For traditional pension plans to work, the promised benefit levels must be affordable and the accounting practices and actuarial assumptions must be reasonable.
Yet, retirement systems for California government workers violate both principles, promising overly generous payouts and gaming the numbers. As a result, they are hundreds of billions of dollars underfunded -- a debt that will be passed on to future taxpayers.
In September, Gov. Jerry Brown signed legislation that made small adjustments to the benefit levels, but only for new employees. This week, the California Public Employees' Retirement System board will consider accounting changes recommended by its actuary to prop up the nation's largest pension plan.
The proposal would restore some fiscal integrity to CalPERS, one of the biggest practitioners of numerical gimmicks. The plan, which has not drawn the attention it deserves, doesn't go far enough but should be considered a reasonable minimum starting point.
Without change, actuary Alan Milligan warns, CalPERS faces "a significant probability" of serious future funding shortfalls and "a disturbingly high probability" of large single-year rate increases during turbulent economic times.
In other words, pay now -- or pay more later and put the system at even greater financial risk. Yet some members of the labor-dominated board have suggested delay because the changes would require larger immediate contributions from state and local governments.
It's time to get real. For far too long, CalPERS has failed to require adequate funding, enabling government leaders to promise workers costly benefits based on artificially low payments.
Rates have been tamped down, in part, because CalPERS spreads investment gains and losses over 15 years, triple the industry standard. Consequently, the system claims artificially high assets because it has not yet accounted for most Great Recession losses. Milligan's plan would end this gimmick.
He would also change the way CalPERS requires repayment of the debt, the difference between those assets, and its current liabilities for future benefits.
The pension system currently spreads repayment from government agencies so that most, but not all, is recouped over 30 years. Milligan proposes repaying all the debt in 30 years. That's too long. It still immorally pushes the debt onto our children and grandchildren.
But, for now, Milligan has focused on ensuring the system doesn't enter a dangerous downward spiral. CalPERS, like all pension plans, depends on investment returns. But as assets decline, there's less money to invest, and hence fewer returns are possible.
Milligan's calculations show the risk of such a slide is very real. It would endanger workers' and retirees' benefits. Unfortunately, his plan only slightly alleviates that risk.
Labor representatives should be concerned about long-term dangers to their pensions. Instead, they worry that, even though the changes would not directly affect employee pension rates, they would reduce public funds immediately available for compensation.
That's shortsighted thinking. For the sake of everyone -- employees, employers and future taxpayers -- it's time to face financial reality and stop kicking the proverbial can down the road. It could go off a cliff.