Guest Editorial by John Takeuchi,
Sadly, the new year arrived with old concerns
California’s out-of-touch government has given us the highest overall tax rates in the country; homeless people roaming our cities; a justice system favoring more the lawbreaker than the law-abiding; and an exodus of companies and wealth.
A huge problem that’s escaped much attention so far is the California Public Employees’ Retirement System, partly because few understand it and partly because government and the unions like it that way. Let’s explain the first part.
CalPERS is the largest state-run retirement system in the country. It holds accounts for most of the state’s counties and cities, encompassing about 1.9 million employees. Its assets are almost $350 billion, most of which is invested in financial markets. That sounds like a lot of money; but it’s barely $175,000 per person. When you consider that the average retiree will burn through his share in four or five years, the problem comes into focus. Running out of money is common to nearly all defined-benefit programs – retirees are promised a monthly check regardless of how the underlying investments perform. CalPERS is one.
A recent study estimates that CalPERS’ unfunded liability – the additional amount needed to assure that every retiree gets what he or she is promised – is almost $1 trillion! How did the system get so far behind?
Twenty years ago, CalPERS was fully funded. The Reagan Revolution and successive good years through the Clinton presidency yielded excellent returns on the system’s investments, often exceeding 10 percent annually. Things looked so rosy that in 1999 Gov. Gray Davis signed off on a dramatic increase in benefits. Among them was a provision allowing “public safety” personnel – police officers, firefighters, even prison janitors – to retire at age 50 with 3 percent of annual pay per year of service.
This generosity backfired a few years later when the economy began to slide. While CalPERS assumed long-term annual investment returns of 7.5 percent to calculate its solvency, actual returns sank to a fraction of that – once, even approaching zero.
Who makes up a shortfall? Member governments do – which means, we the taxpayers. In 2002, counties and cities were hit with huge “catchup” assessments. Fairfield, for example, had to borrow $42 million. As the country slid into the Great Recession, unfunded liability grew – and grew.
Today, even with new prosperity, it’s unlikely that CalPERS will ever be fully funded again. Governments seem incapable of denying regular pay raises to their employees, most of whom already make considerably more than their civilian and military counterparts. This largesse increases their annual budgets, displacing things they ought to do – like maintaining streets. It also adds to their – our – pension liability.
CalPERS is a black hole. At this point, there are no reasonable ways to keep it afloat. The state has to get away from defined benefits. Can it be done?
Of course, it can. Over the past 20 to 30 years, nearly all of private industry has shifted into what are known as defined contribution plans. Employees direct some percentage of their pay into company-sponsored investment programs – mutual funds and such – and the employer matches all or a significant part. There are many financial institutions – insurers, brokerages, mutual funds – who would gladly manage those accounts. Over long periods of time, the stock markets have created considerable wealth for steady investors. When the employee retires, the whole investment package is his. The employer has no further obligation.
Transitioning CalPERS out of defined benefits requires the Legislature to act. Communicate with your elected representatives. Ask them what they’re doing to stop the bleeding. If you don’t like their answers, elect people whose answers you do like.
In the meantime, remind local officials that every pay raise they approve adds to our CalPERS deficit. It will come to bite us. Bet on it.
John Takeuchi is a Fairfield resident and a member of the Central Solano Citizen/Taxpayer Group. Reach him by email at email@example.com.