California has a state pension problem that defies partisan politics. It’s not about Hillary vs. Donald, it’s about math. Past pension promises may exceed the potential for pension asset growth.
Whether we are currently or were former California residents, as I am, we all want California to prosper. We want a better education system and excellent public services. Unfortunately, that’s not today’s California.
Total government spending is 20.8% of gross state product — the 15th highest in the nation. However, the state has fewer teachers (224) per 10,000 population than the national average, vs. the national average (275) and Texas (324). Our teachers are the nation’s highest paid, while California’s combined taxation is also the nation’s highest. Yet, student test scores are the nation’s fourth lowest. Screaming won’t help solve this problem.
In California’s pension system (CalPERS), employee and employer contributions and investment returns are supposed to pay for pensions. Otherwise, the state general tax fund covers the difference.
This shortfall is growing worse. CalPERS recently announced an annual investment return of 0.61%, far short of the 7.5%-rate needed to meet obligations. Every year CalPERS misses that target, the state falls further behind. California taxpayers now face a $139 billion bill for retirement benefits that workers have already earned. So even if the state were to make future-hire reforms, or lay off every single CalPERS-covered employee, the unfunded liability would still exist. With a roughly $139 billion pension shortfall, every household owes around $11,000 for public pensions.
This understates how much taxpayers really owe. That $139 billion figure assumes a 7.5% annual gain. CalPERS has now failed to meet that benchmark over the last three-, five-, 10-, and 20-year periods. These lower-than-expected returns are already having a negative impact on CalPERS: The pension fund’s ratio of assets to liabilities, i.e. the funded ratio, decreased from 86.5% in 2003 to 72.2% in 2013, according to Pew Charitable Trusts.
Persistent lower returns push unfunded liabilities higher, close to the $500 billion estimated in some studies. This would put every household on the hook for an additional tax of $40,000 to pay for people who are no longer working.
As my old boss Ronald Reagan said, there are no easy answers but there are simple answers. California must end “defined benefit” plans that guarantee a certain payout to retirees, regardless of the economy or stock market. Not just reform, but abolish.
This would set up an extraordinary battle with powerful public employee unions. Reform will never happen in the Legislature, whose politics closely align with unions. Like the groundbreaking Proposition 13, this taxpayer savior needs to come from the people.
Defined benefit plans, which we have provided our state employees, have essentially disappeared from the private sector. They should be replaced by more transparent “defined contribution” plans, like 401(k)s, which are fully funded, do not depend on wishful projections or actuaries for their soundness, and leave no opportunity for unfunded liabilities that are backstopped by taxpayers.
It’s a myth that public employees trade lower pay for pensions. Exploding salaries are driving pension costs upward. My book, “An Inquiry into the Nature and Causes of the Wealth of States,” compared salaries for state jobs. In 2014, Texas prison guards earned an average of $38,775; in California, $83,877. For police, Texas averaged $60,573; California $96,131. Texas judges averaged $158,500, while California judges averaged $212,040. California employees came off as a Gilded Age aristocracy compared with their public service peers.
The California pension “$100,000 Club,” where public employees’ pensions reach six figures, has skyrocketed. In 2005, 1,841 California public employee retirees had $100,000-plus pensions. By 2014, there were 19,728. That’s one “Club for Growth” that I don’t support! The trends are unsustainable.
Homeowners losing their homes to outrageous property tax increases launched Proposition 13, the most consequential, grass-roots tax reform in California history. Voters need a chance to revamp the public pension system. Without reform, California will need massive tax increases, deep service cuts, default on pension benefits, or an ugly combination of all the above to meet its obligations.