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Blue Model Blues
The Pension Vise Tightens in California

Earlier this week, CalPERS—California’s pension fund for most public employees—reported abysmal annual earnings of 0.61 percent, a tiny fraction of the seven-and-a-half percent annual returns needed to keep it solvent over the long run. And its sister fund for teachers, CalSTRS, isn’t doing much better. The Wall Street Journal reports:

The nation’s second-largest public pension posted its slimmest returns since the 2008-2009 financial crisis because of heavy losses in stocks.

The California State Teachers’ Retirement System, or Calstrs, earned 1.4% for the fiscal year ended June 30, according to a Tuesday news release. The result is the lowest since a 25% loss in fiscal 2009 and well below Calstrs’ long-term investment target of 7.5%. Calstrs oversees retirement benefits for 896,000 teachers.

As Steven Malanga has noted, both of these union-managed funds are notorious for pulling political stunts even as they face gaping shortfalls, going on a misguided “green” investing binge that flushed taxpayer money down the drain, and pulling out of tobacco companies on moral grounds just before those stocks began to rise.

But the underlying flaw with the funds is not their politicization. If anything, these kinds of moves are a distraction from more pressing crisis of public employee retirement systems: That state legislatures have epically over-promised the level of retirement benefits they can reasonably provide, and obscured this reality by presuming levels of investment returns that are impossible to sustain, especially in this era of historically low interest rates.

This long-running failure of governance may be irreversible. All that’s left for state governments to do now is reform pension systems for new employees, phasing out defined-benefit systems for 401(k)-style plans, and, where possible, trim benefits or raise contribution requirements for current workers. In the meantime, federal policymakers should start thinking about a reform-for-relief framework that will enable states and localities to honor their obligations to retirees while getting their finances back under control for the long haul.

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  • Andrew Allison

    Why, pray tell should the Federal government be thinking about bailing out irresponsible state and local government?

    • f1b0nacc1

      Because the ‘losers’ in this little drama tend to vote Democrat

    • Governor Squid

      “Hey, Texas — we need you to bail out California and Illinois.”

      “Do ya? Well, Ah’m afraid that’s jess not gonna happen.”

      • Andrew Allison

        You’re right, but the problem is that if the Feds bail out indigent states, it’s the 47% of the popullation which actually pays Federal Income tax, since it will be done with debt, their children and grandchildren) who will pay the price, just as they are doing bailing out the Abominable Care Act.

  • seattleoutcast

    Reform for relief will certainly turn to relief without reform. That is the sad truth.

  • Wayne Lusvardi

    Should money markets see a prolonged bear market as has occurred in the past, and Cal-PERS/Cal-STRS has a continuous 4 or 5 years of anemic rates of returns on their funds such as has just occurred for 2015, my guess is that the funds would collapse and benefits would have to be rapidly adjusted downward by, say, a third or more. One has to be reminded that a 0.6% or 1.4% return is less than or near the rate of money inflation currently running at 1% (not considering real estate or energy costs). In other words, deflation is eroding the two pension funds. In California, a collapse of the funds would likely provoke a political crisis as well, as certainly the two funds won’t be reformed by the legislature or governor and only a crisis could reform (deform) them.

    Also, a 1% inflation rate for 2015 would require county assessors in California to cut in half their inflation adjustment of 2% per year as provided under Proposition 13. So scheduled property tax increases are likely to also decline, a portion of which go toward paying public pension benefits.

  • jhp151

    California may have the additional option of reducing benefits based on:
    fraudulent claims issued by the union run plans.

    • Andrew Allison

      California is ruled by (utterly irresponsible) Democrats whose perquisites depend on the votes of union members. Nothing’s going to happen until the plans go belly-up. Shortly thereafter, California will go belly-up and beg for a Federal bailout. Federal taxpayers had better pray that the GOP is still in control of Congress when that happens.

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