In the early 90's amid a booming economy that many believed would last for the foreseeable future, pension enhancements were granted that in retrospect were not well thought out for their long term ramifications. The dot-com bust and the greatest Recession since the Great Depression that started in 2008 brought a sense of reality to the longevity of good economic times. There is no one group or segment to lay blame; it was euphoric decisions made by most of our political and labor leaders of the time. So now we must face the results of those ill-fated decisions and hopefully learn from them.
California Public Employees Retirement System (CalPERS) is the pension fund that serves the majority of California's government employees. On April 17, 2013, the CalPERS board adopted a resolution that use "professionally accepted amortization methods to eliminate unfunded liabilities or surpluses in a manner that maintains benefit security for the members of the System while minimizing substantial variations in employer contribution rates".
For years, the term "kick the can down the road" has been used in many scenarios to funding obligations and pension funds being one of them. I as well as many others have used the term in many articles and speeches and now CalPERS has finally bit the bullet and defined just how far the "road" for unfunded pension liabilities will be – the year 2045. With the adoption of the resolution, we can expect CalPERS will be "fully funded" by 2045. This all sounds good for future generations but how do we get "there" from here?
In the past, CalPERS has been utilizing a 15-year smoothing and a 30-year rolling amortization period for contributions. The new method will employ a 5-year smoothing and a 30-year fixed amortization period. Smoothing as used here is the averaging payments (net of CalPERS gains and losses) to CalPERS over a period of time (5 years instead of 15). The move to a 5-year smoothing will show sharp increases in employer contributions. A smoothing technique defuses spiking in contributions and provides more predictable payments.
The rolling amortization allowed payments to be "kicked" down the road with no definitive payoff date. The 30-year fixed amortization guarantees that elimination of unfunded pension liabilities will have a definite elimination date -2045.
With the CalPERS implementation, some projections are that employer contributions will increase approximately 35% over the next 10 years with others exceeding a 50% increase. These increases in contributions are expected to put more financial burden on financially strapped municipalities and possibly more will be looking to join Vallejo, Stockton, and San Bernardino in bankruptcy proceedings. It is difficult to fault CalPERS for their action in not allowing unfunded liabilities to grow any further out of control but the fix has the potential for some undesired consequences. That is simplified view of the statistical methodology.
As a result of legislative action, Government (ultimately the taxpayers) has the legal responsibility for the sustainability of public pension funds (CalPERS) while private pension funds are allowed to go "broke". It is difficult to accept that public pension funds have a guaranteed rate of return while the private sector has no such guarantee. With more people living longer, public pensions and post-employment benefits will be a growing drain on public funds. Since these public funds are paid by the citizens in the form of taxes, how much will the taxpayer tolerate continual increases until they say "enough"?
It is difficult enough to look at the taxpayer, who has lost their job and have seen the value of their pension dwindle to virtually nothing or even gone broke. Then we in the public sector ask those same citizens to accept increased taxes for the pensions and post-employment health plans for those who have worked in the public sector.
Pensions for public employees have become an increasing controversial topic in recent years as local and state governments have struggled with rising costs in this economic downturn. It is estimated nationwide, that all public employee retirement benefit obligations exceed $2 trillion with California being in the worst position.
In 2012, Pension Reform legislation was passed affecting new hires; those hired after January 1, 2013 but did little to address the current situation. I wrote a 2-part article that appeared in July and August of 2012 that addressed pensions and their effect on the financial situations of municipalities. I remain as concerned now as I was then as to the financial viability of all governmental finances as we are faced with shrinking revenues and increasing expenses which include the unfunded pensions and post-employment benefit packages.
I would appreciate your comments on this and other issues by emailing me at email@example.com or 650-573-7359.
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