In the category of “good news, bad news,” America’s recovering economy has had a significant positive impact on the Public Employees’ Retirement Fund (PERF), the primary investment fund administered by CalPERS. CalPERS is the largest institutional investor in the United States and it operates the pension program for over 2 million current and retired California public employees.
Last week, CalPERS reported a 21.3% rate of return for PERF over last fiscal year. That’s much higher than in previous years and is especially robust after more than a year of pandemic induced recession. (In February of 2020, the fund declined in value by $15 billion in a single week).
The total value of the PERF now, according to figures released by CalPERS, is $475 billion, an increase of about $80 billion over the last year. Investment performance is just one contributing factor to PERF’s bottom line, along with withdrawals for retirement benefits and contributions by current employees and public-sector employers.
This is good news for California taxpayers. Most of the public pension plans in this state are “defined benefit” plans, meaning that retirees are guaranteed a sum certain; as opposed to “defined contribution” plans, which operate more like 401(k) accounts that may be vulnerable to wide variations in the market.
The problem with defined benefit plans, from the perspective of taxpayers, is that they are responsible to ensure payment of those promised benefits later, even if there isn’t enough money in the retirement fund to cover them. Because of the risk to taxpayers, many states have converted to defined contribution plans which, from the taxpayer and employer perspective, are much less risky.
The positive investment performance might help rehabilitate CalPERS’ reputation given that CalPERS has a sordid history of scandal and mismanagement. Just last year, CalPERS’ chief investment officer Yu Ben Meng resigned amid allegations that he had approved a $1 billion deal with a firm in which he was a shareholder.
In 2018, the chief financial officer got bounced for misrepresentations on his resume. And, in 2016, the CEO of CalPERS was sentenced to prison for taking bribes from a former CalPERS board member who never faced trial because he committed suicide.
Many of CalPERS’ previous problems were due to overpromised pension benefits and, regrettably, that continues to be the case. California has the most generous pension benefits in the nation.
A review by Transparent California revealed that those receiving more than $100,000 annually in pension benefits, the so-called “$100,000 Club,” has increased by 173% since 2012. And that doesn’t even include the Fontana city manager who received credit for time he did not work in order to allow him to hit the 30-year mark and collect a larger pension, along with a nearly $1 million severance settlement.
Now for the bad news. In 1999, in the midst of the dot-com boom, CalPERS made a horrible miscalculation. Thinking that the rise in the stock market would go on forever, it sponsored Senate Bill 400 to boost benefits. Investment earnings had averaged 13.5% for a decade, and a few state and school plans had 100% funding – meaning zero unfunded obligations — some were even overfunded, with assets totaling more than they needed to pay every dollar in pension benefits that would come due.
Without going into all the gory details, suffice it to say that SB 400 supercharged pension benefits for most public employees. Seeking union support for his upcoming re-election campaign, Gov. Gray Davis signed the bill. Campaign finance records confirm that public employee unions contributed generously to Davis’ campaign committee in 2002. The prison guards’ political action committee wrote checks totaling more than $1 million.
Years later, the worst of the abuses from SB 400, but certainly not all, were corrected by a pension reform bill pushed by Gov. Jerry Brown.
Taxpayers hope that CalPERS and our elected leadership learned their lesson from two decades ago and refrain from granting higher benefits during a time when the stock market is frothy, because the fact that PERF is so well funded at the moment will certainly motivate public-sector labor groups to push for larger payouts.
Already, the news is not good. In a troubling development, Assemblymember Jacqui Irwin, D-Thousand Oaks, has proposed Assembly Bill 826 to validate certain pension-spiking practices happening in Ventura County, despite the Brown-era pension reforms and a decision from the California Supreme Court.
Although AB 826 applies narrowly, just to pension plans offered by counties under a 1937 law, the fact that any lawmaker would seek to give a legal thumbs-up to pension spiking, reversing course on pension reform, is troubling.
Even the Ventura County Employees’ Retirement Association’s own counsel concluded that counting the value of “flexible benefit plans” in pension calculations is not permitted under the law.
Proposals such as AB 826 need to be opposed vigorously. Here’s hoping our current elected leadership begins to channel their inner Jerry Brown to reject such efforts.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.