Pensions – What Went Wrong

Jan 11, 2011 by Dick.Thomson

An analysis by CalPensions.

Two CalSTRS programs that expired at the beginning of the new year are an example of what all three state public pension systems did in good times — pumped up pensions for retirees, while cutting payments into the pension funds.

The conventional wisdom was that employers and employees could put less money into pension funds, and get much larger pensions in the future, because investment earnings would cover most of the cost.

Now in bad economic times CalSTRS, CalPERS and UC Retirement have huge debts and need big increases in government funding, leaving less money for other programs and increasing the pressure for tax and fee hikes.

This year a wave of state and local government pension reforms began reversing the boom-years trend — increasing payments into the funds and rolling back pensions for new hires. Pensions promised current workers are protected by the courts.

Why had it seemed that investment earnings would provide the best of both worlds, lower contributions and higher pensions?

Proposition 21 in 1984 allowed public pension funds to shift most of their investments from predictable bonds to stocks and other investments, with higher yields but also higher risks.

The lid came off as stocks began to soar during a  historic two-decade bull market. The boom gave the three state pension funds surpluses of different sizes, but the response was the same:

Lower annual contributions from employers and employees to the pension funds, and higher pensions for retirees through more generous formulas based on years of service and percentage of final pay or other means.

Bill analyses show that the Legislature was given questionable information about whether key measures for the California State Teachers Retirement System and the California Public Employees Retirement System would increase state debt.

In the case of CalPERS, critics soon began to say the higher pensions threatened government budgets, but there was no change. Then historic pension fund losses in the stock market crash two years ago triggered alarming forecasts of soaring pension costs.

Here’s a look at what happened to the three state pension funds, beginning with the California State Teachers Retirement System.

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