One big cost that never goes down: public retirement benefits

February 6, 2008

By DANIEL BLACKBURN

2/6/2008

First in a series

While California’s housing market has been swirling down the drain, the state’s largest public retirement system has been enthusiastically investing hundreds of millions of dollars into a more promising real estate market… south of the border.

Mexican home buyers have been benefitting from more than $300 million that California’s largest public employment retirement system, CalPERS, has pumped into Mexico real estate throughout California’s catastrophic housing market freefall.

All seven cities in San Luis Obispo County have employee pension plans with CalPERS, which statewide boasts 2,500 public agency members.

State, California State University, and local government employees are covered by CalPERS. (San Luis Obispo County is one of two in the state which have independent retirement systems for employees, with a different set of rules. Public school teachers are covered by CalSTRS, which along with SLO County’s system will be examined in subsequent articles in this series.)

Public portfolios containing imaginative investments, however, such as CalPERS’ Mexican property financing, eventually could result in some relief for taxpayers by reducing public retirement contributions by individual cities, according to fund officials.

That might provide only a negligible savings in the long run. Public pension and benefit costs to taxpayers in the form of matching payroll contributions are steadily on the rise, while the ability of public entities to fund those promised obligations is rapidly diminishing. Some California local governments as a consequence are on an inevitable collision course with bankruptcy, most notably San Diego, Bakersfield and the county of Contra Costa.

Clark McKinley, information officer for CalPERS, acknowledged the apparent irony of the Mexican investment. McKinley told UncoveredSLO.com that CalPERS got into the Mexican real estate market “before the subprime crisis hit last summer and the U.S. housing market tanked.”

CalPERS investments “are doing well for us in Mexico,” said McKinley. He believes such broad-based investments can result in local tax revenue savings.

“Every dollar in value generated by good Mexico returns is one more dollar that we won’t need from those same local agencies that are under budget pressure,” he said. “We’re investing for the long term, which is one of the reasons for our success; we don’t overreact to temporary market downturns.” Still, McKinley said CalPERS “has a pretty big focus on California assets, including real estate.”

Public retirement systems like CalPERS are required by the state constitution to maximize investment returns. Even as that happens, with investments like that in the Mexican real estate market, the overall cost to state taxpayers continues to balloon. While other sectors of the economy fluctuate according to market movement, the state’s pension program remains remarkably stable. That’s partly because state law at present requires investment losses to be corrected through greater public contributions, rather than reduction in benefits to recipients.

A city handbook published in 2005 by San Luis Obispo contends that officials “believe that the retirement plans in place today are appropriate.” However, those same city officials and others statewide are working with the League of California Cities to make “course corrections” for the CalPERS system.

Those “corrections” are needed to deal with a shortfall of $65 billion in California’s long-term public pension obligation, an amount that likely is increasing at this moment because of financial market softness. According to a recent report by the Governor’s Public Employee Post-Employment Benefits Commission, only 89 percent of the committed amount is currently funded statewide, on average. That unfunded amount varies widely between public agencies, and does not now incorporate the financial fallout from recent market declines.

But that unfunded liability concern pales alongside the anticipated price tag for taxpayer contributions for benefits granted along with pension payments – lifetime health, dental, survivor insurance and other allowances. Funding mechanisms and policies for pension plans under CalPERS are well-established and regularly reviewed. The same cannot be said, though, for the 800-pound gorilla in the public retirement closet, “other post-employment benefits (OPEB).” These costs to taxpayers go well beyond the payment of pensions, to the tune of as much as $170 billion, according to former California lawmaker Keith Richman who now runs a lobby group called California Foundation for Fiscal Responsibility.

Richman authored an unsuccessful proposal to amend the state constitution to change current public pension law. Backed by Gov. Arnold Schwarzenegger, the measure was defeated by voters in 2005. A similar plan failed last month to qualify for a place on an upcoming ballot.

(Editor’s note: This is the first in a regular series of articles that will explore public pension programs in San Luis Obispo County and examine their growing costs, and potential fiscal risks, to taxpayers.)