By Chris Reed.
Last week’s announcement by the California Public Employees’ Retirement System that it had strong 11.2 percent returns on its investment portfolio in 2016-2017 after terrible returns the two preceding years prompted ebullience from the pension giant’s supporters.
Sacramento Democratic insider Steve Maviglio and theCalifornians for Retirement Security – a union-backed group that opposes any effort to change public employee pensions – shared a Twitter post about how the news “should quiet pension bashers.”
But credit ratings agencies, actuaries and investment experts aren’t likely to see the news as reason to change their grim view of CalPERS’ medium- and long-term prospects. Even with the strong year, CalPERS still only has 68 percent of funds in hand to cover its pension obligations – a roughly $100 billion shortfall – and that’s based on a forecast of 7 percent annual returns that CalPERS’ own consultant said should be reduced to 6.2 percent.
Meanwhile, local governments around the state are in no mood for happy talk about the nation’s largest public pension agency. Their required CalPERS’ pension payments are soaring and appear likely to keep increasing for years to come – even if CalPERS achieves its 7 percent return goal. Aging public agency work forces are swelling the ranks of retirees and “smoothing” practices that phased in CalPERS rate increases over the last 15 years no longer offer much of a cushion to governments’ bottom lines.
Modesto official: CalPERS status quo will collapse
In May, Joe Lopez, Modesto’s acting city manager, said the city eventually wouldn’t be able to afford its CalPERS bill, which will nearly double over the next eight years.
“Ultimately there is going to have to be a substantial change made to the way the pension system is run,” Lopez told a City Council budget committee hearing, according to the Modesto Bee. “We can’t continue to rely, CalPERS can’t continue to rely, on revenue [from cities and its other public sector members to meet its pension obligations]. There is going to have to be substantial changes to the actual benefit packages if these are ever going to be sustainable.”
There are similar worries in many small cities around the state.
Last month, Chico Councilman Randall Stone – a financial planner – predicted CalPERS would eventually collapse as the benefits it paid out exceeded the money it was taking in.
The grim assessment was triggered by a report showing the city’s CalPERS bill will go up about $370,000 in 2018-19, $803,000 in 2019-20 and nearly $2 million in 2020-21 alone.
“I think generally speaking, the community doesn’t understand what a time bomb this is,” Stone told the Chico Enterprise-Record. “You should be screaming with your hair on fire from the rooftops.”
In May, the Bay Area News Group reported that three small East Bay towns – Pittsburg, Walnut Creek and Martinez – had to cut several agencies’ budgets for 2017-18 to pay their CalPERS bills. And these cuts are even before the large pending CalPERS hikes.
In March, the Ventura County Star reported on how local cities were reeling because of the CalPERS hikes. Tiny Port Hueneme’s pension bill went from $774,000 in 2014-15 to $1.3 million in 2017-18 and will reach $3.2 million in 2022-23 – more than quadrupling over an eight-year span.
SEIU leader: Pension shortfall like drought
But union officials have not expressed sympathy with struggling local governments. In a June 26 op-ed for the Sacramento Bee, Yvonne Walker, president of the Service Employees International Union Local 1000, mocked “doomsday predictions about California’s public worker pension funds.” She likened the recent poor CalPERS returns to the state’s drought, which came to an abrupt end this winter.
This analogy – and Walker’s long-term optimism – prompted a tart response from David Crane, a financial expert and former aide to Gov. Arnold Schwarzenegger.
“No financial expert can present any real evidence showing that CalPERS can grow its way back from its current 63 percent funded ratio to anywhere close to 100 percent,” Crane wrote on the Medium website.
The 63 percent funded figure went up to 68 percent after CalPERS’ good returns were noted, but Crane stands by his dismissal of any optimism about CalPERS recovering from its current woes.