Refusing to give Californians a real picture of the state’s unfunded public pension liabilities, Democrats on the Senate Public Employment and Retirement Committee killed SB 601 by Senator Mike Morrell (R-Rancho Cucamonga), which would have required the state’s public pension systems to disclose return on investment estimates similar to those required of the private sector.
“Like all workers, public employees should be able to make informed decisions about their retirement,” said Morrell. “To plan ahead, however, requires complete information about possible financial outlooks. California’s public pension systems should have no issue ensuring their members, as well as taxpayers, are aware of the various scenarios that could play out regarding the state’s debt.”
Unlike private sector employers, pension plans offered by local and state governments can assume any rate of return (or discount rate) on their investments they want. On the other hand, private employers are mandated by federal law to utilize discount rates that are “risk-free,” such as the rate for a long-term U.S. Treasury note. Rather than assume any return on investment they want, private sector employers must assume a rate closer to three percent. It is considered a consumer protection measure that should be offered to private and public sector employees alike.
As such, SB 601 would require the California Public Employee Retirement System (CalPERS), the California State Teachers' Retirement System (CalSTRS), and request the University of California Retirement Plan to include in their annual reports an additional analysis of their respective pension liabilities using a discount rate tied to the risk-free 10-year U.S. Treasury note, which, as of March 26, 2017, had a yield of approximately 2.4 percent.
In contrast, for the 2015-16 fiscal year, CalPERS averaged a 0.6 percent return on investment, far below the expected 7.5 percent assumed rate of return. CalSTRS recorded a 1.4 percent return for the 2015-16 fiscal year. Both systems have now adopted plans to reduce their expected rates of return to 7 percent.
“Continuing to assume a high return on investments places future taxpayers on the hook for shortfalls created decades prior and puts retirees at risk of losing benefits,” said Morrell. “The systems need to come to terms with the volatility of their situation and begin planning now to prevent our children and grandchildren from having to deal with this ever mounting debt.”
Additional facts about California’s public pension liabilities:
- Groups like the American Legislative Exchange Council peg our statewide unfunded liabilities at over $956 billion – almost $1 trillion. Per capita, it amounts to approximately $24,424.
- CalPERS is only 68% funded and is cash-flow negative, meaning each year CalPERS is paying out more in benefits than it receives in contributions.
- In Fiscal Year 2016, statistics show CalPERS received $14 billion in contributions, but paid out $19 billion in benefits. The $5 billion difference was made up by selling investments.
SB 601 failed passage on a party-line vote of 3-2.