Two actions occurred earlier this week that guarantee Californians will pay higher taxes for fewer services in the future to satisfy the insatiable demands of our two-headed pension monster, CalPERS and CalSTRS.
The CalPERS board decided Tuesday that the state will increase its annual contribution to the pension fund by $400 million on July 1, ramping up to $1.2 billion in three years. This will raise the state’s annual payout to $5 billion a year to fund the retirement of government workers who aren’t teachers, a fund that is $100 billion in the hole.
Sensing the political backlash this is likely to cause, the CalPERS staff wanted to delay the increases until 2016, but Gov. Jerry Brown said such a delay would be “unacceptable” and would end up costing the state billions of dollars more in the long run.
Local governments and school districts, which currently contribute about $4 billion to CalPERS, get to delay the pain until 2016, and their increased contributions will be phased in over five years instead of three. Nevada County estimated it will have to increase its contribution by $1.3 million a year for five years. That means either program cuts or new taxes.
Then there’s CalSTRS, the state pension plan for teachers (administrators are covered by CalPERS). It will need a cash injection of $240 billion over 30 years to meet its future commitments, and the state Legislature held hearings this week on making a down payment of $4.2 billion next fiscal year.
And that $240 billion number is optimistic–it assumes CalSTRS can average a 7.5 percent return on its investments over the next 30 years (a rate of return Warren Buffet would happily embrace) and that there will be no future increases in pension benefits.
California is clearly reaching the point where these obligations are becoming unsustainable. Two cities have gone bankrupt in recent years, and each cited large pension obligations as major culprits.
The mayor of San Jose is pushing a ballot initiative to give governments more power to roll back pension costs, and that’s part of the solution. We’re also going to have to look hard at the possibility of converting defined benefit pensions to 401(k) plans, requiring government employees to contribute more to their pensions, and forcing agencies to take a tougher stance in negotiations.
All of this will require considerably more political will than currently exists in the state, but we cannot put ourselves in a position where the biggest obligation of government is to pay the pensions of retired workers.