On Wednesday, the CalPERS Board of Administration will make a very important decision that will have billion-dollar impacts on state and local government budgets for two generations. California's children, our taxpayers-in-waiting, have the most at stake.
For more than a decade, the CalPERS board has been charging its government agency members less than the full cost of the benefits it provides. First it convinced legislators that it had made so much money during the dot-com boom benefit payments could be increased by up to 50 percent "without it costing a dime of extra taxpayer money." That estimate was off by more than $20 billion and counting.
Later, CalPERS manipulated its funding policy and market predictions to provide easy payment plans after the stock and real estate markets cratered. Although fiscally responsible accounting standards that control private-sector pension plans would have required state and local governments to immediately make much higher payments, the CalPERS board voted to spread a $57 billion loss over more than 30 years through amortization and smoothing, officially kicking the pension debt can three decades further down the road.
But the most negligent decision was basing current benefit costs on an 80 percent funding goal instead of always working toward 100 percent funding of the retirement promises entrusted to their care.
Mathematically, setting low funding targets today leaves future generations with hundreds of billions of dollars in unnecessary debt and increases the risk that pension funds will run out of money. On its current course, the CalPERS fund covering most state employees has a 59 percent chance of having less than half of the money it needs to pay benefits during the next 30 years.
Things got so bad that by 2009, CalPERS' then-head actuary Ron Seeling publicly described the true cost of CalPERS benefits as "unsustainable" and quietly retired shortly thereafter.
Now there is hope for California's fiscal future. CalPERS chief actuary Alan Milligan seeks to undo nearly a decade of fiscal chicanery by making responsible changes in CalPERS funding policy that would reject what the American Academy of Actuaries described last summer as "The Myth of 80 Percent Funding," stating:
"Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time."
By adopting and sustaining Milligan's recommendation, the CalPERS board would align itself with responsible actuarial standards and enhance the retirement security of millions of California's government employees and retirees.
Of course properly funded pension plans will cost more. Under Milligan's proposal, government employers will see their pension benefit costs rise by up to 50 percent during the next five years.
One thing CalPERS has clearly proven during the last five years is there's no magical way to improve pension fund security without contributing more money.
It is also important for government agencies, government employees and taxpayers to have better informed conversations about total retirement benefit costs and how to share them. While unsustainable pension costs have thrown several cities into bankruptcy, nearly every community is experiencing the steady erosion of public services as their governments cut programs to preserve too costly pensions.
On Wednesday, the CalPERS board can correct nearly a decade of fiscal irresponsibility that produced huge unfunded liabilities and intergenerational transfers of government debt.
While most believe we have an obligation to leave future generations with a sustainable natural environment, unsustainable pension obligations will clear-cut public budgets and leave their toxic fiscal debris for decades to come.
The CalPERS staff of experts is pointing in the right direction. California's children have their fiscal future riding on the board's decision.
Dan Pellissier is president of California Pension Reform, a citizens organization dedicated to establishing fair and sustainable retirement benefits for California's state and local government employees.