Would you please fill out this 3-minute survey about our service? Your feedback will help us improve CalMatters.
The California Public Employees Retirement System has been hammered by poor investment earnings in recent years, but got some good news last month.
CalPERS reported an 11.2 percent gain on its investment portfolio in the fiscal year that ended June 30, following a couple of years of near-zero earnings that sharply boosted its pension debt, known as “unfunded liability.”
So does that mean that CalPERS and the nearly two million retirees and current state and local government employees that look to the nation’s largest pension trust fund for their post-employment income have pulled back from the abyss of insolvency?
Only by inches.
CalPERS still has scarcely two-thirds of the money it needs to meet its pension obligations – even assuming a 7 percent annual earnings target that many independent authorities and even its own staff believe is unattainable.
“We welcome this fiscal year’s strong returns, but we also remain about 68 percent funded and vulnerable to a downturn in stock markets,” CalPERS’ chief executive, Marcie Frost, warned in a statement.
It’s apparent that the 11.2 percent return, as welcome as it may be, did not result from any CalPERS investment acumen. As a recent Wall Street Journal article points out, it reflected what was happening across the spectrum of pension funds, thanks to a booming stock market, and, in fact, fell short of the 12.4 percent median return for such funds calculated by Wilshire Trust Universe Comparison Service.
It would take years of double-digit returns to narrow CalPERS’ pension debt, now more than a quarter-trillion dollars, and reach the 80 percent funded level deemed to be minimally sufficient.
The more likely scenario is that the gap between what it needs and what it has will continue to languish, and even grow, even though CalPERS continues to ramp up mandatory “contributions” from state and local governments – or more accurately their taxpayers. Those inflows have more than doubled in recent years, hitting cities especially hard because they devote so much of their budgets to highly paid police and fire staffs that have the most lavish, and therefore most expensive, pension promises.
It’s not unusual for government employers to be paying 50 percent of payroll for police officers. In other words, for each dollar of salary, they must kick in another 50 cents to their pension accounts.
As the financial vise tightens, all eyes are on the state Supreme Court, which is handling appeals from appellate court decisions that public employers, contrary to long-standing belief, could reduce pension benefits for future work by current employees.
The chief appellate decision, rendered in a case from Marin County, declared that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension – not an immutable entitlement to the most optimal formula of calculating the pension. And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”
That and other rulings now under appeal to the Supreme Court could give state and local governments an out if pension costs become too much to bear, but public employee unions hate the notion and will fight it to the last breath.