Governor Jerry Brown wasted little time upon his return to Sacramento pushing a pension reform plan that, in his own words, would change the landscape of California’s pension woes.
“These pension reforms will go a long way toward making our pension system more sustainable and more fair to the taxpayer and to the employee,” Brown told a group of reporters last October.
Fast forward a year, and California has enacted pension reform legislation that contains many
of the governor’s chief proposals: a cap on benefits for future hires, a later retirement age, a rolled- back pension formula and higher contributions from some state employees.
But will the highly-publicized reforms actually make a dent in the state’s mushrooming unfunded liability, and if so, can Californians expect substantive change?
“I think it goes in the right direction, but it definitely does not go far enough,” said Mike Polyakov,
research director for the non-profit group California Common Sense in Los Altos.
Polyakov explains that the roughly $50 billion in anticipated savings won’t take place for another 20 or 30 years, as most of the reforms affect future employees, not current ones.
Critics of Brown’s plan argue that comprehensive pension reform has to do more to address current employees’ benefits.
At times lost in the discussion, however, is another salient point about how pension funds maintain their solvency- from employee contributions, government contributions and investment returns.
Brown himself has pegged investment returns as high as 75 percent of a fund’s value.
So how have California’s largest funds, CalPERS and CalSTRS, performed recently?
Last year proved a difficult one for both funds, with CalPERS earning a one percent return and CalSTRS not faring much better with a meager 1.8 percent return.
Moreover, since 1999 both funds have seen their 5-, 10-, 15- and 20-year averages trend downward.
This should capture your attention because a fund’s returns directly affect its unfunded liability.
Right now, California has a reported $162 billion unfunded liability among its largest funds,
*if the pensions fetch a 7.5 percent return.
Drop the rate of return down to a more conservative 4.15 percent, and the unfunded liability balloons to $500 billion.
“Pension obligations are virtually irrevocable so they’re going to have to be paid no matter what,” Polyakov said.
He advises a more conservative discount rate, or how much the fund will have to earn to cover its obligations.
“It’s all a matter of perspective,” Polyakov added. “CalPERS would argue that historically their assumptions are well-grounded [having returned close to 8 percent]. The question is, of course, moving forward can we rely on history to predict the future?”
Edd Fong, spokesperson for CalPERS, told NBC Bay Area that pension numbers can look however you want them to look, depending upon how figures are manipulated.
“The point is you have to keep in mind a pension fund is a long-term endeavor,” Fong said.
“Someone working for the government is going to be working for 30 or 40 years before they retire,”
he continued, “and if you go back and look over the longer-run, over 20 years, our average return is
Fong explained that CalPERS has a very systematic approach to determining its discount rate, including talking to investment professionals, examining historical returns and running computer simulations for thousands of possible outcomes.
Ultimately, CalPERS and CalSTRS have settled on a 7.5 percent return for the immediate future.
That figure is right in line with what the funds have returned historically, but substantially more optimistic than performance over the last decade.