California Pensions Improve Slightly, Still Deep in the Red

The California Public Employees' Retirement System building in Sacramento, Calif., on July 21, 2009. Max Whittaker/Getty Images

Commentary

A recent Pew Charitable Trusts study found that the rising stock market has improved the fortunes of state pension funds, including that of California, but cautions that “uncertainty remains.”

“The State Pension Funding Gap: Plans Have Stabilized in Wake of Pandemic” (pdf) calculated that state pension systems are in the best fiscal shape since before not only the recession from the COVID-19 pandemic, but before the 2007–08 Great Recession. The reason was state retirement fund asset increases of more than $500 billion “fueled by market investment returns of more than 25 percent in fiscal 2021,” the best annual return in three decades.

Public employee and taxpayer contributions also boosted the fiscal condition of these funds.

But it’s not all peaches and cream. Pew said, “Despite the encouraging trend, public pension funding can be volatile.”

The funding ratio of assets versus liabilities “has risen above 80 percent, a substantial improvement,” the study found. Indeed, preliminary results show that it hit the 84 percent mark for fiscal year 2021, which ended on June 30.

The 80 percent mark long has been considered the minimum threshold for a pension fund. However, that’s actually still too low. An Issue Brief by the American Academy of Actuaries called it, “The 80% Pension Funding Standard Myth” (pdf).

It said, “An 80 percent funded ratio often has been cited in recent years as a basis for whether a pension plan is financially or ‘actuarially’ sound. Left unchallenged, this misinformation can gain undue credibility with the observer, who may accept and in turn rely on it as fact, thereby establishing a mythic standard. ... Pension plans should have a strategy in place to attain or maintain a funded status of 100 percent or greater over a reasonable period of time.”

California Still Underfunded

And California, although also improving, is not among the best states. It didn’t even meet the 80 percent funding threshold, clocking at just 71.9 percent. By comparison, Idaho was 94.6 percent, Nebraska 93.1 percent, South Dakota 100.1 percent, and Wisconsin 103 percent. Even departed Gov. Andrew Cuomo’s New York was 96.1 percent.

At least the Golden State wasn’t as low as perennial spendthrifts Rhode Island at 54.5 percent, Hawaii at 54.9 percent, and near-bankrupt Illinois at 38.9 percent.

However, after the typically perennial tardiness of Controller Betty Yee, Pew lamented, “Data on a subset of California local governments participating in the California Public Employees’ Retirement System was not available in aggregate and was not included in our data.”

Yee’s Comprehensive Annual Financial Report for fiscal year 2019–20, which ended more than a year ago on June 30, 2020, still has not been produced. Most states finished theirs last fall.

So the actual funding ratio may be different from the estimated 71.9 percent.

And for 2019, the last year calculated in this study, California’s end-of-year net pension liability was $185 million.

Bad Years and Good Years

I talked to former state Sen. John Moorlach (R-Costa Mesa), the only CPA in the legislature during his six years there. With the national average 84 percent, and the Orange County Public Retirement System (OCERS) more than 80 percent, he asked, “How did California miss the boat by staying around 72 percent?”

Part of the reason may be that the reforms he advanced after his 2006 election as a Republican Orange County Supervisor helped OC, but he was unable to apply similar remedies to the state because the legislature is supermajority Democratic.

The problem now is the future. “There are economic cycles,” he cautioned. “The Pew Report does not provide a graph showing historical activity for net returns over the past 20 to 50 years. The reason I mention it is that bad years follow good years.”

What should be done?

“States need to stay the course and anticipate continuing with their serious efforts of addressing unfunded pension liabilities. And as they do, they should thank the good fortune of a rising tide as they prepare for the lowering of that same tide.”

Unfortunately, in the last year, Moorlach lost bids to stay in the Senate and return to the OC Board of Supervisors.

In the Sept. 14 recall election, the need for pension reform hardly came up. Gov. Gavin Newsom obviously didn’t want to bring up that failure. Larry Elder included one sentence on it in his “Vision” statement, which listed his issues positions.

One of the few columns I could find was by Marc Joffe of the Reason Foundation in the Orange County Register, “Whatever the outcome of the recall, the Wall of Debt must be a priority.”

Yet as the state found out to its regret during the dot-com bust two decades ago and the Great Recession, an economic downturn turns $20 billion budget surpluses into $40 billion deficits. Which then spark tax increases.

The business cycle hasn’t been repealed. With another gubernatorial election cycle beginning again, the pension debt ought to be Issue No. 1.