Bull? Stocks can’t stave off California pension crisis forever
In those halcyon days, your cities, state and local governments paid
One year later -- the year
And so it went. Each year, state and local governments shoveled more and more cash into pension funds --
Then -- hallelujah! -- the hole shrank a tad in 2015, dipping to
Did California turn the corner?
Unlikely, experts say. That dip was the work of some stellar years on the stock market -- the mammoth
Even at that lower figure, unfunded liabilities can be viewed as a
Why should you care? Because it's your pocketbook. If that hole is not filled up with meatier earnings and heftier contributions from public workers and agencies, taxpayers could be called upon to fill it directly.
This is where folks start talking about heady concepts like "generational equity." Your children and grandchildren will be paying for the services that you are enjoying today. And there's also the concept of "crowd-out;" as governments pay more into pension funds there is less available for services like roads and parks and libraries. They ask: Is that fair?
There are basically two things that can happen next: Workers and governments negotiate more modest benefits for work yet to be performed, or taxes go up.
The smart money is on some combination of the two, and the
"While a public employee does have a 'vested right' to a pension, that right is only to a 'reasonable' pension -- not an immutable entitlement to the most optimal formula of calculating the pension," wrote Justice
Bear wrestling
Officials from retirement systems say they'll be able to hold the line on the growth of unfunded liabilities and eventually catch up without changing the formulas. Observers remain skeptical.
"The economic downturn and the volatility in the market were still the primary drivers for CalPERS unfunded liability growth during this time period," CalPERS spokeswoman
Many agencies in
"CalPERS estimates that our unfunded liabilities are expected to decrease over time and not increase unless there is a string of losses," she said.
"Something we've seen on a widespread basis in the past year or two is that public pension plans have reduced their assumed rates of return," Aaron said. "Not long ago, CalPERS had assumed returns of more than 8 percent, but recently decided to drop that down to 7 percent. That results in liabilities going up."
Even when systems hit targeted returns -- and they exceeded those targets this year -- the amount that governments and workers kick in isn't enough to prevent unfunded liabilities from growing, he said. They tend to favor paying less now and paying more later, robbing them of the magic of compounding.
There is not a pension fund in America that can earn its way out of its liabilities, said
Money makes money
Compounding, Mary Mary Quite Contrary, is how the money garden grows.
If you put
But, if you put
There are larger changes at work: Forty years ago, contributions from governments and workers comprised two-thirds of what was in the pension funds, and one-third was expected from investments, Kiernan said. Today -- driven by the bull markets of the 1980s and '90s -- it's just the opposite.
Annual required contributions have more than doubled over last decade, from 6.2 percent to 18.1 percent, which leaves less money to pay for other things.
State Sen.
Meaning this: City A had been socking money away for Police Officer B's retirement for decades. When City A adopted sweetened pension formulas, it suddenly was committed to paying Police Officer B quite a bit more every month for the rest of his life -- even though it had ever set money aside to cover a pension that large.
Officials thought pensions were so super-funded that this retroactive thing would not come back to bite them. Add in "pension holidays" (when funds looked so healthy that officials quit putting money into them, sometimes for years), a crippling recession, lengthening life spans, a spike in retirements and reductions in what pension plans expect to earn on investments, and you get a hole hundreds of billions of dollars deep.
What's next?
Or deeper. Current liability totals are computed assuming returns on investments that exceed 7 percent, which critics say won't pan out over the long haul.
If one assumes lower return rates -- as does former Democratic Assemblyman
But the end is not nigh, said Kiernan.
"
There must be political bargaining, he said. Since the recession, every state has tried to adopt reforms -- but those modest formulas apply only to new hires, doing little to nothing to reduce current liabilities for the vast universe of public workers.
We invited several public pension advocates to share their thoughts on the numbers. They said they were studying them, but did not respond by deadline.
"The relevant question to ask is: Is there sufficient political will to achieve major reform?" Kiernan asked.
We'll see.
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