic under-contributing arising from unreasonable expected return assumptions. The resulting deficits are huge, as have been the financial consequences for students, residents and taxpayers. In 2000, the state provided $1.3 billion to CalPERS and CalSTRS. By 2020, that figure had risen to $10.3 billion. But that’s not all. On page 212 of the budget sits this tiny footnote:

On top of already-fast-growing annual pension costs have been supplemental pension payments approved by the Legislature and Governor. E.g., the supplemental payment in 2018 brought the total that year to $14.3 billion.* Supplemental payments improve funding ratios (an accounting item that measures the difference between pension assets and liabilities) but once shipped to pension funds are not available for public services or reserves, which are dangerously low in California. That’s why government employee unions push for supplemental pension payments when they can’t get the money used for salary increases.

In 1999, the State Senate fiscal analysis of SB 400 forecast the state would have to contribute $4 billion to CalPERS from 2000 to 2011. Instead, the state had to contribute $25 billion, a 525% difference. Bad policy promoted by special interests has terrible consequences.** Had GFC been formed in 1991 instead of 2011, we feel confident we could have stopped SB 400 in 1999. Persistence matters.

*We hope the Department of Finance includes supplemental payments in the annual retirement spending chart going forward.

**Campaign donations from interests that do business with the state help fuel bad policies. SB 400 passed with support from both Democrats and Republicans on the receiving end of donations from the beneficiaries of the retroactive pension increase. GFC seeks to ban donations from corporations, unions and associations that do business with the state. Needless to say, that will be a war.