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CalPERS to Force Choice Between Bankruptcy and Bureaucrats

Monday February 26th, 2018   •   Posted by Craig Eyermann at 6:18am PST   •  

In an all too predictable move, the board of the California Public Employee Retirement System (CalPERS) pension fund has begun taking steps to try to bail itself out before it is forced to acknowledge that it has little-to-no prospect of paying out the excessively generous pensions that politicians have promised to local government employees throughout the state.

In doing so, the board will force local governments throughout the state into one of three options: slash services to the residents of their communities to pay the pension benefits that politicians have guaranteed to the state’s public employees, hike local taxes through the roof to pay them, or go bankrupt as they might try to reduce their pension liabilities to levels they can sustainably afford.

Dan Walters of CALmatters describes how CalPERS board will impose those options on California’s school districts, cities and counties in a recent op-ed that appeared in the Fresno Bee:

The CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years.

The bottom line is that it will require the state government and thousands of local government agencies and school districts to ramp up their mandatory contributions to the huge trust fund.

Client agencies – cities, particularly – were already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency and the new policy, which will kick in next year, will raise those payments even more.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

Last summer, CalPERS board member and former state controller Steve Westly put numbers to the state’s growing government employee pension problem in his own op-ed at the Mercury News:

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 last 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 may 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.

CalPERS’s public employee pensions have fallen to that 65%-funded level from 77%-funded just two years earlier when the red flags of its future insolvency risk began to be raised. Worse, that shortfall has grown even as the U.S. stock market has strongly rallied during that time, where the recent 10% correction the market has seen in the past month underscores the risk of lower investment returns.

The leading candidates running to replace California’s outgoing Governor Jerry Brown have largely avoided addressing the growing risk of CalPERS’ insolvency, although Governor Brown has suggested using the opportunity of an upcoming court case to force California’s state and local government employees to take a pension haircut. Bloomberg reports:

Mr. Brown in January said legal rulings may clear the way for making cuts to public pension benefits — specifically a case before the state’s Supreme Court in which lower courts ruled that reductions to pensions are permissible if the payments remain “reasonable” for workers. That would undermine a maxim called the California rule that holds that benefits can’t be rolled back.

“There is more flexibility than there is currently assumed by those who discuss the California rule,” Mr. Brown said at the time. In the next recession, the governor “will have the option of considering pension cutbacks for the first time,” he said.

Already, the state’s contribution to the public employees’ retirement system for the fiscal year beginning in July is double what it was in fiscal 2009. It’s worse for cities, where personnel expenses consume a greater share of budgets.

No matter what, somebody in California is going to bear the brunt in paying the cost of CalPERS’ looming risk of insolvency. The only question is whether it will be the residents of the state’s local communities or the bureaucrats who have benefited so much under the state’s current public employee retirement system?

Right now, the bureaucrats are getting their way. How long can Californians afford for the status quo to continue?

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February 2018