There are many negative effects throughout both the private and public sectors that have resulted from the plummet of stock values on Wall Street. In the public sector, throughout the country, public pension funds were heavily invested in the market — and the results have been a plummeting of the value of these funds. The problem, of course, is that while nationally there has been a massive "evaporation of value" — the liabilities on these funds remain — with public employees expecting their defined benefit pensions to be fully funded and paid on promptly.
Here in California, the California Public Employees’ Retirement System (which is the fund for most state and local government employees and pensioners) has seen the value of its holdings fall by literally tens of billions of dollars. According to the Los Angeles Times, it’s holdings were around $240 billion last July — but have now (with the downturn and then a slight upturn in the market) down around 23% — a massive drop. The Times goes on to say that in order to make sure that there is enough money in these funds to cover the calculated costs of paying out pension benefits, public entities would see a massive jump in their annual contributions to CalPERS — from 16.9% to 24.8%.
That is very sad, but predictable. And necessary, no doubt, without some legal mechanism to reduce pension obligations.
But get this, CalPERS is apparently seriously looking at NOT upping those contributions to nearly 25% of payroll, and instead increasing the contributions by only 19.7%. The idea, I suppose, is that if things get better with the market, the uptick in the value of the fund would obviate the need for having to make the higher contributions.
The problem with this is that it is, in essence, gambling on the market. What happens if instead of getting better, the market gets…worse? Then the situation is exacerbated even more.
Governor Schwarzenegger has come out strongly against this proposal, and is quoted in the Los Angeles Times thusly:
California’s government, including CalPERS, should be focusing on fixing its pension system to cut future costs rather than relying on actuarial maneuvers to temporarily ease the pressure on public agencies to meet burgeoning pension obligations, Schwarzenegger said.
The long-term solution, of course, is to get government out of the business of managing individual retirement funds — by moving to a defined contribution benefit (similar to 401k type accounts) — where individuals can make their own investment decisions, and moving the risk away from the taxpayer.
In the meantime, the Governor is absolutely correct to oppose this policy, and it is our hope that the governing board of CalPERS pursues the fiscally prudent course advocated by Schwarzenegger, and opposes this imprudent proposal.
We’re a bit skeptical that CalPERS will do the right thing, because in what was clearly a bad decision by state policy makers, the governing board of CalPERS is dominated by representatives of public employee unions. Guess what, in these tough times, those unions are not interested in seeing payments into CalPERS go up right now, because it will mean more pressure to reduce the salary, wages, and headcount of current union members (of a 13 member board, the Governor appoints only three members). Perhaps this situation highlights that putting union representatives on the CalPERS board is like asking the proverbial fox to guard the hen house…
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