Opinion

California’s public pensions are worse off than we thought

Rolling up big paper profits on stocks and other capital investments during 2017 and most of 2018 was very easy, and the California Public Employees Retirement System, the nation’s largest pension trust fund, took full advantage.

Its strong earnings, particularly in 2017, narrowed a yawning gap between its assets and future liabilities for pension payments to state and local government workers. But it was short-lived and CalPERS has not only regressed but could actually be underwater because of a new way of calculating liabilities.

A little history:

By its own calculations, CalPERS was 100 percent funded during the 1990s and into the first decade of the 21st century – so healthy, in fact, that state and local officials sharply increased pension benefits retroactively.

However, pension funds took immense hits during the Great Recession. CalPERS alone lost $100 billion; most have not fully recovered.

From 2007 to 2016, before the 2017-18 stock market surge, CalPERS’ total liabilities increased by a startling 76 percent, from $248 billion to $436 billion, while its assets increased by just 19 percent, from $251 billion to $298 billion, sharply increasing the fund’s unfunded liabilities.

The earnings surge, plus big increases in mandatory “contributions” from state and local governments, raised CalPERS’ official funded level slightly to 70 percent, but that was still a long way from 100 percent – and now it’s again declining.

Very quietly, CalPERS officials told its governing board last month that the trust fund actually lost 3.9 percent during 2018, apparently due to the sharp stock market decline late in the year, pushing funded levels back down to 67 percent.

Having just two-thirds of the assets needed to cover pension promises should be a wakeup call to politicians, but public employees unions would prefer they ignore it.

Jerry Brown sponsored a very modest pension reform three years ago, hoping to close the funding gap. But even that step drew opposition from unions, who sued; those lawsuits are pending before the state Supreme Court.

Worse, the official assumption that CalPERS is even two-thirds funded may be optimistic. The Federal Reserve System late last year doubled its calculation of state and local governments’ unfunded pension liabilities to $4.1 trillion, using a new methodology devised by the federal Bureau of Economic Analysis.

The new method, called “projected benefit obligation,” aligns pension assets and liabilities with governmental accounting standards and how the federal government values its own employee pension program. Using that method, CalPERS’ current unfunded liabilities, officially $179 billion, could be closer to $360 billion, completely overwhelming the fund’s current assets and making it, on paper at least, insolvent.

David Crane, the head of Govern for California (and a CALmatters donor), says that while serving on the California State Teachers Retirement System board as an appointee of former Gov. Arnold Schwarzenegger, he attempted to persuade CalSTRS to adopt the methodology now used by the BEA and the Federal Reserve to provide a more realistic picture. His suggestion merely fueled successful efforts by defenders of the status quo to scuttle his state Senate confirmation in 2006.

The Federal Reserve’s accounting change vindicates Crane, but also implies that California’s public pension crisis, as serious as it appears from official data, is likely much worse and therefore much more difficult to resolve.

Dan Walters writes on matters of statewide significance for CALmatters, a public interest journalism organization. Email: dan@calmatters.org.

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