Public Employee Pension Crisis Threatening Cities’ Continuation

The lion’s share of municipal governments in California, many of the state’s 58 county governments and the state government itself are on a collision course with fiscal reality that is threatening to bankrupt scores or even hundreds of political jurisdictions or entities and reduce the future provision of public services to critical levels or eliminate them entirely.
The circumstance comes about as a consequence of past and current commitments to provide lucrative pensions to public employees, such that in some of the state’s political subdivisions taxpayers are already paying retired workers more than they are paying ones who are currently employed. By the early 2020s just about every city in the state participating in the California Public Employees Retirement System other than the most newly formed ones will be paying out more in pensions than they will be paying still-working employees.
The beneficiaries of this arrangement – public employees already retired or set to retire over the next three decades – were able to forge for themselves the generous benefits over the last two generations by means of pooling their union dues to create political action committees which then made substantial donations to politicians at virtually every level in California politics. The politicians receiving this largesse have included federal office holders such as senators and members of the House of Representatives, state officers from governors, lieutenant governors, attorney generals, controllers, secretaries of state, state senators, assembly members, county officials such as members of the board of supervisors, sheriffs, district attorneys, treasurers, controllers and assessors, and local politicians such as mayors and council members, as well as school board, water board and fire board members. By supplying these politicians with the lifeblood of politics – money with which to run their election campaigns – these public employee unions have essentially purchased the indulgence of the elected officials who vote on setting the salary and benefits for those public employees. In case after case after case throughout the state, politicians have allowed satisfying their major political donors to take precedence over tending to the long term financial health and fiscal viability of the agencies they head.
In California, the largest pension fund entity is the California Public Employees Retirement System, known by its acronym CalPERS. While some governmental entities, including San Bernardino County, have independent or joint systems to oversee the pension funds for their employees other than CalPERS, the lion’s share of government employees in California – 1.6 million of them – have their pensions tied up in the California Public Employees Retirement System.
CalPERS oversees a retirement trust fund which relies on two primary revenue sources: ongoing annual mandatory contributions from the governmental entities employing CalPERS members and the proceeds from investments CalPERS makes.
Per laws passed by the legislature, the members of which were and are beholden to the CalPERS political action committees that provided them with a major portion of the campaign money they used to get into and remain in office, when CalPERS fails to meet its investment earning goals based upon the performance of the stocks and bonds in which the system has invested, then the state government and thousands of local government agencies and school districts are required to increase their mandatory contributions to the pension trust fund.
In previous years, CalPERS set an annual earnings goal for its investments of 7.5 percent. In years when the stock and bond markets were booming, state and local governments needed to come up with no more than the minimal mandatory contributions built into their budgets – some 12.7 percent of standard government budgets, on average – in order to keep the California Public Employee Retirement System afloat. But in those years when CalPERs investment earnings fell short of the 7.5 percent goal, those governmental entities had to make up the difference, meaning providing money in addition to their mandatory annual contributions. For most of the last decade, these governments have been required to make those additional payments, in nearly every case increased contributions exceeding ten percent and in some cases 20 percent of what they were already contributing.
This drain on those governmental entities’ available revenue, in particular the revenue available to cities – has resulted in those agencies digging into their dwindling reserves or reducing services or otherwise functioning on budgets that were unbalanced, and in some cases engaging in a combination of two or all three of these activities. In the cases of those cities or agencies with thin reserves, this has pushed them closer and closer toward insolvency.
Now, with CalPERS struggling under a heavier and heavier burden as the roster of retired employees grows and life spans are increasing so that more and more retired employees live into their 70s, 80s and 90s, the amount of money demanded by the ever-consuming CalPERS machine continues to escalate, even as the stock and bond markets sputter and reaching the 7.5 percent earnings goal, which was downrated a few years back to 7 percent, often looms beyond reach.
In the face of that, the CalPERS board recently took steps to ensure that the pension fund remains solvent, moving to change the projected term for recouping investment losses from three decades to two decades. That policy will become effective next year. This has meant that the state government and all of the local government agencies and school districts participating in CalPERS will have to increase their already increased mandatory contributions to the retirement trust fund, which is threatening to push some of the cities that are already considered to be financially marginal even closer to the insolvency precipice. Even ones who are in better shape fiscally at present will see constant inroads on their available revenues in out years, such that they too may be at the door of either bankruptcy or zero functionality in another decade or so.
At the turn of the millennium, CalPERS was more than 100 percent funded. In response to confident pronouncements by CalPERS officials that the pension system would remain fully funded for the next several decades, elected officials in hundreds of locales complied with union requests to increase salaries and the benefit formula for public employees. But with the economic downturn that began in 2007 and which continued with the degradation of stock prices and persisting listless stock performances in numerous sectors since, the CalPERS trust fund lost in the neighborhood of $100 billion over the next seven years. Even prior to that, prognosticators were warning that the system could not sustain itself. There were efforts to redress the crisis, including the lowering of earnings projections from 7.5 percent to 7 percent and the creation of a two-tiered retirement system that not only substantially decreased the pension benefits for those government workers hired after January 1, 2013 but required them to contribute more money toward their retirement plans.
Those reforms, alas, appear to be too little too late as government employees under the old system will continue to retire in ever greater numbers until 2045 or so, putting more and more strain on cities, agencies and the state, monopolizing ever more money. There have been mixed signals from state courts and federal bankruptcy courts, with some judges ruling that retirees have no greater standing than a city’s or governmental entity’s other creditors in a bankruptcy scenario and that retirees must stand in line like everyone else owed money by a collapsing city during a bankruptcy process, while other court rulings have upheld the so-called “California Rule,” which is based on a 1955 state court decision which held that pensions offered to governmental employees at the time they are hired become “vested rights” protected by contract law that cannot be cut unless offset by a new benefit of comparable value.
Pending cases before the California Supreme Court could result in a landmark change in the California Rule, opening the way for modification, i.e., reduction of existing pension plans. One potential modification might be limiting pension payments to those that can be defrayed by the money available to CalPERS through the pre-scheduled contributions from cities and agencies and its investment performances without requiring additional contributions if investment goals are not achieved.
In the alternative, if lawyers for CalPERS succeed in convincing the California Supreme Court that pensions are entirely sacrosanct and cannot be reduced, in a worst case scenario cities throughout California might become insolvent en masse, revoking their charters and abdicating their existence as a last means of coming to terms with the financial demands upon them, surrendering their authority in whole to the counties in which they are located. Such a crisis would likely lead to the implosion of CalPERS altogether and retirees forfeiting their pensions.
-Mark Gutglueck

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