(March 4, 2011) California’s public pension systems need immediate reforms in order to be sustainable, a bipartisan, independent state commission has concluded.

Public Pensions for Retirement Security, a report of the Little Hoover Commission, found that without reforms, “Pension costs will crush government.”

The commission report commented that in another five years, “when pension contributions from government are expected to jump and remain at higher levels for decades in order to keep retirement systems solvent, there will be no debate about the magnitude of the problem.”

Findings

The commission also found that:

• “The math doesn’t work.” In addition to investment losses in 2008–09, other factors contributing to “an unsustainable pension environment” include ballooning pension liabilities as the minimum retirement age has dropped to 55 and people live longer.
  Increases have made state and local government pensions “the most generous in the country.” Relying on high fund returns and “an aggressive investment strategy” has meant “employers and employees also have failed to contribute sufficiently,” the commission said. “Today, the state’s largest pension systems are dangerously underfunded.”
• “The system lacks discipline.” The commission noted that the pension system is regarded as deferred compensation “the perceived tradeoff of earning a lower salary in the public sector in exchange for a good retirement package.” When aggressive investing by the retirement systems fail to meet system needs, taxpayers are left facing all the risk, the commission said.
  The commission warned that when the market recovers, “history would suggest that. . . the pressure from employees will return to ramp up pension formulas and undo any reforms being made today.”
• “The system lacks oversight and accountability.” The commission pointed out that since 2008, fewer than 30 of the 1,500 local public agencies in the CalPERS network (the largest pension plan in the country) have adopted a lower level of benefits for new hires. Nearly 200 public agencies in CalPERS continued to increase retirement benefits for current workers, even as pension portfolios shrunk and tax revenues dropped.

The commission pointed out that the lack of uniformity clouds transparency, invites mischief and abuse, such as pension “spiking,” creates a “compensation arms race” among communities and “delegates complicated decisions to often inexperienced” local officials.

Addressing Pension Liabilities

The commission recommended reforms to address current and future pension liabilities, including a “hybrid” pension model that combines a lower defined-benefit pension formula with an employer-matched and risk-managed defined-contribution plan.

The commission also suggested that the state explore extending Social Security old-age benefits to uncovered state and local employees, as is the case with the federal workforce.  

The full report is available on the Little Hoover Commission website.