Between a Rock and a Hard Place: California’s Pension Crisis in a Nutshell

CalPERS sent the state’s municipalities into a tailspin this month when it announced a change in its amortization policy from 30 to 20 years. But as Dan Walters at CalMatters notes, the sheer alarm over a rather small change to its payment schedule highlights some of the deeper problems plaguing the system itself.

Walters notes that CalPERS’ move was designed to ensure its own stability.

The system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees – and that assumes it will hit an investment earnings target (7 percent per year) that many authorities criticize as being too optimistic.

The trust fund lost about $100 billion in the Great Recession and never has fully recovered. By lowering its earnings projection – it had been 7.5 percent – while moving to a more conservative investment strategy and cutting the amortization period, CalPERS hopes to avoid another disaster were the economy to turn sour.

Officials fear that were it to experience another big investment loss, it would pass a point of no return and never be able to pay for pension promises.

But the new policy means local governments will have to speed up their contributions to the system. That has put a number of them in an untenable position and could ultimately push some to the brink of insolvency.

So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency. That’s the crisis in a nutshell.

Be sure to check out the full column by Dan Walters here