As Americans, we have become numb to inconceivably large numbers.
Ten-digit figures that used to be reserved for the realm of astronomy now have made their way into the fiscal vernacular, as billions and trillions are casually bandied about like spare change. Likewise, California’s financial conundrums are also swelling astronomically with a major driver being unsustainable pension liabilities from public workers.
California’s three largest public pension funds, the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and the University of California Retirement System (UCRS) guarantee the retirement packages of 2.6 million Californians.
These government employees pay a portion of their paycheck into their retirement systems in exchange for lifetime pensions and other benefits after retirement. To pay for these promised obligations that are significantly higher than contributions, pension agencies must turn around and invest employee contributions into bonds and mutual funds, with the intention that the principal grows with the economy.
Unfortunately, this system is unsustainable and untenable in its present form.
For example, in order for CalPERS to remain on target for its pension obligations, the agency must maintain a 7.5 percent annual average on returns from investments—a difficult goal even in boom times. However, for the Fiscal Year of 2012, CalPERS only managed a humble 1 percent return within its portfolio, widening the gap between promised and actual resources.
The sheer size of this growing gap is astounding, with a Stanford University analysis concluding that these three pension funds alone possess a combined $534.9 billion in unfunded liabilities. This half-trillion dollar difference between projected revenues and expenditures puts California’s taxpayers on the hook to make up the slack.
Many cities in California face similar pension dilemmas.
The city of Stockton filed for bankruptcy in June with $147 million in unfunded city pension liabilities, while San Bernardino owes CalPERS anywhere between $143.3 and $319.5 million for its employer contributions after it filed for bankruptcy in August. Los Angeles also possesses a whopping $27 billion in unfunded pension liability, while the Orange County Employee’s Retirement System has more than $10 billion in unfunded liabilities according to a separate Stanford study.
Like the state, these municipalities are sitting on ticking fiscal time bombs that will inevitably leave them facing bankruptcy.
On Sept. 12, Gov. Jerry Brown signed AB 340, the Pension Reform Act, in which he promised “sweeping bipartisan pension reform legislation that saves billions of taxpayer dollars by capping benefits, increasing the retirement age, stopping abusive practices and requiring state employees to pay at least half of their pension costs.”
Once Brown ceases his self-congratulatory strutting, he might realize that his reforms are in effect only against newly hired public employees. The state will only begin to see meaningful pension savings around the year 2055, when the current batch of public sector new-hires begin to retire. This extended time frame also gives powerful public employee unions decades to bribe and coerce lawmakers to peel back the hard fought reforms before they go into full effect.
Of course, everybody would like a comfortable pension after a lifetime’s worth of hard work, but the tragic fact remains that there is not enough private capital to support legions of public sector pensioners at current rates.
However, California’s pension saga certainly will come to a dramatic climax well before mid-century. Without a drastic change in trajectory, future economic and fiscal scenarios appear bleak, and someday California’s true pension reform will likely be hammered out by a judge in a bankruptcy court during a federally mandated restructuring package in return for federal bailouts needed for the state’s daily operating expenses.
If nothing is done, California’s insolvency drama likely will mimic the current Greek economic tragedy.