Is California Doomed to Repeat Pension History?
Dear John,
California’s state and local governments are struggling to find the cash needed to pay government employees the retirement benefits they promised. As the League of California Cities observed, pension costs for many of their members have been rising to “unsustainable levels.” Now, remarkably, the state Assembly is ready to make that problem far worse — by promising even more benefits without any plan to fund them.
Legislators in both parties are backing Assembly Bill 1383, a bill that creates new, more generous pension formulas for public safety employees and allows government employers to negotiate away the 50% employee contribution requirement at the bargaining table. It gets worse: the bill would also allow more government employees to retire earlier — at age 55 — while receiving 90% of their final average salary (i.e., their average salary for the 36 months during which they received their highest base pay). This would be on top of the retiree health benefits that safety employees already enjoy.
What will happen next is unintended but absolutely predictable. To cover the increase in benefits, state and local agencies will find themselves paying more into the California Public Employee Retirement System (CalPERS). That will leave less cash for government services. Pressed to manage their budgets, government officials will propose cutting costs — including jobs and services. That will trigger almost immediate protests by government union leaders — followed by walkouts, strikes and temporary government shutdowns.
That’s the situation in Los Angeles where Mayor Karen Bass is working to plug a $1 billion deficit by cutting some 1,600 jobs. In Fiscal Year 2023-24 alone, the City was obliged to make over $1.6 billion of contributions to its three pension funds.
“I’m going to push back and fight against every single one of these layoffs,” said David Green, president of SEIU 721, the union that represents tree trimmers, trash truck drivers and others.
There was a time when CalPERS was fully funded. In the late 1990s, after years of strong stock market performance, the retirement system achieved a funded ratio of 120.5% — meaning that it had $120,500,000 of accumulated assets for each $100,000,000 it needed to pay future benefits.
The money quickly burned a hole in the pockets of officials eager to please leaders of the state’s politically powerful government unions. CalPERS’ management reacted by proposing that the state legislature increase pension benefits. They expected the increased costs would be covered by “excess assets” in their funds and very modest increases in future state pension contributions. The legislature dramatically increased CalPERS benefits by passing Senate Bill 400 in 1999.
Then reality set in. The stock market fell in 2001 and collapsed in 2008. By 2013, faced with the increased benefits costs of SB 400 and a decline in revenue, CalPERS’ funded ratio plummeted. By 2013, the ratio had fallen to just 75%. It has remained around that level ever since — despite strong stock market performance and sharply higher employer pension contributions.
The situation would be even worse today if not for the 2012 Public Employee Pension Reform Act (PEPRA), passed by the legislature and signed by Gov. Jerry Brown. The bill limited pension benefits for new hires and required that employees cover half of the “normal” cost of their pension benefits (normal cost excludes any pension contributions intended to reduce underfunding).
California political leaders already predict that Trump’s tariffs will play havoc with the stock market on which CalPERS relies for investment revenue. Even without AB 1383, public employee pension funds will become much more depleted.
AB 1383 has already passed out of its first Assembly committee unanimously. It enjoys vigorous support from unionized firefighters, who undoubtedly provide a valuable service at considerable risk, but many of whom already receive compensation packages of $600,000 or more for their efforts.
Before this bill rolls through the entire legislative process, much more analysis needs to be done of its potential impact on CalPERS and smaller pension systems. Just about everyone, including Gray Davis who signed SB 400 into law, now realizes that law was a mistake. Let’s not make the same error with AB 1383 and its potential successors.
— By Marc Joffe, President of the Contra Costa Taxpayers Association and a California Policy Center Visiting Fellow
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