How did pension debt grow so much?

Public pension systems have been underfunded for years. The last time California’s largest pension system—CalPERS—had a surplus was in 2007 before the Great Recession. The last time CalSTRS for educators was fully funded was in 2000 before the dot-com crash. And remember, it’s risky to rely on overly optimistic investment assumptions to fund pension systems.

Benefits are another part of the equation.

Most notably, Gov. Gray Davis signed legislation in 1999 granting early retirement and enhanced pension benefits for state workers amid the intoxicating highs of the dot-com bubble. School districts and local governments followed suit and many employers took so-called pension holidays, or a break from making pension contributions. Assuming an annual return of 8.25 percent over the coming decade, proponents, largely public employee unions, sold the measure with the promise that it would not cost taxpayers a dime.

They were off by billions of dollars.

Pension systems took a double whammy in the dot-com crash and the Great Recession. For example, CalPERS lost 5.1 percent in 2008 and 24 percent in 2009—wiping out $67 billion in assets. In a 2016 interview, Davis said if he had to do it over again, he would not have signed enhanced benefits.

In 2012, when Gov. Jerry Brown pushed for sweeping reforms to close the funding gap and ease the burden on taxpayers, Democrats in the Legislature and public employee unions blocked his most ambitious idea for a hybrid retirement system combining smaller pensions with 401(k)-style plans.

While the savings from Brown’s Public Employee Pension Reform Act of 2012 are estimated at $28 billion to $38 billion over 30 years at CalPERS and $22.7 billion for CalSTRS, the changes will only save state and local governments 1 to 5 percent on pension payments because the law mainly reduced benefits for newly hired employees.