PD Editorial: Pension math: Big returns, bigger bills

California just got another dose of news on public employee pensions.

For the fiscal year that begins July 1, actuaries for the California Public Employee Pension System are recommending that the state contribute $5.35 billion - an increase of $602 million over the current year.

The state’s obligation to CalPERS has nearly doubled over the past 10 years, with annual increases of $459 million and $487 million in the past two years alone.

Despite the steep increase in state contributions, which crowds out other public programs and services, the retirement fund is in worse shape than it was in 2007, the year prior to the worldwide economic meltdown.

It’s true that the investment losses from the Great Recession have been recouped. CalPERS reported a $290 billion fund balance earlier this month, compared to $260 million in 2007 and about $160 billion during the depths of the recession.

Yet, as Calpensions.com reported last week, the five state worker plans now have 69.4 percent of the assets required to cover their future obligations. That’s down from 72.1 percent a year ago.

The CalPERS system was fully funded in 2007.

Today, the unfunded liability for state employee pensions is $49.6 billion, according to CalPERS’ numbers. A year ago, it was $43.3 billion.

In summary, retirement fund assets are up. And so are unfunded liabilities.

The gap between the present fund balance and long-term obligations is getting larger.

And so is the bill for California taxpayers.

Talk about a bad news trifecta.

CalPERS also covers thousands of municipal employees around the state, including those of all nine Sonoma County cities. As with the state, their employers almost certainly will be required to pay more in the upcoming fiscal year, again leaving less for other services.

California has taken some steps to improve the financial health of its public employee retirement systems, most notably reducing benefits for anyone hired since Jan. 1, 2013 and requiring all public employees to pay a larger share of regular pension costs.

Indeed, as the Calpensions.com report noted, the state’s obligation for 2016-17 would be $33 million higher if it weren’t for the pension reform law.

But that doesn’t address the unfunded liabilities, which are being reported in a more transparent manner under new accounting rules.

Taxpayers are on the hook for all of those costs.

Higher employer contributions will continue for the foreseeable future as CalPERS ratchets down its projected rate of return on investments from 7.5 percent annually to 6.5 percent. It’s a prudent approach, but the target is still quite ambitious in a state in which retirees are beginning to outnumber active members of many public employee pension funds.

Here’s where we’d like to propose a solution. But there isn’t any easy fix.

By law, retiree benefits cannot be reduced. Neither can the accrued benefits of active employees. As long as future benefit accruals are treated as untouchable, it will be extraordinarily difficult to control costs.

CalPERS is reconsidering its 15-year-old ban on investments in companies, an ethically questionable move but one that promises improved returns. A growing portfolio is the one thing that might ease increases in taxpayer costs for public employee retirement benefits before other public services go up in smoke.