In a 2023 article, Psychology Today looked at the reasons why most people avoid talking about the proverbial “elephant in the room.” There’s often a taboo about mentioning some large, obvious problem. But the magazine failed to mention an explanation that’s relevant for today’s topic: the political cost is too high to mention it, so everyone treats the large beast like a potted plant.
We’re referring to a giant obstacle to California budgets that lawmakers have refused to mention for a decade: the state’s pension debt. The California Public Employees’ Retirement System, or CalPERS, is funded at only 72%. That means the fund has less than three-quarters of the funds needed to make good on the pension promises made by local and state governments. Its funding levels are dependent on stock-market returns.
Recent market drops—propelled by the Trump administration’s on-again, off-again threats to impose massive import taxes on Americans (tariffs)—are reminding California policy makers of a financial challenge that’s getting harder to ignore. For instance, the San Diego Union-Tribune reported last week that San Diego’s pension board approved a record-setting $533-million pension payment. It’s $44 million higher than last year and comes amid a $250-million budget shortfall.
“Because the market has been so volatile lately and because it plays such a key role in the city’s annual payment, the actuary presented positive and negative stock scenarios … that showed next year’s payment could range from $517 million to $563 million,” the newspaper reported. If the market does go into correction mode, then every California city and the state government will be scrambling to come up with billions of extra dollars.
San Diego granted “generous” government pay raises in 2023, which will exacerbate the problem. This is reminiscent of the past, when California officials ramped up pay rates and boosted pension formulas during soaring economic times, only to face reality when a recession hit. A dozen years ago, that gave life to a pension-reform movement that sought to rein in the growing liabilities. San Diego passed a major reform measure in 2012, but a union-friendly state agency and the courts gutted it. Reforms in other cities also were overturned.
Then-Gov. Jerry Brown responded with modest pension-reform law (the Public Employees’ Pension Reform Act of 2013). It helped, but not by a lot. Since then, the Legislature and local cities have essentially declared the pension issue a non-issue and have gone about their usual business of taxing, spending and raising public-employee pay rates. The bipartisan group of pension reformers took on the state’s unions and repeatedly lost. Lesson learned.
So the problem continues to grow. Last March, the San Francisco Chronicle reported on the small city of Carmel-by-the-Sea, which is paying its retirees more than its current workers—and had amassed an astounding $100 million in retirement liabilities including healthcare benefits.
Per the newspaper, big cities face an astounding mess: “San Jose faces $4 billion in unfunded pension and health care liabilities. San Francisco faces a staggering $7 billion. California’s total unfunded pension liabilities are an eye-watering $250 billion.” Los Angeles’ combined retirement debt is around $15 billion.
We expect the union-dominated Legislature and city councils to keep ignoring the ever-fattening elephant, but soon they might not be able to maneuver around it.