Pension Crisis

Terrible Returns Keep California's Public Pension Bomb Growing

And don't forget that massive wage increase coming!


Christos Georghiou /

Another year, another mess with California's public employee pensions. The California Public Employees' Retirement System (CalPERS) announced this week that the rate of return for its investments for the fiscal year ending on June 30 was less than one percent. It was .61 percent. As the Los Angeles Times notes, this is the worst returns it has logged since 2009, when the housing bubble burst and hit California particularly hard.

CalPERS assumes an annual return of 7.5 percent in the long run, calculated over several years. But even calculating in previous years where the economy performed much better, the retirement fund is not meeting its return obligations. Over 20 years, it's about half a percentage point below its return goals.

This all matters because the state, its municipalities, and—most importantly—its taxpayers are obligated to make up any differences to make sure that the retired government employees get the pension payments promised to them by their bosses. So naturally, as the pensions underperform, the amount of money the government has to set aside for them is going to get larger and crowd out spending for actual government services (and even current employee wages).

The fund has already decreased its expected rate of returns over time by a quarter of a percent, which added more than $150 million to the state's pension bill and to the costs for every municipality that has employees in the fund.

California's teachers' pension also performed well below its target, but not as poorly as CalPERS. The teachers fund earned 1.4 percent, and officials claim it's still on track to pay down its unfunded liability by 2046. That, of course, assumes that pension payment plans stay on track, and money has a way of being directed away from pension funds for other purposes, which is partly how these liabilities happen and grow.

Also, keep in mind that pensions are calculated on salary averages, and wouldn't you know it, California just passed a $15 minimum wage. Calculations indicate that when the full $15 wage is enacted, it will add more than $3.6 billion in annual costs for government employees across the state. Union representatives also say the wage increase will kick up salaries up the pay chain as well.

Therefore the increase in the minimum wage also increases all the pensions for California government employees and will add even more to the pension crisis.

In news that's somewhat good in one way, but very bad in others, the state has also changed its accounting rules on calculating the state's pension liabilities. The good news is that this gives Californians a better sense of how much the state's pension debt actually is. The bad news is that the calculation of debt jumped about six-fold, from $11 billion to $78 billion. The state also has $90 billion in unfunded state employee retirement health benefits. Those numbers come from Truth in Accounting, which calculates that each Californian taxpayer has a burden of $20,900 to pay off this debt and others. They warn:

Unless these pension and retiree health care benefits are renegotiated, future taxpayers will be burdened with paying for these benefits without receiving any corresponding government services.

How likely is that? San Bernardino, which filed for bankruptcy in 2012, was still fighting with a firefighters union in June over money owed, and still has not exited bankruptcy four years later.

For more news about pension issues, check out the Reason Foundation's regular pension reform newsletter here.