(February 23, 2012) — California’s local pension systems have far more in unfunded liability than state systems, with the state’s city and county governments accountable for $135.7 billion in unfunded pension liabilities, according to a newly released report by the Stanford Institute for Economic Policy Research (SIEPR) and California Common Sense (CACS).
Excluding the California Public Employees’ Retirement System and the California State Teachers’ Retirement System — California’s largest schemes and the two largest pensions in the United States — the study covers the top 24 local systems across California.
The schemes in the study range from large systems such as the Los Angeles County Employees Retirement Association (LACERA) and San Francisco Employees’ Retirement System (SFERS) to smaller systems such as the city of Fresno systems and the Stanislaus County Employees’ Retirement Association (StanCERA).
“Each system substantially understates liabilities and overstates funded ratios,” the report states.
The report continues: “Much attention, in both policy research and broader political circles, has been paid to California’s statewide pensions systems. In contrast, virtually no systematic analysis of the state’s independent pension plans has been performed, though they collectively hold more than $150 billion in assets. The purpose of this report is to explore the 24 largest independent pension systems in 20 California municipalities.”
The report finds that between 1999 and 2010, pension spending grew at 11.4% per year, more than the rate of growth for any other expenditure category. Meanwhile, the study notes that if the investment rate of return is 6.2% annually, which is a typical rate of return for private pension systems, total pension costs would total 17.4% of all municipal expenditures by 2012.
According to the report, none of the systems studied are at least 80% funded — a number frequently used as the cutoff for the minimum funding level of pensions.
The authors outline the following questions:
1) How much are system members receiving in pension benefits, and how are those benefits determined? How do benefits vary and compare across the systems?
2) How financially healthy are these systems—how likely is it that they will be able to cover all of their future obligations without significant increases in the amounts local governments contribute to them, and if such increases are needed, how large would they have to be?
3) How do pension costs fit into broader municipal spending? How large a share of municipalities’ spending goes to funding these systems, how has that share changed over time, and how is it likely to change in the future?
The report comes during a time when California Gov. Jerry Brown has revealed his aims to bring public-sector retirement benefits closer in line with their private sector counterparts, as government pensions continue to be pummeled by weak investment returns. In October, Brown revealed that he was seeking pension cuts, which the administration estimated would save about $900 million annually. Some of the changes the Governor proposed include raising the retirement age to 67 for new employees who are not public safety workers and requiring state and local employees to pay more toward their retirement and health care.
“It’s time to fix our pension systems so that they are fair and sustainable over a long time horizon,” Brown said in a statement. “My plan raises the retirement age and bans abusive practices…while mandating that public employees pay an equal share of pension costs.” The Governor also revealed aims to end so-called pension “spiking,” while also ending the practice of buying service credits.