In good times and in bad, California’s pension fund managers win fat bonuses

By Steven Greenhut
October 31, 2017

Sacramento — California’s top pension funds have suffered through a few cycles of bleak investment returns and plummeting funding ratios, so we can’t blame them for wanting to celebrate after what was, relatively speaking, a stellar financial year. But the manner in which they chose to celebrate was shocking. The funds gave their top officials massive bonuses, in part to assure that these officials don’t flee to higher-paying private-sector jobs.

The California State Teachers’ Association (CalSTRS) enjoyed a 13.4 percent return on its investments, while the California Public Employees’ Retirement System (CalPERS) earned returns of 11.2 percent. That’s good news, especially given that higher rates of return translate into lower pension debts ultimately borne by taxpayers.

It was especially good news for CalSTRS Chief Executive Jack Ehnes, who received a $224,682 bonus in addition to his $420,000 salary, according to a Sacramento Bee report. And it was good news, too, for CalSTRS Chief Investment Officer Christopher Ailman, who will receive a $272,678 bonus on top of his $509,000 salary. Those salaries, as you can imagine, come with great retirement plans.

The Bee noted that CalPERS’ executives did well, too, with Chief Executive Marcie Frost receiving an extra $80,190 and Chief Investment Officer Ted Eliopoulos receiving an extra $312,305 after last year’s returns were announced in September.

One might argue that it’s great to reward investment officials for bringing in banner returns that keep the pension funds and taxpayers out of hot water. But there are two problems with that argument. First, the funds gave their executives massive bonuses even when the investment returns were vastly underperforming predictions. As an example, Ehnes received a $214,500 bonus in 2015-2016 – when CalSTRS earned a piddling 1.4 percent return.

It’s yet another example of the “heads we win, tails you lose” approach to finances that CalPERS and CalSTRS have taken to an art form. Despite the seeming grotesqueness of six-figure these bonuses, they don’t mean much to taxpayers, local school agencies and school districts, or pension recipients. They are a drop in the bucket in the multibillion-dollar funds. They are illustrative mainly of the attitudes that dominate in the public-pension world.

The bigger problem is that the funds have run up massive debt that, based on more realistic rates of return, has hit $1.3 trillion dollars. Sure, the funds’ executives win huge bonuses in good years and bad ones. So do all the pension recipients. In these defined-benefit plans, California public employees are promised a pension payout based on a formula that calculates their years of service and their final three years of pay. It is guaranteed, with the only possible exception being a bankruptcy from the employing municipality.

As they work, that formula can never be reduced – even going forward. Back in 1999, when CalPERS pushed a state law that led to massive, retroactive pension increases the state, officials there promised that it wouldn’t cost taxpayers a dime. So far, it’s cost them many billions of dollars and has helped lead to service cutbacks as cities struggle to pay rapidly increasing pension costs. The pension funds blame previous financial crises for the problems – rather than their own culpability in hiking benefit levels. Whatever the case, the pensioner can’t lose. Taxpayers are on the hook for whatever the shortfall may be thanks to a variety of court decisions.

CalPERS and CalSTRS may be giddy over the latest returns, but one year of good returns doesn’t fix the deep hole created by years of poor returns and benefit increases. Even a few years of great returns can’t make up for system’s low funding rates. CalPERS, for instance, is only about 68 percent funded even after the stellar returns. That means that it has only a bit more than two-thirds of the money it needs to make good on all its promises. As of last April, CalSTRS’ funding ratio was around 64 percent.

A recent study from Stanford University’s Institute for Economic Policy Research deals only with CalPERS. As I explained for the California Policy Center, it found “that over the past 15 years, employer pension contributions have increased an incredible 400 percent.”.  Pension costs have tripled since 2002 and are eating up larger shares of city budgets, thus leading to a crowding out of vital public services. City officials attended a recent CalPERS board meeting and shared their troubling stories, with one city official even raising the specter of bankruptcy.

Yet instead of dealing with these problems, the pension funds are partying like it’s 1999, when soaring investment earnings promised to usher in decades of “cost-free” benefits for the public-employee unions who control the pension funds and the Legislature. They act as if they couldn’t have seen a downturn coming. They blame the financial crash, rather than their foolhardy financial decisions. Did any executives get dinged for those decisions?

The Legislature’s best-known pension reformer, Sen. John Moorlach, R-Costa Mesa, agrees that it takes incentives to hire top officials to run the nation’s largest funds. But he attributes the latest solid performance to the market rather than the magic of fund managers. “What did (CalPERS’ chief investment officer) and team provide above and beyond the average rate of return for similar institutional pension systems?” he asked. “Just because the market is up is not something to be rewarded for. What did you do to exceed the average yield from which the taxpayers can split the difference in an appropriate manner? … Just being there doesn’t cut it.”

But “just being there” is the entire foundation of the state’s public-pension system. If you’re an executive for the funds, you get a big bonus, apparently in good years or bad. If you are a public employee, you receive a large, guaranteed pension for working a set number of years, no matter what happens in the economy at large. And if you’re a taxpayer, you’ve got to pay any and all shortfalls and endure any service cutbacks because of the selfish decisions made by pension funds and legislators. It’s your fault for being here.

The bonuses are the least of taxpayers’ worries, but they are remarkably emblematic of a system that runs for the benefit of its employees and beneficiaries – and not at all for the benefit of the California residents who pay the bills.

Steven Greenhut is contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

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