Retirement Debt: What’s the problem and how does it affect you?
- How big is the problem?
- So really, how big is it?
- And what's the size of retiree health debt?
- How did pension debt grow so much?
- What are other factors?
- What's the impact?
- What's being done about pension debt?
- What's being done about retiree health?
- What is the average public pension?
- How many get $100,000 pensions?
- Who makes more—public or private workers?
- What do the courts say?
- Are there any solutions?
- Where can I learn about CALmatters' coverage of retirement debt?
- Where else can I learn more?
- Reader Reactions
Across California, the cost of retirement benefits for public employees remains untamed. The total cost to state and local governments as well as schools and colleges has more than tripled since 2003—and projections indicate the burden in coming years will continue to grow.
Payments for public employee pensions and retiree health care benefits are putting so much pressure on government budgets that many are having to choose between service cuts and raising taxes. Gov. Jerry Brown has called the issue a “moral obligation” and the association of California cities now predicts that the growth will be “unsustainable.”
It’s an important issue to understand for the state’s future, but it’s also highly political and controversial. Labor unions and budget watchers debate the magnitude of the problem. And precision isn’t always possible when projections are based on estimates or assumptions.
CALmatters recently took an in-depth look at what we know and don’t know about retiree debt, working on the topic in collaboration with the Los Angeles Times and Capital Public Radio. Here are the highlights of what we’re learning, based on a comprehensive look at key data sources and perspectives from experts and advocates.
We encourage any feedback or commentary—we’ll investigate your comments and add updates as appropriate. Our goal is to offer a trustworthy source of information about this important issue.
How big is the problem?
Broadly, we know California state and local governments face more than $400 billion in unfunded liabilities for public employee retirement benefits—enough money to cover the state’s general fund for three years, including funding schools, universities, prisons and health care for the poor.
That debt is made up of two chunks: $254 billion in pension liabilities and $147 billion in retiree health care.
In pensions, the unfunded liability is the shortfall between retirement benefits that governments have promised and the current funding available to meet those obligations.
The $254 billion pension debt estimate comes from the state controller’s office, which collects financial data from California’s 130 state and local pension plans. Those plans cover 2.6 million workers and 2.4 million retirees for a total of more than 5 million beneficiaries as of fiscal year 2015-16. They include the state, cities, counties, school districts and public universities.
Three-quarters of the pension burden comes from the state’s two biggest systems: California Public Employees’ Retirement System(CalPERS), the nation’s largest public pension fund that manages benefits for 1.9 million state and local government employees, retirees and their families, and the California State Teachers’ Retirement System (CalSTRS), the nation’s second-largest public pension fund with 933,410 public school teachers and administrators prekindergarten through community college, and their families. CalPERS’ unfunded liability grew from $111 billion in 2015 to $138 billion in 2016. CalSTRS’ unfunded liability grew from $76.2 billion in 2015 to $96.7 billion in 2016.*
Both funds say the jump was due to changes in investment assumptions.
In addition, the total pension debt in California includes the University of California and some of the largest local governments, such as Los Angeles, that self-fund employee benefits instead of participating in CalPERS.
The other portion of retirement debt comes from retiree health care benefits that the state, public universities and many local governments have already promised to their workers. This unfunded liability is the present-day cost to provide health care and sometimes dental and vision benefits to public workers once they have retired. The benefits vary depending on what workers have negotiated, largely through collective bargaining.
No single agency keeps track of the statewide retiree health care liabilities. So CALmatters conducted a review of financial reports from the biggest public agencies in California, including the state; the University of California; the cities of Los Angeles, San Diego and San Francisco; and the counties of Los Angeles and Orange.
Here’s what we found: California’s largest government employers face a combined $147 billion in unfunded retiree health care costs. The overall cost is more when adding in all other local governments.
California is not alone.
Across the country, many states are facing large pension and retiree health care liabilities. Illinois, New Jersey and Connecticut are saddled with heavy pension costs. A survey by Pew Charitable Trusts shows California’s pension funding ranks 26th in the nation.
