The California Supreme Court upheld reforms to the state’s pension plans for public employees, which will save taxpayers billions of dollars but leave the system with hundreds of billions of dollars in unfunded obligations.
The court’s March 4 ruling upheld Gov. Jerry Brown’s 2012 reform that curtailed the practice of allowing employees to purchase service creditss in order to increase their pensions. Brown also raised the amount employees must contribute to retiree health care coverage. The changes will save $29 billion to $38 billion over the next 30 years, reports the nonprofit news service CALmatters.
California has two state retirement systems: one providing pension incomes and health benefits for local and state government employees, and one for public school teachers. The systems have total estimated unfunded future obligations of $400 billion, based on 2016 data, CALmatters reports.
Nationwide, the unfunded liabilities of state and local public employee pension plans total about $4.4 trillion, according to Moody’s Investor Service.
Lower Expectations for Returns
The reason public pension systems in California and other states are underfunded is that pension fund managers make overly optimistic assumptions about the rate of return on investments, says Olivia S. Mitchell, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School of Business.
“Public pensions should use a discount rate consistent with the public sector’s cost of borrowing money,” said Mitchell.
“So, for instance, instead of the far-too-high 7.5 percent to 8 percent current rates, they should be closer to 4.5 percent to 5 percent,” Mitchell said. “Of course, this change would massively blow up funding costs, but this is a fairer picture of what is actually owed to public employees.”
Joe Barnett ([email protected]) is a research fellow with The Heartland Institute.
Chief Justice Cantil-Sakauye, Opinion: Cal Fire Local 2881 v. California Public Employees’ Retirement System, Supreme Court of California, March 4, 2019:
Judy Lin, “Everyone is saying they just won a big court case on pensions. What does that mean for you?” Calmatters, March 4, 2019: