About Public Pensions in California
1. Every California household owes $30,000 in public pension debt. The unfunded liabilities of California’s three largest state pension systems – CalPERS, CalSTRS and the UC Retirement System — are between $142 billion and $500 billion. Investment return assumptions account for the difference. CalPERS just lowered its rate-of-return assumption from 7.75 percent to 7.5 percent, still considerably higher than private pension systems (5 percent) or federal employee pension plans (5.75 percent). CalPERS earned 1.1 percent last year and averaged a 5.7 percent return over the past ten years.
Local pension systems are 53.6 percent funded with a shortfall of more than $130 billion. The federal government will intervene when the funding ratio of a private pension plan drops below 80 percent. (Sources follow)
2. Pension costs are the fastest growing municipal expenditure and will consume 17 percent of city budgets this year. Pension costs grew 11.4 percent per year betwe
en 1999 and 2010, faster than any other municipal spending category. By contrast, education spending increased 5.6 percent, public protection 5.3 percent, recreation 5.3 percent, public assistance 4.5 percent, health and sanitation 4.2 percent.
3. Retirement benefits paid to local government employees are higher than the benefits provided to teachers and employees of large corporations. A city employee who begins a career at age 27 with a $45,000 starting salary and receives normal wage increases can retire at age 57 with retirement benefits totaling almost $1.2 million. A similarly situated teacher will receive benefits valued at $500,000 and an employee of a large corporation less than $400,000.
4. Many local government employees contribute little or nothing to their retirement plans. Pension contributions have increased for state government employees in recent years, but many local government employees still contribute little or nothing to their retirement plans. In many cases, labor agreements were negotiated to require public agencies to pay employee retirement contributions in lieu of higher wages. Local governments would save about $2 billion per year if employees split the cost of their retirement plans with taxpayers.
5. Teachers’ pension benefits aren’t excessive, and teachers already contribute almost half the cost. The value of pension benefits among different employee classes varies widely. For example, correctional and CHP officers can retire seven years earlier than teachers with benefits that are 77 percent higher. Correctional and CHP officers also collect larger benefits than FBI agents. A 53 year-old California public safety employee with 26 years service and an annual salary of $140,000 is entitled to retirement benefits valued at $2.2 million. A federal agent’s benefits are valued at $1.6 million.
6. Defined benefit plans are disappearing from the private sector. Only ten percent of employees in the private sector have access to a defined benefit plan compared to 87 percent of state and local government employees. Taxpayers assume 100 percent of the risk of defined benefit plans, because benefit payments are guaranteed irrespective of the plan’s investment performance. In a defined contribution plan (such as a 401(k)), employees share the risk of their plan’s investments. In a hybrid plan, employees may participate in a defined benefit plan subject to limits and supplement their benefits with a defined contribution plan.
7. SB 400 created or aggravated the most egregious problems in today’s public pension systems, including spiking, double-dipping and airtime. When pensions are based on the employee’s compensation during the last single year of employment, everything from vacation pay to uniform allowances is included as “salary” to inflate pension checks. Spiking makes it possible for 84 percent of Ventura County retirees collecting over $100,000 in pensions per year to collect bigger checks retired than they did working. Over 4,000 LA County retirees make more retired than they did on the job, according to the Los Angeles Times.
8. Unfunded liabilities for retiree healthcare could be larger than pension obligations in some retirement systems. State Controller John Chiang reported in February that California has a $62 billion unfunded liability for retiree healthcare. The state paid $1.7 billion of the $4.7 billion it owes this year for current and future retirees. Retiree healthcare is funded on a pay-as-you-go basis.
9. Salaries and benefits paid to local government employees are generally higher than the salaries and benefits paid to state government and private sector employees. State and local government employees in California earn similar salaries as their counterparts in the private sector, but generous retirement benefits push total compensation costs significantly higher than private companies.
10. June 28 is the deadline for the Legislature to place a constitutional amendment on the November ballot. A state constitutional amendment is necessary to implement the most critical reforms: employees pay half the cost of their retirement plans, and future employees are enrolled in a hybrid plan.