How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances

Back in 2013 the City of Irvine had an unfunded pension liability of $91 million and cash reserves of $61 million. The unfunded pension liability was being paid off over 30 years with interest charged on the unpaid balance at a rate of 7.5% per year. Irvine’s cash reserves were conservatively invested and earned interest at an annual rate of around 1%. With that much money in reserve, earning almost no interest, the city council decided use some of that money to pay off their unfunded pension liability.

As reported in Governing magazine, starting in 2013, Irvine increased the amount they would pay CalPERS each year by $5M over the required payment, which at the time was about $7.7M. With 100% of that $5M reducing the principal amount owed on their unfunded liability, they expected to have the unfunded liability reduced to nearly zero within ten years, instead of taking thirty years. Here’s a simplified schedule showing how that would have played out:


This plan wasn’t without risk. Taking $5 million out of their reserve fund for ten years would have depleted those reserves by $50 million, leaving only $11 million. But Irvine’s city managers bet on the assumption that incoming revenues over the coming years would include enough surpluses to replenish the fund. In the meantime, after ten years they would no longer have to make any payments on their unfunded pension liability, since it would be virtually eliminated. Referring to the above chart, the total payments over ten years are $127 million, meaning that over ten years, in addition to paying off the $91 million principal, they would pay $36 million in interest. If the City of Irvine had made only their required $7.7 million annual payments for the next thirty years, they would have ended paying up an astonishing $140 million in interest! By doing this, Irvine was going to save over $100 million.

Four years have passed since Irvine took this step. How has it turned out so far?

Not so good.

Referring to CalPERS Actuarial Valuation Report for Irvine’s Miscellaneous and Safety employees, at the end of 2016 the city’s unfunded pension liability was $156 million.

Irvine was doing everything right. But despite pumping $5M extra per year into CalPERS to pay down the unfunded liability which back in 2013 was $91M (and would have been down to around $64M by the end of 2016 if nothing else had changed), the unfunded liability as of 12/31/2016 is – that’s right – $156 million.

Welcome to pension finance.

The first thing to recognize is that an unfunded pension liability is a fluid balance. Each year the actuarial projections are renewed, taking into account actual mortality and retirement statistics for the participants as well as updated projections regarding future retirements and mortality. Each year as well the financial status of the pension fund is updated, taking into account how well the invested assets in the fund performed, and taking into account any changes to the future earnings expectations.

For example, CalPERS since 2013 has begun phasing in a new, lower rate of return. They are lowering the long-term annual rate of return they project for their invested assets from 7.5% to 7.0%, and may lower it further in the coming years. Whenever a pension system’s rate of return projection is lowered, at least three things happen:

(1) The unfunded liability goes up, because the amount of money in the fund is no longer expected to earn as much as it had previously been expected to earn,

(2) The payments on the unfunded liability – if the amount of that liability were to stay the same – actually go down, since the opportunity cost of not having that money in the fund is not as great if the amount it can earn is assumed to be lower than previously, and,

(3) the so-called “normal contribution,” which is the payment that is still necessary each year even when a fund is 100% funded and has no unfunded liability, goes up, because that money is being invested at lower assumed rates of return than previously.

That third major variable, the “normal contribution,” is the problem.

Because as actuarial projections are renewed – revealing that people are living longer, and as investment returns fail to meet expectations – the “normal contribution” is supposed to increase. For a pension system to remain 100% funded, or just to allow an underfunded system not to get more underfunded, you have to put in enough money each year to eventually pay for the additional pension benefits that active workers earned in that year. That is what’s called the “normal contribution.”

By now, nearly everyone’s eyes glaze over, which is really too bad, because here’s where it gets interesting.

The reason the normal contribution has been kept artificially low is because the normal contribution is the only payment to CalPERS that public employees have to help fund themselves via payroll withholding. The taxpayers are responsible for 100% of the “unfunded contribution.” CalPERS has a conflict of interest here, because their board of directors is heavily influenced, if not completely controlled, by public employee unions. They want to make sure their members pay as little as possible for these pensions, so they have scant incentive to increase these normal contributions.

