End CalPERS’ ir­re­spon­si­ble pen­sion debt re­pay­ment plans

The Mercury News Weekend - - OPINION - Daniel Boren­stein Daniel Boren­stein is the East Bay Times Edi­to­rial Page Edi­tor. Reach him at dboren­stein@ ba­yare­anews­group.com or 925-943-8248.

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.

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