* This description was updated 4/5/2018
So really, how big is it?
Nobody can say for sure.
Pensions are funded from three sources: contributions from the employee, contributions from the government employer, and especially returns on the investment of pension funds. Because pensions rely heavily on those investment returns (they account for 61 cents of every dollar at the state’s main pension fund), no one can predict exactly how much is needed.
The $254 billion statewide pension debt is a projection based on how much money the system assumes it will gain from investments. But actual returns don’t follow a straight line. In the past two decades, California’s two largest systems have hit their target two out of every three years.
Pension funds have slowly lowered their earnings assumption but there’s a debate about what’s reasonable.
As far back as 1994, CalPERS was projecting 8.75 percent from investment returns. Today, it has lowered projections to 7 percent. CalSTRS used to assume 8.5 percent returns in 1994 but it, too, is revising the rate down to 7 percent.
But some pension advisors believe the projections are still overly optimistic. For example, when CalPERS was debating how much to lower its investment return rate, its consultants recommended an assumption of 6.2 percent earnings in the next decade. Stanford University professor Joe Nation, a former Democratic legislator, has also speculated about a “hypothetical” 3.25 percent return, which would create a liability of nearly $1 trillion.*
Labor activists say investment return assumptions are fiscally sound because contributions are invested over the span of a worker’s career.
* This description was modified 4/4/2018
And what’s the size of retiree health debt?
Our estimate for the statewide $147 billion retiree health care debt is also a moving target.
Unlike the case with pensions, which are pre-funded with contributions from both the employer and employee, most governments never set up an account to pay for retiree health coverage (although some are beginning to set money aside). Many government agencies offer retirees a choice of medical plans and may even offer dental and vision coverage.
The employer often pays most of the premiums.
Take retired state workers and their families, for example. California chips in up to $21,000 a year per retiree for health insurance premiums. The state also offers its retirees dental insurance benefits. These health benefits last a lifetime.
State Controller Betty Yee has noted that the $91.5 billion health care liability for retired state workers is one of California’s largest long-term debts due to the increasing cost of premiums and demographic shifts as people live longer.
In 2001, the annual cost to provide state retiree health and dental benefits accounted for 0.6 percent of California’s general fund. In 2017, it grew to 1.6 percent of the budget.
Yee warned in 2016 that if no changes are made to the state’s method of funding retiree health care costs, the state of California’s unfunded liability would grow to $300 billion by 2047.
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.
What are other factors?
Pension funds have not done a good job factoring increased life expectancy.
Take the teachers’ retirement system, which only changed mortality assumptions a few years ago as part of a long-term bailout that requires greater contributions from teachers, school districts and the state.
“Historically, CalSTRS—like most pension systems—has used static assumptions about life expectancy. This means that the assumptions did not change over time to reflect anticipated future improvements in life expectancy,” wrote the Legislative Analyst’s Office.
Currently, CalSTRS assumes that a female teacher will live until 89 and a male teacher until 87. But the system found it should be using more conservative assumptions.
A female teacher who retired in 2016 can expect to live past 90, at least six years longer than the average California woman. And a male teacher who retires the same year can expect to live nearly 88, nine years longer than the average California male.
By 2046, a female teacher can expect to live until nearly 93 and a male teachers past 90.
CalPERS, in November of 2017, made adjustments for longer life expectancy. Instead of updating static tables every four years that make fixed projections of life expectancy, CalPERS has moved to a model that approximates generational mortality assumptions, which reflect continual expected improvements in life expectancies.*
The workforce is also aging, which means pension funds are distributing more benefits than ever before.
According to the state controller’s office, there were 3.2 active workers for each retiree in 2002. In 2015, there were fewer than 2 active workers for each retiree. The trend is expected to continue as Baby Boomers move further into retirement.
The situation is more acute at some pension systems. CalPERS, for example, forecasts its ratio of active workers to retirees will fall below 1-to-1 in the next five years.
