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California Pension Bills Are Sensible Fixes, but They Have Little Chance of Passing

Given the pension funds’ fiscal condition, it’s hard to understand any serious opposition to these modest measures. But don't hold your breath.

The California Public Employees' Retirement System's report released last week touts all of the pension fund's good news, which it says "has built a solid path forward for the long-term future of the fund." But as longtime pension reporter Ed Mendel pointed out in his recent blog, the pension fund's future is still quite troubled. Apparently, myopia reigns at CalPERS.

Consider this fact, raised by Mendel: Despite earning more than double its predicted returns during a bull market last year, CalPERS' funding levels only increased by a blip, from 67 percent to a meager 71 percent of the funds needed to pay its future costs. Pension experts say that 50 percent funding is the likely point of no return—if a pension fund's assets fall below that level it will be nearly impossible to ever recover to a healthy funding level.

Meanwhile, California cities continue to struggle with service cutbacks as CalPERS wallops them with increasing fees. The term is "crowd out" as cities cut "core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety" to pay their CalPERS bills, according to a Stanford Institute for Economic Policy Research report last October.

CalPERS isn't facing the death spiral of, say, New Jersey's pension funds, which are funded at a frightening 31 percent. But the problem should not be taken lightly. The stock market is at record heights. If there's a downturn—and, as Gov. Jerry Brown likes to point out, there always are downturns—local budgets, the state budget and retiree earnings could all be at risk.

Enter state Sen. John Moorlach (R-Costa Mesa). Best known for predicting the 1994 Orange County bankruptcy, Moorlach has introduced four relatively modest pension reform bills that could help CalPERS get control of its liability problem. They are scheduled for an April 23 hearing in the Senate Public Employment and Retirement Committee. They have little realistic chance of passage in the Democratic-controlled, union-friendly Legislature—but it's still worth proposing sensible, constructive measures to highlight the extent of the state's pension problem. When the problems become too severe to ignore, at least CalPERS and legislators will know what approaches they have available to tackle the mess.

Senate Bill 1031 would "amend California Government Code to temporarily freeze cost of living adjustments (COLAs) when a public retirement system investment fund drops below an 80 percent funded status," according to the senator's office. That is a simple approach to ballooning pension costs. California public-employees already receive exceedingly generous pension benefits. It's absurd to keep giving them raises given the fiscal situation.

Senate Bill 1032 is more complex but potentially more significant. It should be called the Terminator bill because it would, well, terminate something known as the Terminated Agency Pool, or TAP. Currently, CalPERS invests all its retirement contributions in a general pool that has a predicted rate of return of 7 percent annually (down from 7.5 percent). The higher the predicted return, the lower the predicted funding problem. Most experts believe that return rate has been set too high over the long term despite the great returns from last year.

However, when a government agency shuts down, as something called LA Works has done, or chooses to exit CalPERS because it can no longer afford to make CalPERS' payments, the pension fund sticks them in a separate pool. That pool, the TAP, has a low-risk expected rate of return of 2 percent. In the general pool, taxpayers are on the hook for any shortfalls. When agencies unlock themselves from CalPERS' golden handcuffs, only CalPERS is responsible for paying them off.

So the fund assumes a return that is basically a risk-free return—and is more reflective of the realistic rates that would exist sans all those taxpayer subsidies. Moorlach wants to put an end to that shell game. It would be a significant reform because, by eliminating TAP, more local governments would feel free to pursue options outside CalPERS. Currently, they can't leave CalPERS because they'll be hit with an enormous financial penalty for doing so. For instance, Calimesa was able to start its own fire department (with a 401/k retirement plan rather than a defined-benefit pension) because it was not burdened by all those penalties.

Senate Bill 1033 requires agencies that contract with CalPERS "to bear full financial responsibility for actions that would increase actuarial liability for a member's pension contributions," according to the senator's statement. If they boost pension payments, they should bear the full costs of that decision. That's a simple matter of fiscal responsibility.

Finally, Senate Bill 1433 restricts counties or districts from newly participating in a Defined Retirement Option Plan, or DROP. DROPs are such a taxpayer giveaway that they were targeted by the governor's own pension-reform legislation in 2013. A DROP allows public employees to collect their full pension and receive their full salary, too, which they get in a lump sum upon their actual retirement. The existence of these programs is proof that the state's retirement systems are much too generous.

Police and firefighters can retire at age 50 with 90 percent of the average of their final years' pay. Many want to keep working and their agencies want them to keep working. But because the "3 percent at 50" retirement plan is so lush, they would be working for little or no pay if they stayed on the job past the young age of 50. Instead, they get paid almost double. These programs were supposed to be cost neutral, but have cost billions of dollars because they were underpriced.

Los Angeles' DROP program is particularly controversial. The program "received a flood of new enrollees in February," according to the Los Angeles Times. This "coincided with a Times investigation in February that found the program, which was created in 2002 to keep veteran officers and firefighters on the job, allows participants to file workers' compensation claims and then take extended injury leaves at nearly twice their usual pay." This has cost more than $1.6 billion, with the average participant walking away with an extra $434,000, per the Times.