When the normal contribution is too low – and it has remained ridiculously low, in Irvine and everywhere else – the unfunded liability goes up. Way up. And the taxpayer pays for all of it.

Returning to Irvine, where the city council has recently decided to increase their extra payment on their unfunded pension liability from $5 million to $7 million per year, depicted on the chart below is their new ten year outlook. As can be seen (col. 4), just the 2017 interest charge on this new $156 million unfunded pension liability is nearly $12 million. And by paying $7 million extra, that is, by paying $20.2 million per year, ten years from now they will still be carrying over $35 million in unfunded pension debt.


This debacle isn’t restricted to Irvine. It’s everywhere. It’s happening in every agency that participates in CalPERS, and it’s happening in nearly every other public employee pension system in California. The normal cost of funding pensions, which employees have to help pay for, is understated so these employees do not actually have to pay a fair portion of the true cost of these pensions. If this isn’t fraud, I don’t know what is.

It gets worse. Think about what happened between 2013 and 2017 in the stock market. The Wall Street recovery was in full swing by 2013 and by 2016 was entering so-called bubble territory. As the chart below shows, on 1/01/2013 the value of the Dow Jones stock index was 13,190. Four years later, on 12/31/2017, the value of the Dow Jones stock index was up 51%, to 19,963.

Yet over those same four years, while the Dow climbed by 51%, the City of Irvine’s unfunded pension liability grew by 71%. And this happened even though the City of Irvine paid $12.7 million each year against that unfunded liability instead of the CalPERS’s specified $7.7 million per year. Does that scare you? It should. Sooner or later the market will correct.


While the stock market roared, and while Irvine massively overpaid on their unfunded liability, that unfunded liability still managed to increase by 51%. Perhaps that normal contribution was a bit lower than it should have been?

Irvine did the right thing back in 2013. CalPERS let them down. Because CalPERS was, and is, understating the normal contribution in order to shield public sector workers from the true cost of their pensions. The taxpayer is the victim, as always when we let labor unions control our governments and the agencies that serve them.


CalPensions Article discussing CalPERS recent polices regarding pension debt repayments:

Irvine 2017-18 Budget – discussion of faster paydown plan on UAAL

Irvine Consolidated Annual Financial Report FYE 6/30/2016

Irvine – links to all Consolidated Annual Financial Reports

CalPERS search page to find all participating agency Actuarial Valuation Reports

CalPERS Actuarial Valuation Report – Irvine, Miscellaneous

CalPERS Actuarial Valuation Report – Irvine, Safety

Governing Magazine report on Irvine

Average Costa Mesa Firefighter Makes Nearly $250,000 Per Year. Why? Pensions.

Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. It even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.

According to payroll and benefit data reported by the City of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.

And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.

We have obtained two innocuous documents recently delivered to the City of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:

Projected Employer Contributions to CalPERS  –  Costa Mesa Police


Projected Employer Contributions to CalPERS  –  Costa Mesa Firefighters


In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this:  For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.

Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions…assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized….”

And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2M in 2017 to $6.8M in 2022, and for police it is set to increase from $5.8M in 2017 to $10.1M in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.

As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.

The following charts, using data downloaded from the CA State Controller, put these costs into perspective:

Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015


In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15% of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay:  $201,330.

Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32% of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.

To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.

Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015

As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.

The next chart shows the impact this has on the City of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.

Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015

At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple, and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:

Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9M per year for police pensions, Costa Mesa will pay $15.2M per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4M per year for firefighter pensions, Costa Mesa will pay $9.1M per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.


So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.

Average Pensions by Years of Service
Costa Mesa retirees – 2015


While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0% multiplier times their final salary, they are permitted to claim 25 years of service.

All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5% (or even 6.5%) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.

Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.

Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?

