California is failing its employees and its citizens. Documents show that the state and local governments in California do not have enough money saved up to pay for the retirement of its current employees. The California Public Employees’ Retirement System (CalPERS) is facing future insolvency.
These findings come from the 2015 CalPERS Actuarial Report for Pensions and the 2015 Actuarial Report for Retiree Health Benefits, which are the most recent actuarial reports available for California’s public employee pensions and other retirement benefits. It is worth noting that retirement health benefits have less legal protections than pensions in bankruptcy court, although they are politically difficult to change.
How did California get into this precarious situation? State and local governments aren’t pre-funding health benefits in California. The Public Employee Post-Employment Benefits Commission concluded that retiree health benefits need to be pre-funded just as pensions are so that retiree benefits are secure, but few local governments have done this. Instead, they use a pay-as-you-go system, where money from the budget goes to pay for post-employment benefits every year. This means that government is not investing the funds intended for health benefits, so they cannot use investment returns to help pay for benefits. The refusal to pre-fund health benefits will cost local governments billions of dollars.
Governmental refusal to pre-fund retiree health benefits causes state and local governments to drastically overstate the solvency of their retirement benefit systems. Let’s consider the state’s situation as an example. According to page 11 of the 2015 CalPERS Actuarial Report for Pensions, the funded ratio for state employee pension plans is 69.4%. Federal ERISA standards say that plans at 65% funding or below are in “critical status”. However, when we incorporate obligations for retiree benefits, the funding ratio for all of CalPERS’ state and local employees’ retirement plans is below 50% – well into the crisis zone. These numbers come from adding the assets and the liabilities in the 2015 CalPERS Actuarial Report for Pensions and the 2015 Actuarial Report for Retiree Health Benefits.