California’s upcoming pension avalanche

In Opinion

As Americans, we have become numb to inconceivably large numbers.

Ten-digit figures that used to be reserved for the realm of astronomy now have made their way into the fiscal vernacular, as billions and trillions are casually bandied about like spare change. Likewise, California’s financial conundrums are also swelling astronomically with a major driver being unsustainable pension liabilities from public workers.

California’s three largest public pension funds, the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and the University of California Retirement System (UCRS) guarantee the retirement packages of 2.6 million Californians.

These government employees pay a portion of their paycheck into their retirement systems in exchange for lifetime pensions and other benefits after retirement. To pay for these promised obligations that are significantly higher than contributions, pension agencies must turn around and invest employee contributions into bonds and mutual funds, with the intention that the principal grows with the economy.

Unfortunately, this system is unsustainable and untenable in its present form.

For example, in order for CalPERS to remain on target for its pension obligations, the agency must maintain a 7.5 percent annual average on returns from investments—a difficult goal even in boom times. However, for the Fiscal Year of 2012, CalPERS only managed a humble 1 percent return within its portfolio, widening the gap between promised and actual resources.

The sheer size of this growing gap is astounding, with a Stanford University analysis concluding that these three pension funds alone possess a combined $534.9 billion in unfunded liabilities. This half-trillion dollar difference between projected revenues and expenditures puts California’s taxpayers on the hook to make up the slack.

Many cities in California face similar pension dilemmas.

The city of Stockton filed for bankruptcy in June with $147 million in unfunded city pension liabilities, while San Bernardino owes CalPERS anywhere between $143.3 and $319.5 million for its employer contributions after it filed for bankruptcy in August. Los Angeles also possesses a whopping $27 billion in unfunded pension liability, while the Orange County Employee’s Retirement System has more than $10 billion in unfunded liabilities according to a separate Stanford study.

Like the state, these municipalities are sitting on ticking fiscal time bombs that will inevitably leave them facing bankruptcy.

On Sept.  12, Gov. Jerry Brown signed AB 340, the Pension Reform Act, in which he promised “sweeping bipartisan pension reform legislation that saves billions of taxpayer dollars by capping benefits, increasing the retirement age, stopping abusive practices and requiring state employees to pay at least half of their pension costs.”

Once Brown ceases his self-congratulatory strutting, he might realize that his reforms are in effect only against newly hired public employees.  The state will only begin to see meaningful pension savings around the year 2055, when the current batch of public sector new-hires begin to retire. This extended time frame also gives powerful public employee unions decades to bribe and coerce lawmakers to peel back the hard fought reforms before they go into full effect.

Of course, everybody would like a comfortable pension after a lifetime’s worth of hard work, but the tragic fact remains that there is not enough private capital to support legions of public sector pensioners at current rates.

However, California’s pension saga certainly will come to a dramatic climax well before mid-century. Without a drastic change in trajectory, future economic and fiscal scenarios appear bleak, and someday California’s true pension reform will likely be hammered out by a judge in a bankruptcy court during a federally mandated restructuring package in return for federal bailouts needed for the state’s daily operating expenses.

If nothing is done, California’s insolvency drama likely will mimic the  current Greek economic tragedy.

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  • Charles Sainte Claire

    You are full of it. California spends 3% to 4% of its tax income on pensions. Compare that to what MY tax money pays for illegal aliens and bullet trains, and I do pay taxes like 53% of the people in this State do.

    The 1990 Bill got me a 13% increase in retirement, not the 50% others lie about. And after 40 years at the age of 62 I am entitled to a decent amount.

    Perhaps you should go after the robbers in private companies who cheated their employees into
    401ks.

  • Jack Tachspeyr

    No Charles, you are full of it. You are a troll with a sense of entitlement that you are blind to yet is obvious to all of us who have worked in the competitive global economy. You have stated in previous posts that you retired with a $90,000 pension. And you think you’ve earned it and you think you’ve paid for it from your paycheck. You are sadly mistaken. Nobody, and I mean NOBODY, retiring from government service should earn a pension that big. Social security’s MAXIMUM benefit is $31,000 per year, staring at age 68. Who do you think you’re kidding?

    As for your assertion that California spends 3% to 4% of its tax revenue on pensions, this is absolute BS. There are 1.5 million state and local government workers in California who are going to retire on pensions that average $68,000 per year. IF you assume these pensions are 100% funded, and IF you assume you can get 7.5% per year, then you may be able to fund these pensions with an outlay of around $25 billion per year – about what we’re currently paying into the combined pensions systems for California’s state and local workers. That is about 8% of California’s combined state and local government budgets.

    If, however, you assume these pensions are 70% funded – and I think that is generous, and if you believe the rate of return will only average 5% per year – and I think that is also generous – then you have to pay into the system nearly triple that much money. It’s that bad, Charles. If we don’t reduce your pensions to affordable levels, Charles, we will have to spend 25% of every tax dollar to keep people like you living on $90,000 per year, when under any reasonable and sustainable formula you should only be getting half that.

    You really ought to consider the financial facts, instead of trolling the internet in your plush retirement spreading misinformation.

  • Tom Norton

    A change from 2% @ 50 to 3% @ 50 is a 50% increase and it was an entirely UNFUNDED gift.

  • eatingdogfood

    Unions + Mobsters = Democrats!

  • Tough Love

    Quoting … “These government employees pay a portion of their paycheck into their retirement systems in exchange for lifetime pensions and other benefits after retirement. To pay for these promised obligations that are significantly higher than contributions, pension agencies must turn around and invest employee contributions into bonds and mutual funds, with the intention that the principal grows with the economy. Unfortunately, this system is unsustainable and untenable in its present form.”

    Now THAT’s an understatement. In fact, if you took ALL of the employee’s contributions (INCLUDING all the investment income earned on those contributions throughout the employee’s career), RARELY would iy accumulate to an amount at retirement sufficient to buy more than 10-20% of the incredibly generous promised pension.

    The TAXPAYERS contributions (and the investment earnings thereon) pay for the 80-90% balance.

    BOY is time for a change … the financial rape of Private Sector taxpayers by greedy Public Sector Unions & workers and the granting of such absurdly generous pensions by politicians bought with Union campaign contributions must end …. and for CURRENT, not just new workers.

  • Tough Love

    So Charles Sainte Claire …. tell us exactly WHAT service you provided for the 13% pensions increase (almost all of which was associated with years of service PRECEDING the law’s enactment)?

  • Tough Love

    Quoting … “These government employees pay a portion of their paycheck into their retirement systems in exchange for lifetime pensions and other benefits after retirement. To pay for these promised obligations that are significantly higher than contributions, pension agencies must turn around and invest employee contributions into bonds and mutual funds, with the intention that the principal grows with the economy. Unfortunately, this system is unsustainable and untenable in its present form.”

    Now THAT’s an understatement. In fact, if you took ALL of the employee’s contributions (INCLUDING all the investment income earned on those contributions throughout the employee’s career), RARELY would iy accumulate to an amount at retirement sufficient to buy more than 10-20% of the incredibly generous promised pension.

    The TAXPAYERS contributions (and the investment earnings thereon) pay for the 80-90% balance.

    It Is WAY past time for a change … the financial rape of Private Sector taxpayers by greedy Public Sector Unions & workers and the granting of such absurdly generous pensions by politicians bought with Union campaign contributions must end …. and for CURRENT, not just new workers.

  • Rebecca Martinez

    The replies to that overpaid state worker makes me so proud! I’m heartbroken to know my sons one college-aged and a high school senior will leave California due to corrupt politicans and public unions destroying this state. Vote Yes on 32!

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