The California Public Employees’ Retirement System just reported an impressive, well-above-average 14.8% return on its investments for the last year. It’s the highest annual return the nation’s largest pension system has achieved in a decade and great news for taxpayers because it improves the system’s funding and reduces CalPERS’ expensive debt.
Unfortunately, state lawmakers are already signaling their intention to eat up these gains by gifting new expensive pension benefit increases to influential public safety worker unions. With the state’s public pension debt and recent history as a guide, policymakers should know not to take good returns as an excuse to saddle taxpayers with more pension costs.
It’s like it’s the 1990s all over again. Riding the wave of a technological boom, market returns for institutional investors soared in the 1990s, with CalPERS reporting returns of over 20% in 1997 and its assets doubling from the previous decade. It was in this gilded backdrop that lawmakers found themselves at a crossroads. Do they use this good fortune to build up a buffer to protect the pension system and future taxpayers from any potential economic downturns, or do they spend the higher-than-expected returns to gift government workers generous pension increases?
California lawmakers chose the latter. In 1999, the legislature significantly increased government employees’ pension benefits without paying for them. Lawmakers assumed the good investment returns would keep coming, which proved disastrous.
Over the 2000s, the dot-com bubble burst, a housing bubble burst, and the Great Recession followed. CalPERS started to lose its surplus and piled up debt. By 2009, with lavish pension benefits promised but unpaid, CalPERS had $115 billion in debt.
Recognizing the state was near a point of no return, lawmakers, under the leadership of then-Gov. Jerry Brown, passed a landmark reform, the Public Employees’ Pension Reform Act (PEPRA) in 2012, which placed the state on the long and arduous path toward reducing debt and paying for the unfunded benefits already promised to workers.
PEPRA limits future pension benefit increases and makes large catch-up payments to reduce the massive pension debt. It is working. CalPERS’ funding has gradually improved. However, the state is still 10 to 20 years from paying down enough debt.
Rather than stay the fiscally responsible course, however, state lawmakers want to “party like it’s 1999,” as Prince sang. State leaders have introduced Assembly Bill 1383, which undermines crucial PEPRA guardrails, granting an unfunded pension benefit increase to first responders by reducing their retirement age. It also provides a significant benefit boost to all government employees making more than $160,000 annually. Currently, any compensation above that amount earns no additional pension benefits, but AB 1383 would lift that cap to $185,000, a massive gift to the highest-paid government employees.
The alleged purpose of the bill is to improve the retention of police and firefighters, but evidence shows there isn’t a retention crisis among these employees. According to annual survey data, the median tenure of California’s public safety employees has doubled since 1983. On average, they stay in the job for 13 years, also well above the national average of nine years.
Even more concerning, the legislature seems to be paying little attention to how to pay for these benefits now or in the future. CalPERS’ own analysis shows that AB 1383 would add $4.8 billion in costs. State and local governments, via taxpayers, would pay them.
Reason Foundation modeling finds that over 30 years, the bill’s best-case scenario would put taxpayers on the hook for an additional $9.3 billion—and that’s only in the unlikely case there are no stock market crashes or recessions over the next three decades. Factoring in the more likely economic conditions, Reason finds the bill would add $14.5 billion in costs to taxpayers.
CalPERS has $166 billion in debt. Its latest strong investment returns will reduce that a little bit. But it is concerning to see lawmakers ready to repeat their very expensive failures of the 1990s. Record market returns are great, but they’re not an excuse to hand out unfunded, costly pension benefit increases that taxpayers and state and local governments don’t have the money to pay for.
Zachary Christensen is a managing director of Reason Foundation’s Pension Integrity Project.