California’s Public Employee Pension Crisis

Mark Fernwood

By Mark Fernwood is a member of the Contra Costa GOP Central Committee and Lamorinda Republican Women Federated.

California, at both the local and state levels, offers very generous, public employee pensions.  They have been so underfunded, that the shortage has reached an estimated $1.5 trillion.  The shortfall in funding was largely due to an “actuarial accounting trick” of assuming a very unrealistically high rate of return on the invested pension funds.  The higher assumed rate of return, the less that needs to be contributed each year. This accounting trick allowed the state law to be avoided that requires all public pensions to be fully funded each year.  This left the state far more funds to be spent on pet programs.  This increasing problem is simply pushed into the future.

Public pensions in California are “Defined Benefit” plans.  They are not “Defined Contribution” plans, like with private employer 401K programs.  No matter how underfunded the public plan is, the full obligation remains on the public.  Other critical programs, even public safety, my must be cut.

Public pension promises normally include lifetime medical and dental benefits.  These future obligations are totally un-funded.

Another trick used before 2012, was called “spiking.” Before, as a public employee was approaching retirement, he would “postpone” payment for vacation time and work as much overtime as possible.  As the pension benefit is based on the final 3 years of wages, by “spiking” these earnings the pension obligation and payments per year, was greatly increased. After 2012, these extra earnings were not allowed to be counted.  The “spiked” pensions of the past, stayed intact, however.  Pension contributions are based on yearly earnings, so contributions are actually based on average earnings not the final 3 years.

Another problem still, is what is called “The California Rule.” This long-standing rule, provides that pension benefits in place, at the moment of a worker's hiring, can never be reduced without equivalent compensation. The only exception is by court order due to municipal bankruptcy.  This has resulted in the bankruptcy, under Chapter 9, of several cities, including Stockton, Vallejo, San Bernadino and Mammoth Lakes.  There is no legal provision or historical example of a statewide bankruptcy.

Chapter 9 bankruptcy is allowed if the municipality is insolvent, (with out means to pay its current  obligations) and have no reasonable alternative to bankruptcy.

The pension crisis has also grown in, some jurisdictions, due to the offering of further increased pension benefits to settle unpayable public employee union demands.

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