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Ed Ring is the president of the California Policy Center.

Governor Brown – The Bailout King

“What a salesman,” he said, mockingly. “I guess that’s what you learned … selling that stock that went south.”
– California Governor Brown, to challenger Kashkari, during televised debate Sept. 4th, 2014 (ref. SF Gate)

If anyone wants to know what the theme of Governor Brown’s attacks on GOP candidate Neel Kashkari is going to be over the coming weeks preceding the November 4th, election, his remarks in their debate last week would probably provide accurate clues. At least a half-dozen times, Governor Brown smeared Kashkari with accusations of being beholden to his banker friends on Wall Street. You know, those guys who shorted the investments of millions of small investors and turned America into a debtors prison? The sharks at Goldman Sachs? The banker bullies who took taxpayer funded bailouts and then collected billions in personal bonus checks? It will play well.

But Governor Brown is the king of taxpayer bailouts. Because pension funds, the biggest players on Wall Street, are getting bailed out by taxpayers. And over the corrupt courts who deny activists their chance to get pension reforms onto the ballot, or deny voters who have passed pension reforms the chance to enforce them, Gov. Brown presides. Over California’s obscure but powerful Public Employee Relations Board, an entity that consistently overrules common sense details of proposed pension reform and compensation reform, Gov. Brown presides. And before the billions in taxpayer sourced public sector union dues that deluge every policy debate, every press briefing, every lobbyist’s bank account, or politician’s war chest, Brown bows down, beholden, and says – “your wish is my command.”

California’s state and local governments owe an estimated $1.0 trillion dollars (ref. CPC Study), about half of it in the form of unfunded retirement healthcare and pension liabilities for government workers, the other half for bonds and short-term borrowing to finance projects whose costs were inflated by unions, or deficits whose root cause is government union greed. Every dime of that debt benefit a public sector union agenda; every dime of it was facilitated by bankers. Unions and the bankers worked together to con voters into approving the myriad measures that lead to this fiasco, or, even more likely, pressured beholden politicians behind closed doors into enacting them without voter approval.

And Governor Brown presides over this entire, gigantic, exploitative joint venture between government unions and financial firms. Who will bail out California’s state and local governments from a trillion dollars of debt?


Who does Brown think will pay for the bailout, when government worker pension funds report too many of their investments were comprised of “that stock that went south?”


Who does Brown think benefits from obscenely inflated asset prices that make life unaffordable except to the super rich? Pension funds benefit, of course! Without asset bubbles, the pension funds would collapse overnight, just like subprime mortgage derivatives did back in 2008. The same corruption. And the same victims.


What a salesman. What a hypocrite. Governor Brown, the taxpayer bailout king.

20140909a_Brown-350pxJerry Brown – the bailout king of California.

Across California this November, voters will decide on local tax measures promoted as necessary to “keep teachers in classrooms,” and to “protect public safety,” when invariably the amounts being raised are roughly equivalent to the amounts by which pension funds are planning to raise contributions. CalPERS intends to increase their required annual contributions by 50% over the next five years. CalSTRS needs an additional $5.0 billion per year, or more. Jerry Brown is no dummy. He can connect the dots, but he’d better make sure the voters don’t.

The pension bankers and their union allies hide behind rhetoric that is transparent in its falsity, with a press that is either too innumerate, too busy, too biased, or too scared to challenge any of it. CalPERS claims their investments help California’s economy, when 90% of their investments are made out of state, and 16% of their retirees live out of state. Union officials claim their pensions are “modest,” citing “averages” of $25,000 or less, but not revealing how those averages include millions of people who only worked a few years for state or local government and barely vested a pension. The truth: For recent retirees who benefit from the “enhancements” of the past few years, the average non-safety pension plus benefits in California is over $60,000 per year; for safety retirees it is about $100,000 per year.