Given the pension funds' fiscal condition, it's hard to understand any serious opposition to these modest measures. When the health of the system is on the line, why wouldn't the state want to clamp down on costs? Stay tuned for the hearing, even though the Legislature has yet to show any interest in reining in pension costs.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org. This column was first published by the California Policy Center.

Photo Credit: Randall Benton/ZUMA Press/Newscom

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  • Scarecrow Repair & Chippering||

    Good luck!

    Well, CalPers is as dumb as they come, and nothing will happen any time soon. Eventually cities will face a taxpayer revolt when basic services run up against police and fire pensions, and the police and firefighters will lose; threaten to close parks and libraries, stretch garbage pickups, stop cleaning streets, and people will get irate enough to raise hell at city council meetings. New candidates will work teh anger to come in and start firing cops and combining police with EMT and whatever else they have to to cut personnel costs.

    And CalPers is too stupid to tell when the wind has changed. They will double down, and there will be bankrupt cities and ferocious court battles, and then CalPers will finbally have to smell the sewage.

    Gonna be ugly, and it could n't happen to a nicer bunhc of union thugs.

  • JesseAz||

    It's not calpers that the taxpayers of California have to worry about but their idiotic judiciary and the California Rule which makes it impossible to modify any future adjustments to the pension system.

  • Rhywun||

    California is just the preview. It's coming to every state unless something is done to curb the power of public sector unions.

  • DrT||

    Yes the unions have bargained aggressively but that alone doesn't cause this crisis. The real problem is that the states and municipalities have not consistently funded their pensions on a fair market basis. Unlike private sector plans, public plans have no ERISA like law to force them to fund. Moreover, actuarial methods consistently undervalue liabilities. Its a known problem which is realized every time a public entity tries to defease or sell their liabilities to an insurance company. Defeasement or a sale requires far more assets than the actuaries suggest.

  • Rhywun||

    The real problem is that the states and municipalities have not consistently funded their pensions on a fair market basis.

    And they never will as long as the unions have the power to continue demanding salaries and benefits that are impossible to sustain in the long run. They reason they aren't being funded properly is politics. If they were, the public would realize the jig was up.

  • sighthoundman||

    You've hit the nail on the head. Unions represent workers and of course they want something for the workers. But workers really don't have an interest in covering up the cost of pensions and driving cities into bankruptcy. You might recall that this has been done before in other states, and even though the obligation remains, bankruptcy judges aren't always or even often willing to force taxes up to the point where people approach the revolt level.

    However, politicians' biggest concern is getting elected. That's why Generally Accepted Governmental Accounting Principles allow for all sorts of liabilities to be posted as footnotes (read: hidden) rather than listed as actual liabilities and accrued in fiscal years. You can't accurately assess the fiscal health of a governmental entity without reading at least the last ten years' statements in all their gory detail. The summaries are worthless. 20 years is probably better. And even then, who knows? There may be liabilities they're just covering up because they just don't want to know. And for the interest rates they pay on their bonds? Just not worth the effort.

  • DrT||

    Got news for you Steven, they're already under 50%, Joe Nation at Stanford is systematically putting together state and municipal pension obligations and valuing them at fair market value instead of the undervalued actuarial standard. His site, http://us.pensiontracker.org, shows that California has about $2.3T in liabilities and about $750B in assets. Namely, they're only funded about 1/3rd. Its not just CalPers that's screwed; its the whole state. If you're a PERS or STRS employee you should take your pension now and leave the state. The reckoning is going to be awful.

  • DrZ||

    It's time to dump union-Democrat negotiated defined benefit pensions and switch to define-contributions. Get rid of the pension investment boards unless they can prove they will beat a passively managed index fund(s) and are worth their keep.

    Get politics and politicians out of the pension business and let ordinary people manage their own pensions.

  • EirkKengaard||

    It would be instructive to see the data associated with public pensions in California from 1900 to present.

  • dchang0||

    I kind of like the crowding out function of these public sector pensions because they move all of the gov't spending from myriad small accounts into one giant highly-visible account.

    This will make it easier for the typical, normally-uninterested voter to see how wrong it is for gov't to take our money by force and spend it on its preferred groups of people. There will be a lot of resentment from the taxpayers who are not able to fund their own retirements seeing their tax dollars going to fund some lavish public sector retirements.

    It will also make it easier to cut gov't spending with one great slash.

    Well, the reality is that gov't will never allow us to cut off its funding. Instead, the money will simply run out, Venezuela style, where the most-politically-connected cronies live it up and the 99.99% rummage through dumpsters.

  • Flinch||

    The problem isn't myopia, as much as it is the SEIU, and their connection to Moonbeam. Until one of them leaves the stage, you can bet they will burn the state to the ground rather than give an inch. Leftist minded unions always put the horse in front of the cart.

  • Flinch||

    Cart in front of the horse that is... where's my coffee?

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