What's being done about pension debt?

Each pension system has responded differently to its own challenges. Some have moved toward less-risky investments and many have increased contributions from taxpayers and from current workers.

Let’s take a closer look at what’s being done to try to tackle the debt at the state’s two largest systems: CalPERS and CalSTRS.

In 2015, CalPERS officials acknowledged they were struggling with negative cash flow—a chronic mismatch between contributions from taxpayers and active workers, and the monthly checks being sent to retirees.

Although the system wasn’t in danger of running out of cash, it was having to liquidate investments. Of the $20 billion in benefits paid out that year, about $13 billion came from contributions and $7 billion from investments, Chief Financial Officer Cheryl Easton said in a presentation to government officials.

Financial advisors and city representatives warn that if investments drop below 50 percent of the amount owed for pensions, catching up becomes nearly impossible. That’s known as the point of no return.

As of 2017, CalPERS was 68 percent funded.

In order to stop liquidating and begin addressing the fund’s long-term unfunded liability, CalPERS began requiring government employers to pay down that debt. The board also voted in 2016 to lower investment assumptions to 7 percent. The moves, however, dramatically increased contributions from state and local governments.

Recently, the fund announced it became cash flow positive due to improved investment performance and higher contributions. Fund spokeswoman Amy Morgan says the fund’s improved condition will allow the system to pay off its $111 billion unfunded liability over the next three decades.

At CalSTRS, the governor signed a long-term funding plan in 2014 to rescue the teachers’ pension system. Before AB 1469, CalSTRS was only 67 percent funded and would have run out of money in 33 years.

The schedule for paying down debt calls for school districts to ramp up contributions from 8.25 percent of their budgets in 2013 to 19.1 percent in 2020. The agreement also raised teacher and state contribution rates, but only slightly.

CalSTRS now projects the fund will pay off its unfunded liability by 2045.