Who Will Fix California’s Biggest Problem?
The looming problem of California’s pension system should be front and center for the upcoming governor’s race.
As the California governor’s race heats up, voters should focus on one issue that towers above all others in importance: our public pension system’s slide toward insolvency.
Even as the stock market soars to historic highs, our state pension funds remain substantially underfunded. CalPERS and CalSTRS, the state’s largest pension funds with $450 billion under management, can currently cover only two-thirds of what they are committed to pay out to retirees. When the stock market drops — and nearly all economists agree it’s a “when” not an “if” — that number could drop to below 50%.
As the bills start coming due, cities will bear the brunt. In the Pasadena School District, spending on unfunded pension promises grew 144% from 2012 to 2017, while spending on teacher salaries grew only 5%. Over the next seven years, rising pension costs will require cities to nearly double the percentage of their General Funds they pay to CalPERS. This will dramatically reduce the amount that cities have to pay for essential services like teachers, police and firefighters. Without fundamental changes, cities will have to choose between cutting services or raising taxes.
This is not an academic concept. I was the state controller in 2003 when California nearly ran out of money. California’s bonds were downgraded to near “junk” status and I had to go to New York to raise money to keep the state solvent. The governor was recalled for the first time in history. We don’t want to go there again.
There are three things we should do now to avoid a similar fate.
First, cities and the state should set aside 2 to 3% of their budgets to pay down their unfunded liabilities. Second, cities and the state should look for cuts and new revenue sources now, not wait until pension costs begin to crowd out funding for basic services. Third, and most importantly, we must revise the California Rule.
The California Rule, created by the California Supreme Court, says that pensions must be treated as contracts under state law. It guarantees not only the pension benefits that a public employee has already earned, but also any pension benefits that he or she might earn 30 to 40 years from now. So any changes to future benefits must be offset by new advantages to the pensioner — effectively making it impossible to bring unearned future pensions in line with budgetary needs.
Governor Jerry Brown has taken the lead in challenging the California Rule in the California Supreme Court, arguing that its inflexibility — in particular, how it bars modifications to unearned future benefits — does not square with contract principles or the state’s economic reality. The governor is right. The only long-term solution for the state’s pension shortfall is to amend the California Rule.
As Californians compare candidates in the gubernatorial race, the looming pension problem should be front and center. The next governor will have significant influence over future budgets and will appoint members to the CalPERS the CalSTRS boards. And, whatever the outcome of the court battle over the California Rule, there will be more litigation on how much cities and the state can modify unearned future pension benefits.
The next governor will need to have the courage to follow Governor Brown’s lead in pushing for the reforms to keep our cities and our state solvent. California’s entire state budget is roughly $130 billion, but we may owe as much as $200 billion in unfunded liabilities — and that number is increasing. We don’t have to pay it all back in one year, but we need to start taking measures to address the problem now. Ask yourself: Which candidate will take action today, so we won’t have to face a crisis tomorrow?
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.