CalPERS Making Strides to Meet Pension Costs

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Later this week, CalPERS’s board is expected to approve a staff
recommendation to require more money from the state in order to meet
pension costs, a decision it had earlier postponed.  The board should
be commended for breaking a troubling trend and lowering total pension
costs to boot.

The troubling trend is "cost shifting," a technique by which a
generation issues debt to cover operating expenses and then shifts the
obligation to service that debt to future generations.  

For years, the
state has been doing just that by making promises of lifetime pensions
and healthcare after retirement but then not contributing enough money
to meet those promises.

This leaves shortfalls to be picked up by later
generations who then have less money with which to meet their own
costs, just as the state’s payment of more than $6 billion for
retirement costs this year is arising in large part because of past
under-funding and causing cuts to our programs.  While this week’s step
will be a small one (the state has already built up $550 billion in
unfunded retirement pension and healthcare debt as a result of
under-contributing), it’ll be welcome nevertheless.

In addition, total pension costs will be lowered because failing to
make that $700 million payment this year would add an extra 7.75% of
cost every year the payment is deferred, compounded.   I.e., failing to
make that $700 million payment now would mean $754 million would have
to be contributed next year, $813 million if made in two years, and so
on. This is why cost-shifting is triply cynical: not only do we shift
our costs to our kids but they have to pay interest, and expensive
interest at that.

But one of the reasons given for the likely decision is equally
cynical.  Last week an article in the LA Times on this subject reported
that CalPERS’s board is more comfortable with the increased
contribution because much of the cost would fall on special funds
rather than the state’s general fund. That’s a false distinction. When
special funds incur higher employment costs, citizens get hurt because
either fees must go up or services paid for by those special funds must
go down, or both. Also, greater costs at special funds reduce reserves
potentially borrowable by general funds. Thus, while we should applaud
CalPERS’s board for its action, we shouldn’t be encouraging the use of
special funds as some sort of low-impact repository to which costs
should be shifted whenever possible.

The next generation will have something to celebrate if CalPERS’s board
supports its staff recommendation.   They’ll have even more to
celebrate when CalPERS reduces its investment return assumption (now
the principal tool used to shift our employment costs to them) and
amortization periods (used to shift our investment losses to them), but
those are subjects for another day.

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