Gov. Brown’s Proposed $6 billion Pension Payment is a Bad Investment

David Kersten
Kersten Institute for Governance and Public Policy

In his May Revise, Governor Jerry Brown (D) has proposed a complicated $6 billion fund shift to the California Public Employee’s Retirement System (CalPERs) that is intended to “reduce unfunded liabilities, stabilize state contribution rates, and save $11 billion over the next two decades,” according to the Governor’s May Revised Budget.

Don’t believe the advertising, this fund shift is a “red herring” that appears to be more about providing a sound byte for the Governor and California Legislature on the pension issue than really solving the state’s massive pension problem.

In politics, most politicians subscribe to the notion that if you can’t solve the problem you have to at least pretend that you are doing something about the problem, no matter how insignificant.

The truth is that it would be better and more honest for the Governor and California Legislature to do nothing, than consider enacting the fund shift as proposed by the Governor.

In short, this proposal is a bad investment that will not shore up the state’s insolvent public retirement fund.

This may not be altogether clear at first glance, but becomes clear if one examines the facts.

First off, this proposal merely continues the same line of reasoning that got us into this mess in the first place—that the state can afford to simply “buy” its way out of the pension crisis by allocating as much taxpayer dollars as possible to pay for mounting public employee pension costs and unfunded pension debt already incurred.

The unfortunate truth is that state and local governments do not have enough money, and will not have enough money in the future–absent significant tax hikes on the order of doubling the size of the public purse by my rough calculations—to pay for the unsustainable pension formulas that are currently on the books.

The state’s only way out of the pension crisis is to change the retirement formulas for current employees, which should include dramatically reducing benefit costs, raising the retirement age and increasing employee cost sharing.

“These retirement liabilities have grown by $51 billion in the last year alone due to poor investment returns and the adoption of more realistic assumptions about future earnings,” state’s the Governor’s May Revise.

Using the Governor’s own actuarial assumptions, this $51 billion in losses will actually cost another $100 billion in increased interest costs to pay down this debt over the next two decades—an estimated $150 billion plus hit to state taxpayers in one year alone!

With a dramatic increase of $51 billion in unfunded pension liabilities in one year alone—an amount nearly half of the size of the state’s annual General Fund revenues–what good will a one-time $6 billion payment do to restore stability to a public retirement system that is clearly insolvent?

It is almost comical to stand back and really think about this as a so-called “solution.” In the words of one famous fictional Wall Street trader “it’s a dog with fleas,”—which means it’s a terrible investment.

If CalPERs is going under why should state taxpayers be asked to invest another $6 billion of public funds in a failed system?

This “supplemental payment” is a drop in the bucket compared to the size of the annual projected budget deficits incurred at CalPERs over the past two years, and those projected for the upcoming several years, according to CalPERs actuaries.

This proposed $6 billion would initially be borrowed from a state pooled cash-flow fund called the “Surplus Money Investment Fund,” which is said to be worth $50 billion in short-term investments that currently earn about 1% annual interest, according to

“Roughly half of the $6 billion loan, covering general fund costs, would be repaid by the Proposition 2 “rainy day” fund approved by voters in 2014 that can only be used to pay long-term debt. The rest of the loan would be repaid by a number of state restricted special funds that can only be used for one purpose, such as transportation,” states the recent analysis.

The Governor’s rationale for making the extra $6 billion payment is that it would supposedly save the state $11 billion in interest costs over the next two decades by reducing CalPERs unfunded liabilities that were estimated to total more than $150 billion in 2016.

But again, this assumption is based on CalPERs bogus 7% assumed rate of return, compared to the 1% earned by the state fund in relatively safe investments. Last year CalPERs earned less than 1%, and not much more the year before, which is part of the reason why its unfunded liabilities have exploded and why the Governor’s calculations of “savings” should be questioned.

The Governor’s May Revise cites a “stock market correction” as one of the main risks to the California economic outlook, stating “valuations of companies are relatively high compared with historical benchmarks. Unless the federal government follows through with…a tax cut, the stock market could drop precipitously.”

Translation: the stock market could collapse at some point in the near future, leaving taxpayers on the hook for another bad investment in a failing public pension fund.

The state would be better served to leave the $6 billion where it is than to invest it in perhaps the riskiest public investment available—the insolvent CalPERs pension fund that is estimated to have lost more than $50 billion in the past two years alone, according to professors with Stanford University.

A smart investor would say that it would be better to just let the fund collapse than risk more public money trying to save it. But this is government we are talking about and government is notorious for making bad investments and then asking taxpayers to bail it out when things go south.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

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