THE PRESENT state of California’s public employee pension system is the result of legislation sponsored by the California Public Employees Retirement System in 1999 under Senate Bill 400 and expanded in 2001 under Assembly Bill 616.
CalPERS argued that its members and retirees were not equitably benefiting from the high investment returns during the 1990s.
The Legislature voted 105-7 to grant all public employees, which include public safety and education, a new formula that increased the percentage applied to each year of service and lowered the age in which an employee is eligible to retire. These new benefits were retroactive and SB 400 also provided a one-time cost of living adjustment for retirees.
Prior contribution levels were calculated over the actuarial life of the employee and did not take into account increases made mid-stream. To offset the cost and future liability of these new benefits, CalPERS proposed to (1) use the surplus generated by the investment returns and (2) make accounting changes to recognize excess assets quicker in order to reduce the impact of these enhancements on the employer’s contributions.
In effect, excess returns, which should have been used to offset shortfalls during periods of underperformance, were used to fund higher benefits.
SB 400 was passed before it could be reviewed by the Legislative Analyst’s Office. In a report issued by the LAO more than
two months later, it was stated (1) the new compensation package would cost $286 million and increase to almost $1.3 billion when all full-year costs were realized and (2) the annual cost of the retirement benefits would be more than $400 million. There were no economic forecasts at the time to suggest if SB 400 was even feasible or not.
In 2004, the LAO issued another report stating the employer contribution had escalated from under $200 million to $2.6 billion in just under four years. The report cites (1) less than expected investment returns and (2) the increased level of benefits under SB 400.
The costs and unfunded liability continues to grow as a result of the Great Recession and slow recovery. Although the assumed rate of return on investments was lowered from 8.25 percent to 7.75 percent in 2003 and to 7.5 percent recently, it does not change the future obligation. It just means the employer has to make a larger annual contribution.
In 2009, Ron Seeling, then chief actuary of CalPERS, stated the system was unsustainable. Terry Brennand, a senior government relations advocate from SEIU, disagreed and blamed a bad economy. Regardless, it will take annual returns in excess of 20 percent to be fully funded again by the end of the decade. Cities will be in severe financial distress or near insolvency before then.
Last October, Gov. Jerry Brown proposed his 12-point plan for pension reform. Little has been made of the plan in Sacramento. Conceptually, there will be some immediate reduction in pension costs, but the benefits of the most significant changes will not be realized for years, if not decades. With the governor’s push for a tax increase on the November ballot, don’t expect to see pension reform before then.
On June 5, voters in San Jose and San Diego approved measures that would reduce the benefit levels of their municipal employees. As charter cities (which 10 of 11 Marin cities are not), they can put it to a referendum. Labor groups are certain to challenge these on the basis that the courts have historically ruled that it is illegal to reduce vested benefits without offering something comparable in return.
Pritchard, Ala., seemed to have the most practical solution. When the cash ran out, the town simply stopped writing the checks.