Throughout California, local government and school district officials are writing new budgets and confronting rapidly rising costs of pensions.
Many have seen their costs double in the last few years, largely consuming revenue increases that the state’s expanding economy have produced. For instance, a projected $1 billion increase in school districts’ teacher pension costs in 2017-18 will more than equal projected revenue gains.
However, as the old rock song says, “You ain’t seen nothing yet.”
Lackluster earnings by pension trust funds, revised actuarial projections and impacts of benefit increases are compelling the systems to sharply increase mandatory “contributions” from public employers.
Nevertheless, pension systems have seen their “unfunded liabilities” continue to increase – giving California one of the nation’s widest gaps between earning assets and pension obligations.
California’s unfortunate status is confirmed in a new report from Pew Charitable Trusts, which found that in 2015 the state’s two big pension funds had the nation’s sixth-worst record of reducing unfunded liabilities, gathering just 79 percent of the $18.9 billion they needed to keep their pension debts from rising.
California’s status may have worsened since then. In 2015, Pew reported, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System had 74 percent of what they needed to meet pension obligations, but that ratio has since dropped to about 64 percent due to reductions in their projected investment earnings.
What emerges from this picture is a precarious balancing act. The pension systems are trying to keep their funding levels from dropping below a point of no return while simultaneously trying to prevent pension contributions from driving local governments and school districts into insolvency.
It didn’t have to be that way.
Pension systems in other states contended with the same macro conditions but, as the Pew report shows, most have been much more diligent in adjusting.
Ed Mendel, a veteran journalist who writes a blog about pension issues, points out that as California was collecting just 79 percent of what it needed in 2015, New York’s big pension fund upped its contributions to 163 percent and is 98 percent funded.
Because New York was diligent in dealing with declining earnings, as Mendel points out, it actually hits state and local employers relatively lightly, charging them only about two-thirds of California’s rates as percentages of payroll.
All of this implies that California’s public agencies and taxpayers can expect ever-higher pension fund demands – unless something is done to markedly reduce the cost side of the pension ledger.
Appellate courts have ruled that the “California rule,” which seemingly prohibits changes in public pension benefits, may not be valid, and the state Supreme Court will have the last word.
It could be the only way to prevent a complete meltdown of California’s already precarious pension systems.