* This description was added for clarity 4/5/18
What’s the impact?
Taxpayers are now contributing nearly $25 billion a year into public pension systems. That’s enough to make higher education free in California, covering tuition, books, food and housing for all students attending the University of California, California State University and community colleges.
Retirement benefits for public workers are becoming such a burden that they are starting to crowd out jobs, street repairs, library and park services.
State and local government employment in California will be one of the most sluggish sectors—growing by a mere 0.5 percent over the next several years—according to an assessment by The University of the Pacific’s Center for Business and Policy Research. The center attributes the drag to “rising pension costs.”
School budgets are growing, but pension costs are growing more quickly. Nearly 40 percent of the increase in school budgets will be absorbed by higher pension costs. The UC system authorized the first in-state tuition hike on students in seven years due in part to soaring pension outlays.
At the state level, California’s pension contribution rates for firefighters and highway patrol officers have tripled. In 1990, the state put in about 16 cents to pensions on top of each dollar a firefighter received in wages and 18 cents for highway patrol officers. Today, the state contributes 44 cents for firefighters and 54 cents to highway patrol officers.
Since Brown returned to office in 2011, state retirement and health care contributions have nearly doubled, from $8.3 billion to $15.6 billion.
Local government officials are also sounding the alarms. At a CalPERS hearing in September 2017, a parade of city managers and finance directors testified how rising pension costs are hurting their ability to operate. They say tax revenues haven’t kept up with skyrocketing personnel costs, in large part because of pensions.
“We’ve been saying the bankruptcy word, which is not very popular,” said Ruth Wright, finance director in Oroville.
The impact of retiree debt could also impact public workers, potentially jeopardizing their benefits.
For the first time in California, four retired city employees in the tiny Sierra Valley town of Loyalton saw their pensions slashed because the city defaulted on payments to the pension fund. CalPERS has since taken action on other agencies that try to leave the fund without paying hefty termination fees.
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.
What’s being done about retiree health?
Most government employers that offer retiree health benefits pay as the insurance premiums come due. It’s known as “pay as you go.” As we mentioned above, the bills tend to go up each year as health care costs rise and life expectancy improves.
However, there are some efforts to tackle this long-term debt.
At the state government level, Brown has been moving toward a prefunding approach more like that used for public employee pension funds. He’s negotiated deals with prison guards, engineers, scientists and highway patrol officers.
In late 2016, he struck a deal with the state government’s biggest union, Service Employees International Union 1000, which represents 40 percent of state workers. That agreement calls for phasing in payroll deductions for retiree health care over several years, extending the period to qualify for retiree health benefits and reducing the state’s subsidy for health insurance.
The state controller supports this approach. She estimates that if the state were to fully pre-fund retiree health debt, the state could save more than $26 billion, or 34 percent.
What is the average public pension?
The average public pensioner who recently retired receives between $38,184 and $53,700 a year, depending on the pension system in California.
The range in pension benefits, however, can be broad.
In Los Angeles County, for example, the average employee who worked for the county for 5-9 years retired last year with $1,416 in monthly benefits ($16,992 a year). But a sheriff’s deputy or firefighter who retired last year with more than 30 years of service is getting $11,358 a month, or $136,296 a year for life.
Some, but not all public employees, are eligible for Social Security.
Generally, public safety workers such as police and firefighters as well as public school teachers do not participate in the federal retirement program as a result of administrative decisions made decades ago. Other public workers, however, do contribute to Social Security and are eligible for benefits on top of their pension checks.
For some, a 2011 report from the Little Hoover Commission, a government watchdog agency, estimated that between pensions and Social Security, a career public servant has the potential to collect “more money in retirement than he or she did on the job.”
Many of those public workers can also count on lifetime health benefits.
It’s a stark contrast to the private sector.
Just 4 percent of private-sector workers in America have access to pensions while 49 percent have shifted to 401(k) plans, in which the employee bears the risk of investments. Another 14 percent have access to a combination of both.
That’s compared to 86 percent of state and local government workers who have access to pensions.
