CalPERS Return Rate Decision Could Lead To Tax Hikes

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

When California voters hear calls for tax increases in the near future they should think of pensions. That truth has never been clearer now that the California Public Employees’ Retirement System board voted to establish a more realistic return rate on its investments. The end result of this action is that state and local governments will have to chip in even more money for public employee pensions.

For years, defenders of the government retirement system justified healthy retirement payouts by claiming that CalPERS investments will bring an annual return of 7.5 percent. That assertion was defended despite the fact that over the last 20 years investment returns averaged only 6.9 percent, with the current annual return bringing in only 2.3 percent.

Facing market realities, the board lowered the estimate to 7 percent, a mark that still may be unattainable.

For taxpayers, the number change likely means more dollars from state and local government budgets will be directed to cover pension liabilities and less will be available to meet services supplied by government. The city of Los Angeles already dedicates 20 percent of its budget for pension obligations, Anaheim 13 percent, Long Beach 11 percent and San Jose as high as 27 percent. These numbers will only increase after the CalPERS board’s decision.

Pension funds come from employee contributions, retirement system investments or government (read: taxpayer) contributions. If CalPERS’ new number more accurately reflects a smaller return on investments and employees resist contribution increases necessary to manage the retirement deficit, that leaves taxpayers on the hook.

Voters will never see a pension tax measure on the ballot. The effort to meet pension obligations will be subtler. Want more police services? Raise your taxes. Want to improve schools or parks? A tax increase is called for. A $10 car registration increase goes into effect in 2017 specifically to deal with California Highway Patrol pension obligations.

In the November election, about 80 percent of the approximately 430 local tax and bond measures passed. Most of the tax measures were dedicated for specific purposes, but, in government, dollars are fungible. Covering a service cost with a new tax allows freed up money to be used for pensions.

For the business community, the CalPERS board’s decision could result in broader efforts to seek more revenue from businesses in the form of business property tax increases or other taxes on business products and services.

The new Trump administration has talked about tax reform, including reducing the United States’ highest-in-the-world corporate taxes. If that were to occur, it is probable that America’s businesses would become more valuable, resulting in higher payouts to shareholders, including CalPERS. More money to cover those pension costs from investments would ease the need to increase government or employee contributions. It’s ironic, then, that many public employee unions lead the charge for business tax increases when, in the end, profitable businesses may aid in covering pension debts.

But until anything that positive occurs, taxpayers should ask if any move to increase taxes is simply a way to deal with governments’ pension obligations.

Originally published in the Orange County Register.

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