Perhaps your eyes glaze over when you think of pension reform — oh boy, here comes a discussion about solvency and rates of return and zzzzzzzzzz.
Well, wait a second, now. Wake up! The San Francisco Chronicle published a piece yesterday highlighting the current human face on this issue. This is not a future problem, it's a now problem. The failure to run pension systems properly or to reform them is already costing people the government services they expect, or at least think they are paying for with their taxes:
Public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars from classrooms into retirement accounts, education officials said.
The depth of the funding gap became clear to district leaders when they returned from the holiday break: What they contribute to the California Public Employees' Retirement System, known as CalPERS, will likely double within six years, according to state estimates...Next year, officials said, rising pension costs will eat up more than a third of proposed increases to the state education budget.
If you live in California or another state with a badly underfunded and overly generous pension system, a large chunk of what you pay in taxes today has to go to support workers already in their retirement, because the money promised to them just isn't there. As that chunk increases, it begins to erode what government can spend on hiring current government workers and giving them the tools they need to do their jobs. And this is what California school district leaders are realizing when they say things like, "It's like an OMG moment of, 'How are we going to cover this?'"
Your child's education, public safety, and even your local fire department are being shortchanged by a combination of overly generous promises to government workers, unrealistic assumptions about rates of return on pension assets, and in some cases bad investment decisions. Also blame all those years when officials decided short-term spending on baubles or creation of new government programs was worth it, even at the cost of making necessary contributions to badly underfunded pension plans. Last year, the state was expected to pay more into pension funds than it spent on environmental protection, wildfires, and drought mitigation, combined.
CalPERS had planned based on a very sanguine assumption of an annual 7.5 percent rate of return. The additional contributions mentioned in the Chronicle's piece have been made necessary because the fund's board just voted to reduce the assumed rate of return to a still-optimistic 7 percent. The projections published in the Chronicle suggest that school districts across the state will be spending, on average, more than 28 percent of their budgets just to fund CalPERS by 2023, up from 14 percent last year.
And CalPERS doesn't even cover the teachers — their pension fund will require additional increased contributions. The government employee unions will demand (as they have repeatedly) further tax hikes, which will sap the vitality of the state's tax base.
This isn't just a California problem, either. State and local employee pensions across America are short by trillions of dollars. Assuming rosy rates of return (as California has been doing), they have on aggregate made it look like they only have $1.4 trillion in unfunded liabilities, but more realistic assumptions hint at up to $5 trillion, or more than twice what they have the means to cover. In many jurisdictions, pension costs have already started to put the squeeze on current government services. Aside from California, the states under the most pressure to fix their pension systems right now are Illinois (where the state courts have been a major obstacle) and Kentucky.
So no, pension reform is not the snooze-worthy issue you might think. In the long run, it might just be the most important economic issue your state lawmakers take up this year.