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The Truth on Unfunded Pension Liability

Wednesday October 21st, 2015   •   Posted by K. Lloyd Billingsley at 9:07am PDT   •  

calpersLogo_200In 1999, Dan Walters of the Sacramento Bee notes in a recent column, the California Public Employees’ Retirement System, “abetted one of the most irresponsible political acts in state history – a massive increase in public pension benefits.” CalPERS did this by telling legislators, “the benefit increase state worker unions were seeking could be financed from investment earnings with no effect on taxpayers.” Governor Gray Davis and the legislature went along, and so did local governments. When the Great Recession struck, “CalPERS suffered immense losses because of the high-risk investments it had made to meet its optimistic earnings projections.” More recently, CalPERS “ramped up mandatory contributions from state and local governments to cover its losses,” and then despite the mandatory hikes, CalPERS suffers “a substantial unfunded liability, roughly 25 percent of its obligations.”

CalPERS new demands “are a big burden for local governments, particularly cities, because so much of their spending is on workers’ pay, particularly for police and firefighters who enjoy high salaries and extraordinarily generous pensions.” The pension obligations, Walters notes, “contributed heavily to the bankruptcies of three California cities, but CalPERS resisted efforts to modify them during bankruptcy proceedings.”

As the Bee’s veteran columnist sees it, “lowering the fund’s earnings target, currently 7.5 percent a year, is long overdue, but reducing it would increase its unfunded liabilities, and force it to demand even more tax money.” Walters sees some prospects for improvement, but happy days are not here again. “One way or the other,” he concludes, “taxpayers will pay for it as more money goes to pensions and less is available for other governmental services.”

Lawrence McQuillan, also writing in the Sacramento Bee, noted the same reality in “Pension payments are starving basic city services.” Unfunded pension liability for all state and local governments stands at $4.7 trillion and California accounts for $550 billion to $750 billion of the total. Without a switch to 401 (k)-type plans, the problem will only get worse.

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October 2015