Unfunded Pension Obligations Threaten Budget Funding for Core Priorities
Independent experts agree that California's unfunded public employee pension obligations are becoming more and more of a budget problem - both for state and local governments.
Many recent, nonpartisan studies have illustrated just how big of a problem unfunded public employee pension obligations have become, though estimates of the scope of the problem vary.
As of June 30, 2009, the California Public Employees Retirement System (CalPERS) reported that its unfunded actuarial accrued liabilities in its main pension fund for state and local governments was over $49 billion-consisting of about $23 billion for the state and $26 billion for other public agencies.1
Showing a bigger problem, a report by the bipartisan Little Hoover Commission found that the top 10 public employee pension systems in California - including plans for both state and local government workers - faced a combined $240 billion shortfall as of 2010.
A study by the Stanford Institute for Economic Policy Research more recently pegged the combined total unfunded pension liabilities of CalPERS, the California State Teachers Retirement System (CalSTRS) and the University of California retirement plan at $485 billion.
A growing problem for state and local governments
When pension costs rise, benefits are increased, or investments in pension portfolios perform below expectations, it is taxpayers that have to make up the difference as pensions are a legal obligation of state and local governments.
Everyday Californians are beginning to understand the severity of the unfunded public pension liabilities with 83 percent of Californians in a recent Public Policy Institute of California poll saying that the amount of government spending on pensions is troubling.
The current growing problem threatens General Fund support for K-12 education, higher education and law enforcement, and has put many local governments on the path to bankruptcy.
State pension General Fund costs for CalPERS has risen from $370 million in 2001-02 to $2.1 billion in 2011-12, a $1.7 billion increase. To put this in perspective, the state spends $2 billion annually to fund the 23 campus California State University System.
Adding in retiree health care costs shows the problem is even worse. Combined General Fund costs for state retirement programs, including CalPERS retiree benefits and health care costs and State Teachers Retirement System (STRS) retiree benefits have grown over the years, and are projected to grow to nearly $7 billion by the 2014-15 budget year.
Legislature Enacts Modest Pension Reform Plan
Earlier this year, Governor Brown proposed a 12-point pension reform plan, which drew bipartisan support from Legislative Republicans. Key points in the Governor's original plan included:
- Changing to a "hybrid" plan (401(k) plan, defined benefit, and Social Security) for newly-hired public employees
- Raising the retirement age for newly-hired state employees to 67
- Require employees to pay a fair share of their retirement health care costs
- Limiting pension spiking by changing the method by which retirement benefits are calculated for new employees from the highest single year salary to the highest three years
- Prohibiting "pension holidays," where employee or employer contributions to pay for pension benefits are suspended
- Ending the practice of allowing state workers to purchase "air time," or additional service credit for time they did not actually work
- Requiring new state employees to work longer to qualify for retiree health benefits.
Though they wished the proposals went further and did more to protect California taxpayers, Senate and Assembly Republicans introduced the Governor's original proposal in the Legislature. The measures, Senate Constitutional Amendment 18 (Huff), Senate Bill 1176 (Huff), Assembly Constitutional Amendment 22 (Smyth and Conway), and Assembly Bill 2224 (Smyth and Conway), would enact the identical legislative language as crafted by the Brown Administration.
In the final days of the 2012 legislative session, the Legislature enacted pension reform legislation proposed by the pension reform conference committee. The plan approved by the Legislature, however, was much weaker than the Governor's original proposal.
Independent experts agree that the proposal takes modest steps to address California's growing pension obligations, yet more must be done to fully address the state's unfunded pension obligations. To review the differences between the Governor's original proposal, and the plan recently enacted by the Legislature, click here.
Following the passage of the Democrat pension reform legislation, Legislative Republicans vowed to continue fighting for stronger pension reform legislation that will address the state's unfunded pension liabilities in a way that is fair to both taxpayers and public employees.
1 Legislative Analyst's Office, Page 11
2 Sacramento Bee, February 10, 2012