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.

NEXT: Stop Bleeding Red Ink, Make America Sustainable Again

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  1. CalPERS assumes an annual return of 7.5 percent in the long run

    What did Madoff promise, ten percent? Whoo boy, this is a whopper. Past performance is not necessarily indicative of future results, but don't expect a hail mary here. What kind of dumbass plans their retirement on such a high return? CalPERS, that's who.

    1. I was wondering the same. A return like that is obviously false, so I don't fully understand why they would calculate it. Surely they want to make sure that the fund will actually have their money when it's time for them to retire? Maybe it lets them negotiate higher wages in the meantime.

    2. Meh, they could say 100% return, doesn't matter. The proggies there will simply raise taxes and funnel more into the pension plans.

    3. Well, why not? The money just going to be made up by the taxpayer, anyway.

      And that gets to the heart of it. Ultimately, CalPERS knows it makes a lot more sense to keep the public sector workers happy than the taxpayers. And the more money CalPERS tells everyone they can earn, the more money the public sector workers can demand in retirement.

      1. Well, why not? The money just going to be made up by the taxpayer, anyway.

        But there's a point where that becomes impossible due to a death spiral. Raise income taxes and (even more) people leave, and the tax base gets smaller. Raise property taxes high enough and property values decline in tandem. That's what happened in Detroit -- it simply wasn't possible to extract more money from taxpayers. Residents and businesses left. Property tax rates were (and still are) so high that new construction (and even maintenance) doesn't make sense (yes, there is a bit of a construction boom in Detroit -- made possible only by tax abatements -- when the taxes reset to market rates, the value of these properties is going to plummet). California as a whole probably isn't close to this yet, but some California cities surely are.

        1. "But there's a point where that becomes impossible due to a death spiral. Raise income taxes and (even more) people leave, and the tax base gets smaller. Raise property taxes high enough and property values decline in tandem."

          Talk to any Leftie about it and they'll respond with how awesome the CA economy is and how many Fortune 500 companies are located there and how all this negative talk is just a Right Wing Conspiracy.

      2. "Well, why not? The money just going to be made up by the taxpayer, anyway."

        Of course.

        Government is just what we've all decided to do together, so obviously all current and future taxpayers have therefore absolutely pledged themselves to be bled dry for the noble cause of funding unionized government workers retirement benefits that are far more lavish than anything they will ever get.

    4. On top of that, don't they have rules about only investing in "good" companies and no "evil corporations?" I'd look it up, but way too lazy.

      1. CalPERS was a pioneer in socially responsible investing.

    5. Its even more unrealistic when you consider that they carry (I believe by law) a large portion of their assets in bonds and especially government bonds.

      Those are yielding a pathetic, what, 1 - 2%? That means the rest of the portfolio has to return somewhere in the double digits to hit the 7.5% bogey. So the non-bond portion of the portfolio has to average a double-digit return indefinitely?

      Sorry, but that can't be done.

      1. Something about this makes total sense in an economically retarded climate like California. And it raises the question of whether all those touting the Jerry Brown "miracle" are able to do simple math.

        1. All you need to know about Jerry Brown: The last time he was governor, there was a severe drought and California is doing the same thing in this drought that they did the last time.

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  3. This all matters because the state, its municipalities, and?most importantly? its taxpayers are obligated to make up any differences

    Fixed. Not sure why the other two were included.

  4. and officials claim it's still on track to pay down its unfunded liability by 2046.

    Which assumes what, exactly?

    1. The increase in minimum wage means that everybody will make more money, which correspondingly means more tax revenue for the hungry State. Duh.

    2. California is inflating their way out of debt by raising the minimum wage.

  5. It's worth noting that the same state that ran CalPERS off the rails wants to put everyone in the state on the same train.

    1. I assume the point of this is to get more people at the base of the pyramid?

      1. basically. If everyone is in the same boat, they'll all demand that the state bail it out.

        If its a minority of the state - only the public-sector unions - there's always the risk that all the non-union voters will tell them to pound sand.

  6. Maybe if the bankruptcy laws are inadequate, Congress should adopt some reforms?

    There's a Republican majority now, you know.

    Maybe let taxpayer suits trigger involuntary bankruptcy if certain indicia of financial ill-health are present.

    Make it much easier to get out from under pension obligations which weren't approved by referenda.

    Thoughts from anyone who knows something about this?

    1. My thought is the DC Republicans lack the stones, the spine, and the brains to do anything like that.

      1. Wow, there's a "blue" version of the Wizard of Oz?

  7. let them eat cake

  8. Here we have a case of one part of the blue state model destroying another part. One the one hand, the government needs to maintain artificially low interest rates to enable it to continue to finance its deficits and service its debt. On the other hand, artificially low interest rates, complete screw returns on investment for things like pension funds and make already insolvent public pension funds go insolvent that much quicker.

  9. Meanwhile, San Francisco passes a $9.6Bn yearly budget

    budget of the state of arizona : $9.1Bn
    budget of the city of san francisco : $9.6Bn
    population of arizona : 6.7Mn
    population of san francisco : 837,442

    $9.6Bn / 830k = $11,524 per person


    1. San Francisco. Bravely proving that you can never run out of other people's money.

  10. S&P 500 for that period was 1.4% (with dividends reinvested), so they did less than 1/2 as good as an s index fund.

    1. S&P 500 has returned 7.8% for last 20 years, so they could have met their goal with an index fund.

      1. To be fair, you probably don't want your retirement nest-egg resembling an index fund. Yes, it's gained 7.8% for the last 20 years. But, there's other periods where it's done significantly worse (and others where its done better).

        You'd want a more conservative portfolio, especially as you approach retirement. That's going to eat into returns. Not that CalPERS is anything other than awful.

      2. See above - they carry a lot of their portfolio in bonds. So they would have to nearly double, roughly, the S&P returns to hit the 7.5% bogey.

        Can't be done. Sorry.

        1. Possibly. A good FI portfolio pulls in about 4% in recent history. Obviously, that's with credit risk. You'd still have some rough work getting that up to 7.5%, but it's theoretically doable.

          1. With bond rates the way they are now, I dont think it is doable without some crazy risky investment on the non-bond side.

            Or some crazy risky investing on the bond side.

    2. squirrels ate part of that post, but figure it out.

    3. That is what happens when your investment plan is based on politics. What do you want to bet they are restricted from investing in politically incorrect investments like evil fossil fuel companies and anything associated with Israel?

      1. Of course.

        I am going to pretend that was part of what I mentioned in the part of the post that was eaten.

        As far as you will ever know, it was there.

      2. That is what happens when your investment plan is based on politics.

        I disagree? I think a investment plan based on how rent-seeking and how engaged in regulatory capture a company is would do quite well.

  11. Progs should really be put to the sword.

      1. I'm indifferent as to which end of the progs should be put to the sword, honestly.

      2. "Which end?"

        First one ... and then the other.

  12. How long, I wonder, before the progs argue that taxpayers in other parts of the country have a moral obligation to bail out California's public sector pension plan? Heh, for all I know they already have.

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