How many get $100,000 pensions?
Within CalPERS, there are about 23,000 public workers receiving pensions of $100,000 or more. They make up 3.5 percent of pension recipients in the system.
Throughout the 1990s, fewer than 200 workers in the system retired each year with six-figure pensions. After the state granted more generous retirement formulas, the number spiked.
And the University of California now hands out six-figure pensions to more than 5,400 retirees, including $357,000 a year to Mark Yudof, the former UC president.
Who makes more—public or private workers?
The controller’s office makes public pay available online so you can check what your city manager or sanitation worker is taking home each year. The website provides information on employee pay and benefits for roughly 2 million positions at more than 5,000 government entities.
The state has also looked at peer-to-peer wages.
The California Department of Human Resources, which is responsible for negotiating state salaries and benefits, found in 2014 that the state pays its workers above market rates in 30 out of 47 occupations, including cooks, psychiatrists, dental assistants, graphic designers and office clerks.
State compensation was below market in 17 occupations such as computer systems analysts, software developers, lawyers and legal secretaries. State police officers were paid less when compared to local police.
When adding in health and retirement benefits, federal data from the Bureau of Labor Statistics suggest government employers across the country pay better overall.
What do the courts say?
There have been two major court fights on public pensions in recent years. One deals with how pensions are prioritized during a municipal bankruptcy. The other, how much flexibility state and local governments have to cut future benefits of current workers.
The first ruling happened during Stockton’s bankruptcy.
On Oct. 1, 2014, a federal judge made a verbal ruling against public pension systems by finding that payments for worker retirements can be cut when a city declares bankruptcy. U.S. Bankruptcy Judge Christopher Klein determined that bankruptcy law supersedesCalifornia pension laws protecting retirement checks.
The ruling, however, was never acted on because Stockton limited the bulk of its cuts to bondholders and saved money by endinglifetime health care benefits for its retirees. The city also raised taxes and reduced services, leaving pensions untouched.
The second fight is still playing out.
In a 2016 ruling upholding a lower court’s decision, state appeals court Justice James A. Richman broke from decades of court decisions in finding the Legislature can alter pension formulas for current employees and reduce their anticipated retirement benefits.
A group of Marin County employees had argued that Brown’s 2012 pension changes infringed on their employer’s contractual obligation to provide retirement benefits at the level that was promised on their first day of work. That premise, known as the “California rule,” has left state and local governments with little room to modify retirement benefits except for new hires. It’s also the reason why recent benefit changes have done little to reduce public pension liabilities.
The Marin County case is one of several pension fights that could be considered by the California Supreme Court. In January, another appeals court came to a different conclusion about the “California rule” by deciding in favor of union employees in Alameda, Contra Costa and Merced counties. While the justices agreed there are limits to the California rule, they said benefit adjustments require “compelling evidence” showing that the changes are necessary to the success of the pension system.*
The high court has agreed to take up the issue of the California rule, which could have huge financial implications for California cities, counties, school districts and the state.
In an unusual move, Brown is defending his pension changes rather than the attorney general. His opening brief in another case brought by a firefighters’ union argues that the Legislature retains the right to modify benefits for current employees on prospective work.
Brown predicts the Supreme Court will grant greater flexibility in order to maintain the long-term health of public pension systems.
“The circumstances that first established the California rule are very different then the circumstances today,” Brown said when he released his January 2018 budget proposal. “Several lower courts of appeals with judges, both liberal and conservative, who have taken the position that the employees are entitled to a reasonable pension are not entitled to any remunerations they can imagine. So I think that there’s a rule of reason and based on the idea that the pension system must be maintained.”
* This description was added 4/5/18.
Are there any solutions?
There have been numerous efforts to tame California’s retirement debt, either through legislation or an initiative. But any one of these efforts would only slow the rapid growth of pension and retiree health debt.
California’s most recent governors have focused on benefit changes for new government workers because of the so-called California rule.
