PD Editorial: Rate hikes show pension challenge
Published: Tuesday, April 23, 2013 at 7:00 p.m.
Last Modified: Tuesday, April 23, 2013 at 5:14 p.m.
A day of reckoning may be approaching for public agencies weighed down by generous retirement promises for their employees.
For years, the California Public Employees Retirement System has kept employer contribution rates artificially low, shielding cities, counties and other member agencies from a shortfall in the giant pension fund by delaying the impact of investment losses.
All nine Sonoma County cities are members of CalPERS, which, by its own estimate, is now 30 cents short of every dollar it needs to meet its obligations to city, county and state employees over the next 30 years. Looking forward, CalPERS’ actuaries estimate a 26 percent to 34 percent chance of falling 40 cents behind over that same 30-year period.
The shortfall resulted from miscalculations when retroactive pension increases were granted to thousands of state and local employees about 10 years ago, exacerbated by bad investments as well as stock market losses the CalPERS fund suffered during the recession.
Although the Dow Jones Industrial Average has climbed back to its pre-recession level and beyond, CalPERS is in a deeper hole than it was before the downturn.
The investment fund is presently valued at about $255 billion, about $5 billion short of its 2007 peak. Based on the market value of its assets, CalPERS reports an unfunded liability of $86.8 billion. Using an actuarial value, it reports an unfunded liability of $57.2 billion.
Even using the lesser amount, that’s almost double the unfunded liability of a decade ago. As of June 30, 2006, the actuarial value of CalPERS’ unfunded liability was $29.1 billion, according to a report by the state’s nonpartisan legislative analyst.
Employers — i.e., taxpayers — are obligated to cover any shortfall. To get back on the path to full funding, the CalPERS board voted last week to ratchet up employer contribution rates beginning in 2015. Instead of “smoothing” investment gains and losses over 15 years, rates will be tied to five years’ performance.
For some of the 2,200 member agencies, rates will increase 50 percent over seven years, with the revised rates pushing retirement contributions beyond 40 cents on every payroll dollar.
Moody’s, the Wall Street rating service, warned that “the most fiscally challenged local governments could find these proposed increases unmanageable.”
With three California cities already in bankruptcy, that’s reason to pause. But, on balance, we think the CalPERS board made a responsible decision.
The new approach will raise employeer costs, at least for the foreseeable future, just as reducing the discount rate — the projected return on CalPERS investments — did. Together, however, the effect is to give policymakers, beneficiaries and the public a more honest accounting of the CalPERS balance sheet.
Because most of the pension reforms adopted last year cover only new employees, the savings are years away. What’s at stake here, and what will become clearer as the new rates are released, is the cost of paying for benefits already granted, especially the large, retroactive increases in the early 2000s.
Supposedly, they were going to be cost-free. For that to come true, CalPERS will need to beat the market in ways that neither Warren Buffett nor Bernie Madoff ever imagined. More likely, elected officials will be left to choose between cutting services and pursuing further pension reforms.