Photo: Little Hoover Commission
Public pensions will bankrupt California if the state does not move aggressively to combat growing liabilities and collapse unsustainable pension models, according to a new study from the Little Hoover Commission, The government watchdog agency gives a grim picture of what lies ahead for state and local governments in California.
Overly generous benefit promises, wishful thinking and risky political attitudes have left Calfornia’s 85 public pensions systems dangerously underfunded. The state’s 10 largest pension funds – including the behemoth California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS)- faced a combined shortfall of $240 billion in 2010, according to the commission.
Investment returns are supposed to cover the lion’s share of pension payments. But when returns fall short of the nearly 8% needed to keep up with obligations – as they did in 2008-09 – state and local governments have to make up the difference.
Without a “miraculous” improvement in the investments of California’s 85 public pension funds, the report argues, state and local governments won’t be able to absorb growing pension costs without making massive, painful cuts to other services.
The only answer, the commission concludes, is to reduce the pension liabilities of current employees and give the state the authority to restructure its generous and unsustainable pension formulas. But in a state where public pension benefits are widely considered untouchable, this is much easier said than done.
As public workers gained more control over their pensions, they justified benefit increases by pushing funds to adopt more flexible investment strategies with higher risk/reward ratios.
Employer contribution rates have historically varied, but are expected to jump 40-80 per cent in the next 5 years to keep up with baby-boomer retirements.
The state's 10 largest pension funds - which cover more than 90% of state workers - had a combined shortfall of $240 billion in 2010.
Retirement costs now make up 4% of the state's general fund and often comprise a much larger portion of local government budgets.
The $146 billion teachers' pension system will go bankrupt by 2040 if the contribution model isn't changed.
Improved wages and benefits, investment losses, and a larger public-sector workforce all contributed to increased pension costs.
In the past five years, the number of CalPERS retirees with pensions at or above $100,000 increased by more than 230%, while the overall number of retirees rose just 17%.
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