California Ignores Growing Public Pension Crisis

The two major California public pension funds have a combined unfunded liability of about $72 billion (PDF- Pg. 41). Yet Gov. Brown just postponed a pension reform ballot measure and instead is making vague promises about how change will come while offering no concrete proposals.

A Field Poll says voters are not too concerned about pension reform, favoring mild changes and opposing eliminating collective bargaining. However, voters in San Jose and San Diego recently overwhelmingly approved pension reform, including eliminating benefits for existing workers (or making them pay more for them). Thus, the issue of pension reform is beginning to get major visibility in California, a trend that will continue as the crisis grows.

The Public Employees Retirement Fund has an unfunded liability of $16 billion while the State Teachers' Retirement Fund Defined Benefit clocks at a whopping $56 billion. This is in addition to their accrued liabilities. While unfunded liability can be calculated in various ways, is there anyone who genuinely believes PERS and STRS will somehow be able to fund these enormous sums?

In recent years, the combined employer, employee, and state contributions to STRS have been significantly less than actuarially required amounts. As a result, and due in part to investment losses, the unfunded liability of STRS has increased significantly. This unfunded liability is expected to continue to increase in the absence of legislation requiring additional or increased contributions.

It’s difficult to understand how the situation at STRS was allowed to get so dire. Were it a privately managed fund it is reasonable to assume new management would have been brought in long ago. The bad news for Californians here is that “additional or increased contributions.” By law, if STRS and PERS have a funding shortfall, they can demand that others pay for it, including municipalities and the state. The tab for this will inevitably be paid by taxpayers.

But what if a municipality goes bankrupt? Then everything changes. It will then matter quite a lot more what the bankruptcy court says, with STRS and PERS being creditors in a line with everyone else. This is not an abstract point. In the past two weeks Stockton, Mammoth Lakes, and San Bernardino have declared bankruptcy. It is certain there will be more municipal bankruptcies in California, with public pension liability being a major cause.

California really does seem to sleepwalk through crises. The budget deficit never really gets resolved. A crucial water bond just got punted to 2014. The legislature and voters mostly admit something must be done about the public pension crisis, but then not much happens.

Sooner or later all these crises will be impossible to escape from. It would be far better if we confront them now, at least partially on our terms, rather than pretend and extend until circumstances force the issue.