New Stanford University Study Reveals California Pension Crisis is Bad Now, But Likely to Get A Lot Worse

David Kersten
Kersten Institute for Governance and Public Policy

Amidst a backdrop of an ever worsening “pension crisis,” Stanford University has released a new “bombshell” study that documents the “financial tail spin” that California state and local governments are struggling with as a result of spiking pension costs, but things will only get “worse” over the next decade, according to the report.

The report, titled “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030,” was authored by Joe Nation, Ph.D. who is a former Democrat State Assemblyman and leading expert on pension reform.

Nation has authored a series of major reports on the pension issue going back nearly 10 years to the Schwarzenegger Administration when the then-Governor first asked him to study the issue and produce a report.

The nearly 200-page report contains an in-depth examination of the financial impact of rising pension costs over the past 10 years, and examines the projected impact going forward to the year 2030.

The major case studies include the State of California, the California State Public Employees’ Retirement System (CALPERs), California State Teachers’ Retirement System (CALSTRs), and a number of local city and school district systems including the City of Los Angeles, counties of Alameda, Los Angeles and Marin, as well as Los Angeles Unified School District and Visalia Unified School District.

The report contains dozens of major sets of figures, graphs and charts, for all agencies studied, but the results are the same across agencies—a dramatic spike in public employer costs since the early 2000s, with higher costs projected through 2030 on the order of nearly a doubling of total “employer” costs from 2017-18 to 2029-30, which most agencies say are already wholly “unaffordable.”

The report details a few different scenarios—the “baseline” results which is essentially the overly optimistic assumptions assumed by the agencies, and an “alternative result” which assumes a more realistic annual investment return that is 2% less than the standard discount rate (usually 7% or 7.5% depending on the system) through 2028-29.

In 2002-03, the State of California’s total pension contributions to its main state employee plans CALPERs and CALSTRS was $1.6 billion.   This amount increased to $4.3 billion in 2008-09.

“In 2017-18, the state must contribute $8.5 billion, more than five times the 2002-03 amount.  Under the baseline projection, this total contribution increases to $17.3 billion in 2029-30; under the alternative projection, it reaches $19.5 billion,” states the report.

The State of California’s total pension expenditures (excluding local) have increased by 532% between 2002-03 and 2017-18.  This compares to total General Fund spending which has only increased by 58%, according to the report.

By comparison, total spending on “social services” has only increased by 4% over the period, and total spending on “higher education” has increased by 47% over the period.

“As pension funding amounts have increased, government have reduced social, welfare and educational services, as well as “softer” services, including libraries, recreation, and community services.  In some cases, governments have reduced total salaries paid, which likely includes personnel reductions,” states the report.

A closer review of the report illustrates that the situation is even more dire at the local levels of government where most public services are delivered, despite more limited revenue growth and ability to fund “unsustainable” cost increases.

Furthermore, it is a little known fact that roughly 2/3 of the California State Budget is transferred down to the local levels of government, which in effect masks the extent of the state’s “pension crisis” at the state level of government.

Most local agencies are projected to experience an approximate “doubling” or more of their pension costs between 2017-18 and 2029-30—despite far more limited revenue growth, and a number of competing expenditure priorities.

To illustrate, the under the realistic cost scenario the County of Alameda is projected to experience a near doubling of its “employer” costs from $300 million in 2018-19 to more than $600 million in 2029-30.  The County of Los Angeles “employer” cost is projected to go from $1.5 billion in 2018-19 to nearly $3.5 billion in 2029-30—a more than 200% increase.

Just last month, a number of local officials and administrators made a trip to Sacramento to plead with CALPERs to do something regarding skyrocketing pension costs, but the agency essentially shrugged off any suggestions that it might change its “business as usual” approach to “unaffordable” cost increases, according to a report by the Reason Foundation.

Perhaps what is most disturbing is that the state’s public employee unions continue to stand by their “head in the sand” of even denying there is a “major financial crisis” looming in the state’s pension system, and entire system of public finance for that matter.

Dave Low, chairman of the union-supporter Californians for Retirement Security, says that he expect it to “take decades” of higher contributions from employers for CALPERs and CALSTRs to “dig themselves out of the losses they suffered during the recession,” according to a recent Sacramento Bee report.

The unfortunate reality is that many California localities, possibly even the State of California, will continue to struggle for however many “decades” it takes this process to occur.  And many localities will likely be faced with “fiscal insolvency,” even “bankruptcy” as reported by public officials from the California cities of Oroville and Richmond in a series of recent media reports.

Something that Low and many public employee union leaders appear to misunderstand, or possibly just publicly deny, is that their positions clearly contradict the actual “facts,” and that it will be their members who bear the brunt of any financial downturn or collapse in the state and local pension system, which appears increasingly inevitable.

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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