Math Should Trump Politics in California Pension Debate
Opinion piece authored by CPF President Lou Paulson, which appeared on the website Fox and Hounds on May 1, 2013.
If there’s one thing the debate over public employees’ pensions has taught us, it’s that California needs to invest more in mathematics instruction in its public schools.
When Stanford professors and self-proclaimed "taxpayer" organizations wag their finger at an an investment system that yields 8 percent annual returns, it’s clear there’s a fundamental misunderstanding of the numbers.
No wonder the state budget is never balanced.
But let’s back up for a moment. When governments hire teachers, first responders, parks maintenance workers, garbage truck drivers, et cetera, they make certain promises regarding those employees’ retirements. Then, they often have decades to pay for those promises. It’s the same as when a family buys a house -- they finance the large amount, and pay it off over 30 years.
In California, the California Public Employees Retirement System (CalPERS) pays for most of those government workers’ retirements, and it does that by making investments, earning interest, and growing the bank account from which it cuts retirement checks.
Critics of CalPERS contend the system doesn’t have enough money in the bank to cover all of the promises it has made. However, it’s already sitting on 70 percent of the money it will need over the coming 30 years. Should it have 100 percent? Of course not. Many of the workers whose retirements CalPERS is funding are still young and working, so the system won’t need to cut checks to them for years or even decades.
The better question is not how much CalPERS has sitting in the bank, but whether it -- like that family buying a home -- has a realistic plan for paying off its commitments to public employees. The numbers indicate that the answer to that question is a clear “yes.”
CalPERS is currently projecting a 7.5 percent annual return on its investments. Critics call that “unrealistic.” Some suggest 3 percent is a safer figure. However, the system yielded a 13.3 percent return in 2012, and over the past two decades it has earned an average of 8 percent every year.
Any investor would be ecstatic to realize sustained returns on investments like the ones CalPERS achieves. In fact, over a 20-year period prior to the recession, from 1988-2007, the average Wall Street mutual fund investor saw annual returns of just 4.48 percent, according to Dalbar, a financial market analyst.
So why is it that CalPERS is getting scapegoated by cities throughout the state filing for bankruptcy and struggling to balance their budgets?
San Bernardino? When that city began claiming financial distress and stopped making its pension payments, its entire pension obligation for the year was $1.9 million. However, it had a budget hole of well over $40 million. That means even if the city had zero pension costs, it would still have had a massive shortfall. Pensions clearly were not the driving factor.
The same goes for Stockton. Pensions costs make up a small fraction of its budget. Debt service on loans to pay for the construction of a lavish waterfront ballpark and entertainment complex likely has much more to do with that city’s financial woes.
Stockton is a cautionary tale, though. When the city began having problems making its payments and began discussing doing away with defined-benefit pensions, police officers began trading jobs, moving into over cities and counties where their retirements were guaranteed. As a result, crime rose in Stockton and its police force lost a tremendous amount of experience.
Of course, those who advocate clawing back the retirement promises made to first responders, teachers, garbage truck drivers, and other public employees -- for them, the more likely scenario is that they’re not looking to have a dialogue based on real numbers at all, but instead one rooted in politics.