PD Editorial: Understanding the concerns about pensions

A reader recently asked this question: "Pensions have been viable for 75 years, why is there such an alarm now?"

To help answer that question, let's take a look at CalSTRS, the state teachers retirement fund. The average benefit is $47,000, and the average beneficiary taught for 25 years, retiring at age 62. Teachers aren't eligible for Social Security, and many don't get retiree health insurance. In short, this isn't a Cadillac program.

Yet the unfunded liability is $74 billion, a figure that, despite robust stock market gains, is still growing — by about $22 million every day. Without an infusion of cash, about $5 billion a year by one widely accepted estimate, CalSTRS will be insolvent in just over 30 years.

Gov. Jerry Brown put a down payment in his revised budget for 2014-15, and school officials around the state howled in protest. Why? It's a zero-sum game. Putting more money into the pension fund means taking it out of the classroom.

Stripped to its essentials, that trade-off is the "alarm."

It's no different at CalPERS, the giant public employees pension fund, or at any of the retirement programs operated by cities and counties around the state. Contributions from public employers and employees weren't enough to cover the benefits they negotiated, and investment returns fell short of expectations. The problem was exacerbated — but not caused — when the stock market dropped precipitously after the dot-com boom and again when the housing bubble burst. A bull market hasn't eliminated the deficit.

The challenge is keeping these funds solvent for the long term, and CalSTRS illustrates the difficult choices confronting policymakers and, ultimately, taxpayers, who are legally obligated to make up any shortfalls in the pension funds.

Federal law and the state constitution prohibit any reduction in benefits, even for employees who won't be eligible to retire for years. That leaves reduced benefits for future employees, which won't stanch the bleeding for years, putting more money into the retirement funds or amending the constitution.

Brown's proposal for CalSTRS would increase contributions from teachers, school districts and the state. Over three years, contributions from teachers would increase from 8 percent 10.25 percent of their pay and the state's would grow from 5.5 percent to 8.8 percent. Over seven years, school districts' share would increase to 19.6 percent of payroll, which isn't out of line with what other public employers already are paying for employee pensions.

Even the first year increase proved too much for school districts, which are trying to rebuild after deep budget cuts during the recession while implementing a new state funding formula and new curriculum standards. Many are suggesting that the state should pick up a larger share of the pension costs.

That still means cutting programs. But instead of K-12, it would be state programs, the largest of which include UC and CSU, where tuition increases already are threatening to price many middle-class students out of a higher education.

It's unlikely that voters will support new taxes for pension debts, and a proposed constitutional amendment addressing future benefits is tied up in a legal battle over the summary to be placed on initiative petitions and, if it qualifies, the ballot.

Looking for an easy answer? Sorry, you won't find it here. But it's impossible to make an honest assessment of the unfunded liabilities without recognizing why there is so much alarm about pensions.