Advocates of overhauling California’s troubled pension system for public employees couldn’t have chosen a more providential moment to launch their reform campaign.
The huge California Public Employees’ Retirement System is in deep financial doo-doo, having lost tens of billions of dollars in often-speculative investments, and is telling state and local officials it will need more “contributions.” Meanwhile, investigations are under way into multimillion-dollar payments to placement agents who arranged some investments.
With a public pension scandal simmering and their private pension benefits shrinking, voters will resent a CalPERS bailout. Indeed, a recent Field Poll indicates that voters are inclined to support pension reform, setting the stage for a high-stakes political battle next year.
The California Foundation for Fiscal Responsibility filed two slightly different measures last week to establish a two-tier pension system, reducing benefits for newly hired public employees. It’s clearly hoping for financial backing from one of the two billionaire Republicans running for governor next year. And it may get support from outgoing Gov. Arnold Schwarzenegger, who has tried, in vain, to overhaul the pension system.
Meanwhile, CalPERS, whose board is controlled by union members, desperately wants to minimize backlash from its investment woes. It’s promoting a “smoothing” plan under which its investment losses would be made up over 30 years, thus softening immediate impact on already strained budgets.
Financially strapped local governments appear to be opting for this easy payment plan, but Schwarzenegger is rejecting it, perhaps because if CalPERS sends a big bill to the state, it would enhance chances of passing the pending reform measure.
“By deferring pension contributions CalPERS would not only be gambling that its investment earnings in this economy will grow faster than its pension obligations but would also be using our kids’ money to do so because they will be the ones stuck footing the bill,” Schwarzenegger said when the CalPERS plan was unveiled.
While some other states have adopted smoothing, research by the Pew Center on the States indicates that it’s typically over a five- or six-year span, so California’s 30-year plan stands out like a sore thumb.
CalPERS’ assumed investment earnings rate, 7.75 percent per year, is more in line with other states but is too optimistic, critics such as Schwarzenegger financial adviser David Crane say. Crane calls it an “earnings assumption ungrounded in reality” and to achieve it, CalPERS is increasing its exposure to high-risk investments.
Given that history and with CalPERS’ own actuary saying the current system is “unsustainable,” it’s high time for the Legislature to conduct a top-to-bottom review of public pensions, rather than continuing its cowardly hear-no-evil, see-no-evil posture.
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