End CalPERS’ irresponsible pension debt repayment plans
CalPERS’ actuary says the nation’s largest pension system should stop kicking the proverbial can so far down the road.
He’s right. But his proposed solution addresses only future debt. It would do nothing to address repayment of the California Public Employees’ Retirement System’s current shortfall of more than $150 billion.
CalPERS administers pension plans for the state and most local governments. And it sets the minimum payments those agencies must make to fund their workers’ retirements.
When it comes to paying off debt from investment losses, CalPERS, bowing to government and labor union pressure, since 2005 has allowed the state and local agencies to behave like reckless credit card abusers.
The required debt payments are spread over 30 years and back-loaded. Consequently, the balance owed grows for about the first seven years, and government agencies take 16 years to even begin to pay down the original principal.
The delay in repayment has helped leave the pension system badly underfunded. And it unfairly sticks future generations of taxpayers with at least tens of billions of dollars of interest payments.
You wouldn’t run your household that irresponsibly. It’s time for CalPERS to stop managing the retirement system for public employees that way.
CalPERS Actuary Scott Terando, in a proposal the pension system board will consider next week, calls for reducing the repayment period from 30 years to 20, and ending the back-loading of payments.
It would be a good start. But Terando proposes only applying the new policy to pension debts governments accrue in the future.
That’s fine for preparing for the next economic downturn. But to have any meaningful im- pact now, Terando’s proposed changes should be applied to repayment of the current debt.
Bay Area government agencies affected include Santa Clara County and most cities except San Francisco and San Jose.
To understand how this works, let’s consider how pension systems are funded.
Each year that a public employee works he or she earns additional future pension benefits. Those pension benefits are just like salary and health insurance — they’re compensation earned at the time workers provide labor. And they should be funded then, too.
That’s why, each year, the employer and the worker make contributions to the retirement system that should, after investment earnings, provide enough money later to cover the pension benefits.
But when the investment returns fall short of projections, that leaves a debt that state and local government taxpayers must cover. The sooner they pay down the debt, the less the interest.
It’s important to remember that this debt stems from the cost of benefits for work employees have already performed. Stretching repayment over 30 years forces our children to pay for services current generations already received. That’s not fair.
To exacerbate the generational inequity, the 30-year payment schedule is back-loaded. Rather than equal installments each year, the payments start out low and ramp up at 3 percent each year.
Consequently, the early payments don’t even cover the accruing interest. That’s why the debt grows for the first seven years. Starting about the eighth year, the payments are enough to cover the interest. It takes until about the 16th year to get back to the start. Only then do the payments start to cover the original principal.
Terando, the actuary, proposes that CalPERS end this practice. He’s calling for reducing the repayment period for future debt to 20 years and leveling out the payment amounts.
Homeowners who have shortened their mortgages will understand why this is a nobrainer. Under the current system, every $1 million of debt for investment losses costs the state and local government agencies $2.7 million to repay. Terando’s proposal would reduce the total principal and interest to $2 million.
CalPERS should apply Ternado’s plan not only to future debt but to the current debt as well. Yes, it would be painful. It would require government agencies paying more in earlier years, leading to belt-tightening that labor unions and many local governments would oppose.
But, actually, it’s a modest proposal. Even a 20-year repayment would lay a significant debt burden on the next generation. It’s time to start requiring that government agencies responsibly pay their bills. We shouldn’t keep making our children pay for our financial sins.