The dimensions of California’s pension crisis

California’s public employee pension systems have immense gaps – called “unfunded liabilities” – between what they have in assets and what they will need to meet their obligations to retirees.

The California Public Employees Retirement System (CalPERS), the nation’s largest pension trust fund, and other state and local systems are desperately trying to close those shortfalls, or at least reduce them, mostly by ramping up mandatory “contributions” from public agencies.

Everyone is getting hit by those rapidly escalating demands and it’s no secret that they are pushing some school districts and cities to the brink of insolvency, forcing them to slash other spending, even vital police and fire services, and/or seek higher taxes from their voters to keep their heads above water.

Moreover, the squeeze is destined to get even tighter. For instance, cities that are now paying 50 cents into CalPERS for every dollar of police officers’ salaries are projecting that it could go to 75 or 80 cents within a few years.

School districts are feeling a double whammy – a more than doubling of their mandatory payments to the California State Teachers Retirement System (CalSTRS) for their professional staffs, plus increasing demands from CalPERS for their support staffs.

The state government itself is not immune. Last week, CalPERS told Gov. Jerry Brown and legislators that they must include $6.3 billion in the 2018-19 state budget to cover state employee pensions, making it one of the budget’s largest single items.

CalPERS officials send mixed messages to the public about the gap, on one hand saying that they must jack up contributions to avoid having it grow so large that the trust fund can never catch up, but on the other crowing about recent investment earnings and insisting that retirees and employees should feel confident that their money will be there when it’s needed.

This month, the Pew Charitable Trusts, which has followed the nationwide public pension issue closely, issued a report that examines the systems’ unfunded liabilities, and explains why some states have big gaps while others are fully funded, or nearly so.

Nationwide, Pew calculated, the total gap for all states grew by $215 billion between 2015 and 2016 to $1.4 trillion – and that assumes that the systems will meet their investment earnings assumptions of 7-plus percent a year.

Actual 2016 earnings, including those in California, fell extremely short of those assumptions, but even if they had been met, Pew says, unfunded liabilities would still have grown because most states, including California, also fell short on employer payments needed to cover ever-growing pension obligations.

That’s an important point. Even though CalPERS and other systems have sharply accelerated payments from employers, they still fell short in 2016 of what was needed to keep the gap from growing. California’s contribution shortfall, in fact, was the nation’s sixth highest in relative terms.

Pew agrees with the official CalPERS calculation that it was 69 percent funded in 2016, which is slightly higher than the 66 percent level for state pension systems nationwide. That’s a $168 billion unfunded liability – again assuming that it will meet its earnings goals, which is dropping slowly to 7 percent.

In contrast, New York’s system is 91 percent funded because it steadily dealt with earnings downturns and funded benefit increases, rather than allow shortfalls to accumulate, as California and many other states did, until they reached the crisis point.

CalPERS says that an uptick in 2017 earnings, to more than 11 percent, has raised its funding level to 71 percent. That’s obviously good news, but CalPERS’ own staff estimates that earnings over the next decade should barely average 6 percent a year, which, if true, would mean the system would either have to allow its funding level to decline or hit state and local government employers – and, of course, their taxpayers – even harder.

It’s a balancing act. CalPERS and the other systems are trying to avoid insolvency without driving their members over the fiscal cliff. Rising pension costs are driving many cities to ask voters for sales tax increases this year, but they won’t be telling those voters the truth about why new revenue is needed, fearing candor would spark a backlash.