When the taxpayer is backing up the entire liability for the massive pensions received by public employees who are part of the California Public Employees Retirement System, then CalPERS officials are exuberant about the stock market. They insist that a predicted rate of return of 7.75 percent is perfectly realistic. But when their own funds are on the line, CalPERS can be extremely conservative as it embraces one of the lowest annual return rates imaginable: 3.8 percent.
In essence, the state’s largest pension system has admitted — through its actions, although not its words — that the most vociferous pension critics have been right all along. Yes, the pension debt is much higher than CalPERS has declared and its assumed rate of return on its investments is much higher than it should be.
CalPERS conceded this quietly when it changed the way it handles local governments that want to exit the CalPERS fund. Some localities want to leave as CalPERS wallows in unfunded liabilities and faces scrutiny over allegations of corruption and cronyism.
“Now that a swarm of local governments wants to abandon the floundering retirement trusts, the state plans are willing to credit only a 3.8 percent expected return,” explains former Orange County Treasurer Chriss Street. If CalPERS used that 3.8 percent number rather than the rosy 7.75 percent figure for calculating its overall pension liability, he argues, the state retirement plans’ “published $288 billion in pension shortfall would metastasize into an $884 billion California state insolvency.”
This is blockbuster news, although the unions and CalPERS officials are doing their best to obscure what it means. As pension writer Ed Mendel explains the CalPERS rationale for the change, “After a plan terminates, there is no way to get more money from the employer … The new safeguard increases the money an employer must set aside to offset or ‘discount’ future obligations.”
Exactly. CalPERS knows that once a locality exits its plan it can no longer grab money from future taxpayers or spread out its debt into the future. So it must assume a rate of return that assures that it gets its money back. That is the same argument that pension critics have been making with regard to taxpayer dollars. We want the government to only make promises that it can afford — not foist an uncertain amount of debt on future taxpayers.
With governmental defined- benefit retirement plans; the higher the predicted rate of return, the better funded the retirement plans appear to be and the less political pressure the funds get for their pension debt.
Ironically, as Street pointed out, the rate-of-return number CalPERS adopts for its own money is even lower than the suggested number that Stanford University provided in a study CalPERS maligned last year.
Aptly called “Going for Broke,” the study pinned the unfunded pension liability, or debt, for California’s three main pension funds at more than $500 billion. CalPERS and the unions slammed the results, claiming that it was absurd for Stanford to calculate the pension debt based on a piddling rate of return of 4.1 percent.
Instead of listening to well- pensioned union apologists, we should look at how CalPERS handles its own dollars.
Better yet, why don’t we just remove all the risk and institute defined-contribution (401(k)-style) plans for government employees. Let them live the way the rest of us do — and assume their own risk for their own retirement portfolios?
Steven Greenhut is editor of www.calwatchdog.com; write to him at firstname.lastname@example.org.