GOP targets California’s underfunded pensions in effort to sink Biden’s COVID stimulus plan
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There’s lots of fiery Republican rhetoric these days about how the $1.9 trillion economic relief plan would help bail out ailing state and local pension systems.
It won’t. It’s not supposed to.
And for the foreseeable future, no one’s benefits in California are in danger of being cut because of the pension system’s status, even though the state has about $167 billion in unfunded commitments to state workers and teachers.
“The bill now before Congress has nothing to do with pensions, and everything to do with providing needed relief to individuals, families, and businesses still suffering from the COVID-19 recession,” said state Finance Department spokesman H.D. Palmer.
Pension systems have become a favorite Republican target over the past year, as Congress crafts packages aimed at helping state and local governments during the COVID-19 pandemic.
Pensions are coming up again, as Congress takes the final steps to what’s likely to be approval of a $1.9 trillion economic relief plan. It includes $350 billion for state and local governments, with California estimated to get $42.2 billion. Final votes are expected next week.
Republicans are taking aim at public pensions such as those in California. GOP senators say the systems are routinely bloated and often mismanaged, and argue those are big reasons federal dollars should not be used to help states.
“California promised these things, New Jersey promised these things, then they don’t want to pay for it,” Sen. Rick Scott, R-Florida, told The Bee. “Their citizens made these choices, so their citizens are responsible for the choices they made.”
A frequent complaint is that people from states with fairly healthy budgets are bailing out California.
“We have the good people of Iowa being asked to support blue state bailouts,” said Sen. Joni Ernst, R-Iowa. “You know who receives the most in these blue state bailouts? Chuck Schumer’s state of New York and Nancy Pelosi’s state of California. Unbelievable how that works.”
Does CA’s pension need help?
Every state would get at least $500 million from the bill. Other funds would be distributed based on formulas that took need into account..
“There are no proposals, either by the governor or the Legislature, to allocate any proposed federal aid toward state pensions,” Palmer said. “When budgeting to meet required pension contributions, or to make supplemental/discretionary pension payments, the state doesn’t consider the use of any federal relief funding – in other words, we do it as a matter of course.”
California’s programs do need help.
“There is still work to do, but significant progress has been made,” said Chris Hoene, executive director of the nonpartisan California Budget & Policy Center.
California has taken several big steps over the past decade to shore up its pensions. In 2012, then-Gov. Jerry Brown signed a law effectively required public employees to chip in more money toward their retirement plans and trimmed the potential earnings of workers hired after Jan. 1, 2013.
In 2016, CalPERS reduced its investment forecast, signaling it expected to earn less money over time from its portfolio. That change also required government employers to pay more money today for tomorrow’s pensions. The California State Teachers’ Retirement System has made similar changes.
Still, “the state has significant unfunded liabilities associated with retirement benefits for state employees and teachers,” said a Senate Budget and Fiscal Review subcommittee report last week.
It said that at the end of fiscal 2019, the state had $186 billion in unfunded liabilities for state workers and teachers. The breakdown: $92 billion for state retiree health benefits, $61 billion for state employee pension benefits administered by the California Public Employees’ Retirement System and $33 billion for teacher pension benefits, which is the state’s share of the teachers’ system’s unfunded liability.
Palmer said that as of January, the state’s unfunded liability figure was $167.2 billion. An unfunded liability is when not enough assets have been set aside during an employee’s working years to pay for their retirement.
The figures Palmer and the Senate subcommittee described do not encompass local government or local school district retiree obligations.
CalPERS, which provides retirement plans for about 2 million current and retired government employees, in its most recent annual financial report estimated its total unfunded pension liability stood at $160 billion.
As of last week, the pension fund’s portfolio was worth about $440 billion.
Pension fund problems persist
In the short term, experts said, the system should be fine. Its investment return in fiscal 2020 was 4.7%, its 11th straight year of positive results. The state’s goal is to earn 7% annually.
But benefits paid to more than 732,000 people were up 6.5% from the previous year.
The independent Legislative Analyst’s Office noted in a January overview of the governor’s budget that “paying down future pension costs could help smooth out a notable increase in costs currently projected for 2022‑23.”
Palmer said that California has not only met its annual state pension responsibilities “but has gone beyond that in recent years to bring down our long-term liabilities.”
Since 2017, he said, the state has committed $7.8 billion to help bring down those liabilities. The funding was done with state money, and is projected to provide a net long-term savings of $8.1 billion. The governor’s current budget proposal would provide another $1.9 billion, which is currently projected to produce another estimated long-term savings of $2.6 billion.
But concern about the future “is not about the investments, it’s about the promises that have been made,” said Lance Christensen, chief operations officer for the Orange County-based California Policy Center.
Those promises are a financial time bomb, said Joe Nation, professor of the practice of public policy at Stanford University.
“The bottom line is that virtually every state and every public pension, regardless of where you look, is not in good shape,” he said.
Nation, who tracks the status of public pensions nationwide, sees California’s unfunded liability closer to $1 trillion. He uses a different accounting system than the state.
What is highly unlikely, at least for the foreseeable future, is any sort of benefit reduction. That would take an extreme event, such as a government bankruptcy.
When the city of Stockton declared bankruptcy in 2012, there was a huge debate over the fate of city pensions. CalPERS argued at the time that since the state managed the pension, it had to remain intact. A judge said it was up to city officials to decide, and those officials kept the pension untouched, though retiree health benefits were eliminated.
Other governments may not be so sympathetic, Nation said.
“If you work for a local government, a city or a county or a special district...if I were employed there I’d be concerned. I wouldn’t be confident the city, county or special district might not declare bankruptcy. If that happens you as an employee would be subject to reductions,” he said.
But for now, state aid appears to be likely, and that at least indirectly helps pension systems.
“The funds that are coming from the federal government actually ensure that states’ underlying finances are solid, such that they can meet their obligations,” said Hoene.
“If their financial health is allowed to decline, many of them will actually reduce their payments into pension systems,” he said, “which will make the problem worse and make their states less financially viable in years to come, and that will be red states and blue states.”
This story was originally published March 8, 2021 at 5:00 AM with the headline "GOP targets California’s underfunded pensions in effort to sink Biden’s COVID stimulus plan."
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