In 2005, Gov. Arnold Schwarzenegger proposed an initiative to give future state workers 401(k)-style retirement accounts instead of traditional pensions. But the Republican governor abandoned the idea after Democratic Attorney General Bill Lockyer crafted a title and summary for the initiative that said the measure would eliminate death and disability benefits for future public employees.*
In 2011, Brown proposed a hybrid retirement system for new employees that would have combined smaller pensions with 401(k)-style plans. But that too was rejected by fellow Democratic lawmakers.
Since then, pension reform advocates and taxpayer watchdogs have proposed benefit changes for current workers for prospective work.
Most recently, former San Jose Mayor Chuck Reed, a Democrat, and former San Diego City Councilman Carl DeMaio, a Republican, led an initiative campaign in 2013-14 that would have required current workers to negotiate future benefits. Such efforts for a statewide initiative have failed to qualify for the ballot, but a favorable ruling from the Supreme Court could renew a campaign.
What isn’t touchable is the benefits workers have already earned.
Because promises have already been made by state and local governments to millions of public workers, the retirement debt cannot be erased. The best solutions can only hope to reduce the taxpayers’ burden.
* This description was modified for clarity 4/5/18
Where can I learn about CALmatters’ coverage of retirement debt?
CALmatters partnered with the Los Angeles Times and Capital Public Radio on a pension series exploring California’s pension crisis. The project examined the huge gap between the state’s obligations to current and future retirees and the capacity of public pension funds to pay them.
Here are some highlights:
- The pension gap: It was a deal that wasn’t supposed to cost taxpayers an extra dime. Now the state’s annual tab is in the billions, and the cost keeps climbing.
- The ruling: California promised public employees generous retirements. Will the courts give government a way out?
- The overhaul: Jerry Brown touted his pension reform as a game-changer. But they’ve done little to rein in costs.
- Richmond: Cutting jobs, street repairs, library books to keep up with pension costs
- Reform initiatives: The cost of California’s public pensions is rising fast. But efforts to fix the problem by ballot measure have fizzled.
- A Tale of Two Sectors: Is it a necessary perk to keep public sector jobs competitive or just too expensive?
- Are Pension Benefits Excessive? State Workers Say ‘No’: Retired state workers are tired of the story about the six-figure pensioner.
Where else can I learn more?
Wanting more? Here are other helpful resources on California’s retirement debt:
- State government
- Local Government Organizations
- Major Public Retirement Systems
- California Public Employees’ Retirement System
- California State Teachers’ Retirement System
- University of California
- Los Angeles City Employees’ Retirement System
- Los Angeles County Employees Retirement System
- San Francisco Employees’ Retirement System
- Orange County Employees Retirement System
- San Diego City Employees’ Retirement System
- Pension reform groups
- California Policy Center: A nonprofit group that advocates for pension cutbacks
- PensionTsunami.com: A website focused on California pensions edited by Jack Dean
- TransparentCalifornia.com: A searchable database of pensions by a Nevada-based free-market organization called Nevada Policy Research Institute.
- Pensiontracker.org: A site tracking financial information about the California Public Employees’ Retirement System by Stanford University public policy professor Joe Nation.
- Retirement Security Initiative: A bipartisan group pushing for fair and sustainable pension systems led by former San Jose Mayor Chuck Reed.
- CaliforniaPensionReform.com: A group dedicated to putting a pension initiative on the statewide ballot led by Dan Pellissier, who served as an advisor to Gov. Arnold Schwarzenegger.
- Calpensions.com: A blog by former San Diego Union-Tribune reporter Ed Mendel.
Do you have something to say about the ongoing retirement debt crisis? Send a note to [email protected].
- ‘We are disappointed at the continued unbalanced coverage’
- ‘Pensions stabilize economies in financial downturns’: Paula Weiss, Sacramento
- ‘Not every system is near failure’: Dick Baldwin
- ‘The UC system took a pension holiday for 20 years’: Doug Rose
- ‘It was a huge and disastrous increase’: Michael Henn, Piedmont