Representing local government, I recently was appointed by Gov. Gavin Newsom to the CalPERS Board of Directors
. Few issues confronting local governments are as significant — or as frequently misunderstood — as our employee pension and health benefit responsibilities.
Following my appointment, I was greeted by two messages. From my friends in public employment: “Congratulations! You’re going to save my pension, aren’t you?” And from my friends serving on local city councils: “Congratulations! You’re going to save my budget, aren’t you?”
There’s the conundrum. We’ve made pension promises to nearly 2 million CalPERS members, who have kept their part of the bargain, done their jobs and paid their required portion of their benefits. But keeping our part of the bargain has become increasingly difficult. Nearly every city and county is facing challenging pension issues.
According to a 2018 League of California Cities study, on average city pension contributions are expected to double by FY 2024-25. And that assumes CalPERS meets its 7 percent investment target.
Many factors led to CalPERS' current state
How did we get here? Pensions, public or private, depend primarily on investment earnings. Over the past 20 years, 59% of pension funding has come from investment income, 28% from employer contributions and 13% from employee contributions.
For most of its 87-year history CalPERS followed a conservative investment strategy weighted towards fixed-income investments: Treasury bills, corporate and municipal bonds. With T-Bill rates as high as 14% in the early 1980s, achieving targeted returns of 8% and higher was not a heavy lift.
But since 2000, T-Bills rates have fallen dramatically — they’re now barely above 2% — and CalPERS has moved to a riskier equity, or stock, dominated portfolio. CalPERS suffered greatly from the dotcom bust and the Great Recession. From a high of 128% in 1999, CalPERS’ funding level fell to 61% in 2009.
Today, CalPERS is about 70% funded. It needs to be much higher. Getting there requires a much sharper focus on long-term investing. After some false starts, CalPERS now has a leadership team committed to and capable of managing a long-term investment strategy.
However, investments aren’t the full story.
A costly miscalculation
In 1999, based on CalPERS’ super-funded level and its history of strong investment earnings, the Legislature substantially increased the benefit formulas for state employees. The CalPERS board president assured everyone at the time that the changes would not cost a “dime of taxpayer money.” Subsequently, local governments across the state increased their pension calculation formulas. (Full disclosure: I am a retired California state worker and I benefited from the changed formulas.)
Labor organizations supported these changes, and local governments willingly adopted them. The fact is we all did this together
and the cost estimates were wrong.
In 2012, the Legislature and the governor acted to correct the mistake, passing pension reform that reduced benefits, largely to pre-2000 levels.
The challenge facing California public agencies is managing a cost arc that for more than a decade will continue to increase, before descending when most public employees will be individuals who were not on the payroll before 2012.
My colleagues on the CalPERS Board have taken steps in recent years to address the problem.
This rising cost of pensions are serious, but with prudence and cooperation they are resolvable. CalPERS and our investment team must remain focused on investment returns. Local government needs improved tools to manage the pension cost arc. And we need to deliver on the promises we made