California’s Pension Reforms Don’t Go Far Enough

Commentary

California’s Pension Reforms Don’t Go Far Enough

The state must stop mortgaging its future to pay for government workers' pensions

Only in California could a bill that requires 32 years to catch up and fund parts of the California State Teachers’ Retirement System’s current $74 billion in unfunded liability be hailed as a major reform.

Yet, Gov. Jerry Brown is doing just that. His latest attempt to cover part of the state’s pension shortfall consists of increasing school districts’ contributions to teachers’ pensions over the next seven years. And this comes on the heels of the California Public Employees’ Pension Reform Act of 2013, which Gov. Brown touted at the time as “the biggest rollback” to the state’s retirement systems in California history. In reality, Brown’s reforms are weak and don’t fix the pension mess.

The California Public Employees’ Pension Reform Act contains some cost-saving measures, but they don’t apply to the majority of California teachers and public employees. California is one of seven states that provide public employees with average lifetime pension benefits in excess of $1 million, so in an effort to limit these so called “pension millionaires” the state cracked down on the loopholes and gimmicks that allowed employees to inflate their pensions through a practice known as “spiking.” But PEPRA’s tweaks to the benefit formula don’t impact the vast majority of state employees and teachers – those hired before 2013.

As a result, William M. Habermehl, the recently retired former superintendent of the Orange County school district, will continue to receive a $339,320 annual pension from taxpayers. The California State Teachers’ Retirement System calculated his pension, boosted by unused sick time and a longevity bonus, based on his final salary of $322,159.

While the Orange County taxpayers paying much of Habermehl’s pension won’t take much solace in this, his pension might actually be modest compared to the pensions future retirees, like current Centinela High School District Superintendent Jose Fernandez, might get.

Fernandez’s total compensation in 2013, inflated by a one-time service credit purchase (now banned by PEPRA), was $663,365, but even without that “air time” purchase he took home $403,183 in 2012 and $392,576 in 2011. Why Centinela’s superintendent, who manages a school district with less than 10,000 students, is compensated so much higher than superintendents in districts with over a million students is another story, but if Fernandez, 54, is able to finish his career in the California school system with a final salary comparable to his recent annual salaries, then he can expect an astronomical pension payout.

The bill recently signed by Gov. Brown hopes to fully fund CalSTRS’s defined-benefit pension plans by 2046 through increases to employer, employee and state contributions.

Employer contributions will rise from the current rate of 8.25 percent of pay to 19.1 percent, phased in over the next seven years. This impacts school districts, which will have to come up with that money and likely have to cut money that would be spent on kids and in classrooms.

State taxpayers will also double their contributions to CalSTRS over three years, rising to 6.32 percent from the current 3.04 percent.

Meanwhile, teacher contribution rates will barely inch up – from 8.15 percent to 9.20 percent for employees subject to PEPRA, and to 10.25 percent for employees not subject to PEPRA.

But because these reforms have not addressed the pension system’s overly optimistic assumed rate of return on its investments – 7.5 percent, a rate much higher than the 5.2 percent five-year average for the stock market and CalSTRS’s own five-year average actual rate of return of 3.7 percent, the unfunded liability is probably a lot higher than $74 billion, and these increased payments won’t be close to enough.

Even Gov. Brown admits it is “highly unlikely” CalSTRS will meet its return estimates. “God help us if medical technology has some breakthroughs and these people who are retiring don’t live to 80, but they live to 100,” Brown half-joked.

But it’s not funny for state taxpayers who are stuck paying the ever-increasing bills. At some point, California must stop mortgaging its future to pay for government workers’ pensions.

Victor Nava is a policy analyst at Reason Foundation. This article originally appeared in the Orange County Register.

Victor Nava is a policy analyst at Reason Foundation, where he researches public sector pensions, federal and state economic policy, and crony capitalism.