This column has covered many scandals in recent weeks including the eye-popping fraud with EDD ($32 billion lost), the rampant abuse in Medi-Cal, and the nation’s highest level (by far) of unemployment insurance debt. All of this, of course, is capped off with our budget crisis when we went from a $100 billion surplus to a $20 billion deficit in a few short months. And if preliminary projections are anywhere close to being accurate, the state will face another huge deficit this coming year.
But a long term financial problem that California needs to prioritize is our level of pension debt. Unlike other fiscal problems, which can change from year to year, the level of unfunded pension liabilities is a problem that won’t disappear overnight.
Taxpayers hear a lot about how generous California’s pension benefits are, notwithstanding some minor reforms under former Governor Jerry Brown, but the public’s understanding of public sector pension benefits remains elusive because the subject is so complex. The first thing to understand is that California’s major pension funds, both CalSTRS (teachers) and CalPERS (public employees), are defined benefit plans, which guarantee specific payouts to retirees and thus leave taxpayers at risk if promised benefits exceed available funds.
The best solution to reduce risk would be for California to do what other states have done by transitioning to “defined contribution” plans. This would not only reduce the risks to the state and taxpayers, but could also produce better returns for the employees. In defined contribution plans, the employee’s benefit is equal to his or her own contributions, plus those of the employer (in this case, the taxpayers), plus whatever earnings the investments accrue. Regrettably for taxpayers, the political clout of public sector labor organizations makes a significant transition to defined contribution plans virtually impossible.
It should surprise no one that California has the most pension debt – by far – compared to all other states, at nearly $250 billion. No other state even comes close.
However, in fairness to California, aggregate pension debt is a misleading figure. First, it does not reflect a dollar-to-dollar amount of what taxpayers owe directly, as is the case with general obligation bonds. Second, the amount of debt is less important than the percentage of funding necessary to meet the obligations to current and future retirees. A funding ratio of 100% has sufficient funds to meet all future obligations barring unforeseen events.
The best explanation of defined benefit pension systems comes from our friends at the Reason Foundation. Reason’s Pension Integrity Project looks at 118 state pension systems and provides a good comparison of where California stands relative to other states. Among all states’ systems, the 118 state pension systems have $1.3 trillion in total unfunded liabilities at the end of the 2023 fiscal year.
Nationally, funding ratios have slowly improved over the years. State pension plans’ funded ratios hit a low of 63.5% funded in 2009 but are projected to be 76% for 2023. According to Reason, “This means that after 15 years of trying to recover from massive financial losses suffered in 2008 and 2009, state pension plans can only pay 76 cents of every dollar of retirement promises already made to teachers, police officers, firefighters, and other public workers.”
If states were judged based solely on their funding ratios, it may surprise people that some progressive states do better than many conservative states. For example, depending on estimated rates of investment returns, the state with the best pension funding is Washington, which sits at around 107% funded. (California is at about 78%). More conservative Kentucky’s funding ratio is below 50%, which leaves that state’s taxpayers at very high risk.
When dealing with pension debt, taxpayers may be overwhelmed with “MEGO” numbers (My Eyes Glaze Over). But pension obligations are a huge part of public employees’ total compensation and thus constitute a big cost to taxpayers. So it is incumbent on all citizens to be aware of how their respective states manage their public sector retirement programs.
Readers may want to check out Reason Foundation’s State Pension Tracker website, which helpfully gives everyone access to important pension information in an easy to understand format. It is worth checking out.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.