Fewer State Jobs and Public Services and More Tax Increases Coming to California Due to Unrealistic Investment Returns for Public Pensions

May 22, 2017 

(Mercury News) - There’s more bad news to come from CalPERS, the nation’s largest pension plan.

In December, the board of the California Public Employees’ Retirement System approved phase-in of a rate increase for the state and local government agencies that provide most of its funding.

But it won’t be enough to shore up the ailing system. That’s why next month the board will begin a review process that’s likely to lead to approval as early as December of another increase.

That’s right. Even as the state and local governments across California struggle to figure out how they’re going to cut services and reduce staffing to pay for the first round of increases, they’re likely to face another one.

As painful as it will be, there are no responsible options. If CalPERS doesn’t act, the problem will only get worse. It’s pay now, or pay more later.

We’re in this pickle because, in the early years of this century, the state and local governments locked in major pension increases for workers, while CalPERS relied on unrealistic investment forecasts to help fund them.

The investment forecasts didn’t pan out and, as a result, CalPERS today has only about 64 percent of the assets it should to pay for benefits employees have already earned. That’s approaching dangerous territory where a sharp economic downturn would leave the pension plan unable to recover.

That’s also the system’s lowest funding ratio at any time except 2009, in the depth of the Great Recession. The only thing that saved the system then was that it was fully funded just before the downturn. In two years, the funding ratio slipped to 61 percent.

In other words, we know we’re due, actually overdue, for another recession and, this time, CalPERS is horribly positioned to absorb the shock.

Meanwhile, CalPERS continues to overestimate the potential returns of its investments. In December, the system board agreed to slowly lower its investment forecast from an annual 7.5 percent to 7 percent. To make up for that reduction, CalPERS approved the contribution rate increase.

But the board hasn’t gone nearly far enough. CalPERS’ consultant says board members should anticipate only an average 6.2 percent annual investment return over the next 10 years. Hence, they need to raise contribution rates even further.

That means even more belt-tightening at the state and local governments: Fewer jobs, more labor concessions and/or more tax increases. Labor leaders and many local officials will protest. They’ll ask CalPERS to wait, or soften the blow.

For far too long, CalPERS board members have capitulated to those pleas. They ignored their professional staff’s advice and kept banking on unrealistic investment forecasts. That’s one reason we’re in this mess.

As we’ve said before, the solution is to fix the system, not continue denying reality.