Pensions are state’s $206 billion elephant in the room
Jerry Brown has been a strong governor and a moderating force on budget issues. But when it comes to pensions, the new state budget projects that California has nearly $206 billion in “unfunded liabilities” for the state’s two public pension funds.
Over the past eight years, we added $100 billion in unfunded retirement liability for these funds. This is the elephant in the room of state finances, and it is time we got serious about it.
You probably haven’t heard much about the looming pension crisis because elected officials don’t like talking about it, and it’s easy for them to kick the can down the road: they can make promises to public employees now that won’t come due until they’re out of office.
But the slow creep of pension costs is crowding out investments in other areas, including education, environmental stewardship, social services, and public transportation. In essence, the state is being forced to default on its social obligations to pay for its pension obligations. If you’re a progressive, fixing this problem might be the most important issue facing the state.
California’s state employees’ pension fund (CalPERS) manages close to $330 billion, making it the largest public pension fund in the nation. Unfortunately, it’s only funded at 65 percent of the amount needed for its commitments to retirees. And this is with the stock market at historic highs. If there is a downturn CalPERS could find itself with a much larger shortfall.
When pension shortfalls occur, Californians are on the hook to cover the unfunded liabilities. That will require us to draw on the state’s general fund: state money that would otherwise pay for education, health care, roads and other public services.
We’re already seeing pension liabilities crowd out other spending. General fund revenues have grown 28 percent during the past six years, but the share available for discretionary spending outside of public safety has declined from 21 percent of the budget to 12 percent. During the same time frame, spending on pensions increased 99 percent.
We’re also pushing some pension obligations onto the next generation: This year alone, we’re deferring $4.5 billion in obligations. Without changes, millennials and their children will face an enormous tax burden or severe cuts in public services.
The solution is easy to understand but hard to do. Elected officials have three choices: raise taxes, reduce pension benefits or raise the retirement age. These are tough decisions that few politicians want to touch, but we need to make hard choices now. The alternative is finding ourselves with worse options down the road.
Meanwhile, there is a simple first step we can take: lower the assumed rate of return on pension investments. When we lower the rate of return that we expect from investments, we require those who receive pension benefits to pay more up front.
Since taking office, Brown has taken laudable steps to push the assumed rate of return down from 7.75 percent to 7.0 percent. In anticipation of a potential market downturn, however, we should push the rate lower. We would then pay more up front, but we would ensure that we can cover our liabilities down the road.
The 2013 annual report for Detroit’s general retirement system said the city’s pension plan was “stable and secure.” Less than two years later, the system was in default. We can do better in California, if our politicians can show courages — but we need to act now.
Steve Westly is the former California State Controller and served as a fiduciary on the boards of CALPERS and CALSTERS. He lives in Atherton and is Managing Director of the Westly Group, a sustainability venture capital fund. He wrote this for The Mercury News.
California’s state employees’ pension fund (CalPERS) manages close to $330 billion, making it the largest public pension fund in the nation. Unfortunately, it’s only funded at 65 percent of the amount needed for its commitments to retirees.