And Brown leads this chorus of deceit with abandon, claiming last week that thanks to his pension reform (AB 340), “government employees will pay 50% of the normal contribution,” conveniently neglecting to explain the “normal contribution” is deliberately underestimated via using hyper-optimistic rates of return when making the calculation, and ignoring the fact that the unfunded liability (caused by years of insufficient “normal” contributions) requires a much larger “unfunded contribution,” for which public employees, their unions, and the politicians like Brown who are controlled by the pension bankers and the unions, expect taxpayers to bear 100% of the cost.

Bond issuers earn billions on fees to enable California’s state and local governments to accumulate unsustainable debt. Pension funds pay billions each year to financial firms to speculate on global markets in a desperate attempt to prolong the nominal solvency of unsustainable government pensions. And when these bills come due, and when the investment returns fail to meet expectations, taxpayers fund the bailout.

Neel Kashkari may or may not have some explaining to do. But Governor Brown, the bailout king, has no business calling anybody, anywhere, a tool of bankers.

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Ed Ring is the executive director of the California Policy Center.

Examining the CalSTRS Shareholder Bailout

“CalSTRS has a $70-plus-billion unfunded liability – even with assumed investment earnings that Brown deems ‘highly unlikely’ – and says it needs about $5 billion more a year to regain solvency.”
–  Dan Walters column, “Brown budget reflects state’s massive debt,” May 25, 2014, Sacramento Bee

Those “investment earnings” that Walters quotes Brown as finding “highly unlikely,” refer to the long-term annual return on investment projection of 7.5% used by CalPERS (ref. FYE 6-30-2013 CalSTRS Annual Report, page 29).

So what happens if investment earnings generated by CalSTRS are destined to, as even California’s union-friendly Governor Brown attests, achieve more “likely,” lower returns? In November 2013, using data from CalSTRS FYE 6-30-2012 Annual Report, the California Policy Center released a study “Are Annual Contributions Into CalSTRS Adequate?,” that examined this question.

The first objective of this study was to calculate how much CalSTRS was actually paying down on their unfunded liability. Here’s what it found:

“For the fiscal year ended 6-30-2012 the California State Teachers Retirement System, CalSTRS, collected $5.8 billion. Of this $5.8 billion, $4.7 billion was the normal contribution and the remaining $1.1 billion was a ‘catch-up’ payment to reduce the unfunded liability, which as of 6-30-2012 was officially estimated to be $71.0 billion.”

Based on these numbers, which are all pulled directly from CalSTRS official disclosures, it should come as no surprise that Gov. Brown’s CalSTRS bailout plan requires annual contributions into CalSTRS to double. When you are paying down mortgage of $71 billion – the imperfect analogy that nonetheless applies quite accurately in this context – and in a given year you only pay $1.1 billion (one seventieth), you will never pay off your mortgage. Rather, you will incur negative amortization, owing more every year.

Where will this money come from?

To put this challenge in perspective, it is relevant to note just what CalSTRS retirees are getting. According to 2012 data provided by CalSTRS, as summarized in a March 2014 California Policy Center study “How Much Do CalSTRS Retirees Really Make?,” the average CalSTRS employee after a 30 year career currently retires with a pension of $51,500 per year; their average retirement age is 62. How many private sector employees can work 180 days a year for 30 years and retire with a guaranteed annuity this big – including annual cost-of-living adjustments? The conventional wisdom of retirement planners is to save approximately 25 times the amount you intend to eventually withdraw each year to live on. That’s $1.3 million. How many people can work 180 days a year for 30 years and save $1.3 million?

The idea that CalSTRS participants can save this much money via their 8.25% payroll withholding is ludicrous. And the idea that contributing 8.25% to CalSTRS vs. 6.4% to Social Security justifies a pension benefit this much higher than what participants can expect from Social Security is equally unfounded. Here is the conclusion of a February 2014 California Policy Center study “Comparing CalSTRS Pensions to Social Security Retirement Benefits.”

