It’s a highly technical process that the board undertakes every four years. But the consequences are profound for public employees, state and local government agencies, and taxpayers. In the Bay Area, CalPERS provides pensions for employees of Santa Clara County and most cities except San Jose and San Francisco. And the CalPERS board, dominated by labor representatives and elected officials beholden to labor, continues to enable this risky behavior. They did it again earlier this month when the board set its investment return target. The less money the retirement system anticipates receiving from investment returns, the more it must seek from employers and sometimes workers to ensure the system is financially solid. But the more the system seeks from public agencies, the less money is available for employee raises and other government operations.
Californians are the losers when the pension system’s bets don’t pan out. Under CalPERS’ complex accounting, government agencies, not employees, must make up the shortfall through higher taxes or reduced services. That’s because, more than a decade after the Great Recession, and despite an exceptionally strong market this past year, CalPERS has only crawled halfway back to the fully funded target, and much of that gain has been in the past year. The pension system still has only 80% of the funds it should have on hand. It’s still roughly $120 billion short.
The solution is simple but politically difficult. To shore up the funding, the retirement system should require employers and employees to pour more money in. But labor unions and many local government managers resist, preferring instead to kick the proverbial can down the road. It’s not the first time. The retirement plan’s propensity for risk-taking left it badly exposed during the Great Recession. Assets of the California Public Employees’ Retirement System dropped over two years from 101% of what was needed to pay government workers’ retirement benefits to 61%.
But board members were told that, under current expert projections, their current portfolio could only attain a 6.2% annual investment return over the next 20 years. If they wanted to reach the 6.8% target, they would have to shift investments and take on more risk. That’s because greater returns generally come with more risk of bigger losses. Or, board members were told, they could lower the target to 6.5%, keep the risk lower and ask public employers and employees to kick in more money. The board rejected that, opting for the riskier option instead. This time, as the board started to set its investment return target, CalPERS policies tied to last year’s strong market performance automatically reduced the previous target from 7% set four years ago to 6.8%.
The employees don’t bear that burden. Instead, our children and grandchildren are left to pay part of the labor costs for public services we enjoy today. So, there’s tremendous political pressure to keep employer and employee contribution rates low by keeping the investment return projections artificially high. But when those investments don’t pan out, the shortfall is essentially turned into a long-term debt that current and future generations of taxpayers must cover.
The News Highlights
- CalPERS bets again with taxpayer money – Daily Breeze
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