The nation’s largest state pension fund, the California Public Employees’ Retirement System, still is reeling from bruising publicity it received after it slashed the pensions for workers in the tiny Sierra Nevada town of Loyalton (population 862) and in the now-defunct East San Gabriel Valley Human Services Consortium.
Public employees across California understandably were spooked after reading news stories about the plight of Loyalton’s four retirees after the town exited the retirement system in 2013. And nearly 200 retirees in that San Gabriel consortium are losing as much as 63 percent of their retirement pay because the consortium, known as LA Works, closed its doors and stopped making payments.
But leave it to CalPERS to view that state of affairs as a public-relations matter rather than a CalPERS-created policy problem. At the pension fund’s recent meeting, its board proposed finding a sponsor for a state bill that would require agencies to notify their employees when they intend to exit the pension fund. The goal is to shift the blame to cities and districts that rely on CalPERS to administer their pension benefits.
The proposed legislation shows that CalPERS “would like someone else to deliver the bad news when local governments quit paying their bills and put a retiree’s pension in jeopardy,” reported the Sacramento Bee. CalPERS is capable of keeping pensioners posted, but there’s nothing wrong with giving retirees additional information given the months of uncertainty they endured.
But the CalPERS proposal doesn’t go nearly far enough. Any new law ought to include myriad other disclosures, too. Namely, retirees — and maybe taxpayers, too — ought to be informed about the size of the state’s pension debt and the frighteningly low rate at which CalPERS is funded. They ought to be told why public services are gutted and local taxes keep going up.
But the fund probably wouldn’t be too thrilled about those suggestions, just as it rejected recent efforts by Sen. John Moorlach, R-Costa Mesa, to force it to provide cities with more actuarial calculations. CalPERS said no even though hard-pressed city officials came to a Sacramento hearing to plead with them to provide the data.
Loyalton voted to exit CalPERS because the town couldn’t afford the payments. LA Works exited because it shut its doors in 2014. When they left, CalPERS slammed them with massive bills. Loyalton was assessed a $1.66 million “termination fee” it couldn’t possibly afford given its $1 million annual budget.
Apparently, CalPERS wants retirees to believe that it’s the local agencies’ fault for leaving the fund, without mentioning that it’s the pension fund that put them in their current bind. The issue revolves around some eyes-glaze-over accounting known as the Terminated Agency Pool, but the details say much about how CalPERS operates (hint: for the benefit of union members).
In the private sector, most employees receive 401(k) plans. The employer deducts money, sometimes makes a contribution. The money is invested in a mutual fund. If returns are good, the employee benefits and vice versa. In the public sector, employees receive a “defined benefit.” They are guaranteed a payout based on a formula, regardless of how well the pension fund’s investments may perform. The “unfunded liability” is the difference between what’s promised and the money available to pay for those promises. Taxpayers are on the hook for that shortfall.
The funds invest the dollars and predict a rate of return. Higher returns mask the size of the liabilities and enable governments to ramp up benefit levels — or at least avoid trying to trim them. The fund assumes a hefty rate of return of 7 percent (down from 7.5 percent). But when an agency wants to leave, CalPERS sticks them in a separate fund for terminated agencies, where it only predicts a rate of return of around 2 percent. Local agencies get a bill for the difference.
In other words, the union-controlled fund is bullish when taxpayers’ money is at risk. The fund assumes high rates, which keeps the gravy train chugging along. If there’s a shortfall, they increase cities’ fees or take more money from the state general fund. But when agencies leave, CalPERS no longer has a way to make up for any future losses. So when its own money is on the line, it becomes miserly and assumes a piddling rate of return.
Everything CalPERS does is carefully audited, so it knows how much a local agency has paid into the fund, how much it earned and how much it paid out. CalPERS can calculate a balance and work out a plan with the agency to pay the difference. Instead, CalPERS “negotiates” with these agencies in a way that’s more reflective of negotiations between a mugger and victim. The fund does so because it fears other agencies will head for the exits, too.
Can someone sponsor a bill that discloses those facts to retirees and the public?
Image by Aaban