At age 62, the average CalSTRS retiree collects 56% of their final salary in the form of a pension, whereas, depending on their income, the average Social Security recipient collects between 29% and 36% of their final salary in the form of a retirement benefit. At age 65, the oldest age necessary to collect the full CalSTRS benefit, a CalSTRS retiree with 35 years experience will collect a retirement benefit equal to 84% of their final salary. At age 65 a Social Security recipient will collect a retirement benefit between 30% and 35% of their final salary.

The CalSTRS bailout – and it is a bailout – will cost California’s taxpayers an additional $5.0 billion per year, and only if, as Governor Brown says, the “highly unlikely” average returns of 7.5% per year are realized. But as documented in the aforementioned study “Are Annual Contributions Into CalSTRS Adequate?,” using a 20 year payback period, here’s what lower rates of return mean for California’s taxpayers:

  • At 7.5% per year, unfunded contribution = $7.0 billion per year (increase of $5.9 billion over what was actually paid).
  • At 6.2% per year, unfunded contribution = $9.6 billion per year.
  • At 4.8%, unfunded contribution = $12.2 billion per year.

The 20 year amortization period, recommended by Moody’s investor services, used in the study, resulted in an estimate $900 million over the latest figures from Governor Brown. This minor discrepancy validates these calculations more than anything else – they probably used a 30 year payback period. Fine. Let’s continue.

  • At 7.5% per year, the normal contribution necessary to CalPERS, i.e., not the “catch up” payment on the underfunding of prior years, but just the payment necessary to cover future pensions earned in each most recent year, is $4.7 billion per year.
  • At 6.2% per year, the normal contribution = $5.8 billion per year.
  • At 4.8%, the normal contribution = $7.2 billion per year.

To summarize:  In the FYE 6-30-2012 CalPERS, assuming a long-term return of 7.5% per year, received contributions (normal and unfunded) of $5.8 billion; they should have collected total contributions of $11.7 billion ($10.7 billion using Brown’s numbers). But if their rate of return going forward drops to 6.2% per year, they would have had to collect $15.4 billion. Got that? If the highly unlikely 7.5% average annual return isn’t realized, and only 6.2% is realized instead, taxpayers will pitch in nearly $10 billion more per year, just to bail out CalSTRS.

The money is not there.

And why is the 7.5% return “highly unlikely?”

(1) Pension funds are starting to pay more in benefits than they collect via contributions, for the first time ever. As a result, pension funds, who own over 20% of all U.S. equities, are becoming net sellers in the market instead of net buyers, pushing prices down.

(2) The U.S. population is aging, with citizens over age 65 projected to represent 22% of the population by 2020, compared with just 11% in 1980. All of them will be slowly selling off their retirement assets instead of buying and saving assets for retirement – twice as many people as a generation ago – also pushing prices down.

(3) A major factor in the market rise of the past 40 years was the accumulation of debt and progressively lower interest rates, which flooded the economy with cash and caused rapid stock price appreciation as companies profited from debt-fueled consumer spending – those days are over.

(4) Pension funds are now too big to consistently beat the market, assuming they ever could.

There is a larger question, however. Why is it that government unions, and their progressive partners, are so anti-corporate, when it is corporate profits that fuel the high returns of their pension funds? Why is it they urge us to blame pension challenges on banks, when it is the banks that lowered interest rates to literally zero (accounting for inflation), in order to create the asset bubble that keeps their pensions marginally solvent? Why is it they blame corporations for caring more about shareholders than workers, when their pensions are dependent on the pension funds reaping massive shareholder benefits from this supposedly misplaced priority?

Ultimately, the solution to the pension crisis facing CalSTRS that is most consistent with progressive principles would be for teachers from now on to collect Social Security instead of pensions, and for existing participants in CalSTRS to collect a pension benefit that is reduced by precisely the amount CalSTRS is underfunded – i.e., a 30% cut to benefits, across the board, to everyone. That solution would epitomize “fairness,” a concept of which they speak so eloquently, and so often.

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Ed Ring is the executive director of the California Policy Center.