PD Editorial: Numbers tell the story on pensions
We write about California’s public employee pension funds on a regular basis, and at least one person inevitably says that we’re being alarmist.
The numbers say otherwise.
Controller John Chiang provided more evidence last week when he posted sobering financial data about retirement funds for city and county employees at his ByTheNumbers.sco.ca.gov website.
Consider these figures:
Over the past 11 years, employee contributions toward retirement benefits increased 57 percent, from $5.21 billion a year to $9.07 billion a year.
Employer contributions nearly tripled over the same period, from $6.38 billion a year to $17.52 billion a year.
Meanwhile, the unfunded liability— that’s the difference between promised benefits and projected funds to fulfill those obligations — grew from about $6.3 billion in 2003 to a little more than $198 billion in 2013.
To summarize, employees are paying more, employers are paying more, and the hole is still getting deeper. Moreover, the unfunded liabilities have grown even faster since the recession officially ended in 2010.
The hole isn’t just a little deeper, either. Chiang reported that unfunded liabilities for city and county workers have increased more than 30-fold in a little over a decade. Even that figure is an estimate, based on projected returns on the investment of retirement funds.
The giant California Public Employees Retirement System, and many smaller funds, assume a return averaging 7.5 percent annually. It’s true that CalPERS did far better than 7.5 percent over this past year. But there are reasons to question whether it can keep it up year in and year out.
A separate pension system for Los Angeles city employees recently reduced its “discount rate,” the projected return on investments, to 7 percent. Meanwhile, financial advisers warned the California State Teachers Retirement System that it’s unlikely to meet its annual goal of 7.5 percent over the next 10 years.
Chiang, who was elected state treasurer on Tuesday, highlighted a few other troubling figures. The number of retired workers drawing pensions increased from 816,000 in 2003 to 1.2 million in 2013, while local government payrolls decreased from 2.25 million to 2.14 million, meaning fewer people are paying into the retirement funds.
Finally, despite a strong five-year run that has seen new record highs for the Dow Jones and other stock indexes, the combined balance of the state’s pension funds was $50 billion less in 2013 than it was before the recession started in 2007.
Pension benefits for new hires are less generous, and those employees will pay a larger share of the cost, but it will be years before big savings are realized.
Stockton retirees and employees avoided reductions in their retirement benefits when a federal bankruptcy judge accepted a reorganization plan that left pensions intact. But the same judge ruled that those benefits aren’t sacrosanct, so the question could arise in another municipal bankruptcy.
The solution is for public employees and public agencies to work together on a system that protects retirees and benefits already earned but allows for negotiated reductions in future benefits. Only then will California realize the kind of savings required for long-term solvency in its public employee retirement systems.
If you doubt that, look at the numbers.
Editor’s note: This editorial has been updated to correct a reference to post-recession pension fund balances. The $50 billion figure cited by the controller refers to the combined balance of all public employee pension funds.