Pension Law and Policy,
By Michael Karsch, Legislative Representative
There are a lot of gloom and doom commentaries out there in the world on every kind of fallout from the novel coronavirus on every aspect of life it seems. I am just interested in how dire the impacts are on public pension systems.
California faces a $54 billion shortfall in 2020-21, the next fiscal year, per the Department of Finance. In 2008, the financial recession, California suffered a loss of $40 billion for comparison. Our state’s income tax rate, 13.3 percent, is the highest of any state, and it relies on the rich, whose revenues stem from dividends, capital gains and bonuses (City Journal, May 19, 2020). These sources mostly vanish in recessions, hence increasing the pain. Our state added new taxes on those earning more than $250,000 a year, and increasing the state sales tax. These increases were added after the 2008 recession as temporary, but were extended in 2016 for another 15 years. There is a prediction by the Public Policy Institute of California, made before the coronavirus struck, of revenue shortfalls of $22 billion a year for the next four years; a more “severe” impact, like the pandemic, could increase the total impact to $170 billion over five years. With not only this growing debt, add the cost of homelessness and pensions in the public sector, and we have a challenging agenda in our laps. Our government pensions are protected by the “California Rule,” which guarantees the pension that a government worker could expect from the day he or she was hired. Just within the last 20 years, the California pension system for state and local governments, CalPERS (to which the City does not belong), has grown from less than $400 million in 2000 to $15 billion last year. Public pensions are funded by the employee contributions while working, returns on the fund’s investments, and by what their employers will have to contribute annually to make up any unfunded liability. With the stock market having more ups and downs, the reliability of high-investment returns may force large increases in contributions for the cities, counties and state governments. Yes, there was a rainy day fund set up by former Gov. Jerry Brown, now amounting to $17 billion. But that amount is far from enough.
The Financial Standard reported in late May 2020 that several US public pension funds are approaching a “point of no return.” They identified the worst funds as Kentucky, Illinois, New Jersey and Connecticut. A measurement used by Moody’s to compare the assets held by each is then projected for how many years of retirement benefits each could pay for, which is an asset-to-payout ratio. These four states had assets equal to just a few years’ worth of benefits. The stronger states had assets guaranteeing 20 years or more of payouts before the COVID-19 pandemic hit. Kentucky is the weakest state with just enough assets to cover 2.5 years of fund benefits. Illinois has six funds ranking among the weakest in the nation. New Jersey’s Teacher’s Fund has $26 billion to cover just six years of benefits. Their state public employee plan can cover just eight years of benefits. If the pandemic lasts for the rest of this year, New Jersey won’t have the liquidity to pay pensions in full, or not at all. If funds run out, what then? It would become a pay-as-you-go arrangement, hopefully finding enough in the annual state budget to cover it all. Chicago was rated as junk bond status by Moody’s before the pandemic hit. In April, Illinois sought a bailout from the pandemic bailout by Washington: $20 billion in the total COVID relief of $42 billion is supposed to be for public pensions across the nation, while Chicago already has a pension debt of $240 billion!
It all sounds pretty bad, but we are in a far better picture than those states. And by “we” I mean the City of Los Angeles. Everyone will have to take a hard look at how our own public pensions in California can be better run. At the same time, the State Supreme Court is hearing a case of alleged pension spiking in Alameda County Deputy Sheriff’s Association vs. Alameda County Employees’ Retirement Association. Stay tuned for updates on that case.