Pension Spending

$270 Billion Of Spoils

This post was updated on 4/19/2024 to include 2024-25 proposed State Retirement and Health Care Contribution numbers resulting in a change of the reported pension cost portion from the Governor’s January Budget from $95 billion to $105 billion and the supplemental portion from $19 billion to $20 billion.

One of the first things I learned after Governor Schwarzenegger appointed me to the board of the California State Teachers’ Retirement System (CalSTRS) in 2005 is that public employees only contribute to their pensions upfront but taxpayers contribute upfront and are on the hook for 100 percent of any funding deficiencies. Public sector unions exploit that asymmetry by pressuring pension fund board members to utilize artificially high investment return assumptions. The higher the assumption, the lower the upfront contribution, but when those assumptions aren’t met, taxpayers must make up the difference plus compound interest at the assumed rate. I advocated for realistic investment return assumptions that would’ve forced higher upfront contributions but under pressure from public sector unions, the State Senate removed me from CalSTRS’s board in 2006 and because CalSTRS and its sister state pension fund the California Public Employees’ Retirement System (CalPERS) continued to use unrealistic assumptions, taxpayers are saddled with nearly $270 billion of expensive unfunded pension liabilities*.

You can see part of the cost to taxpayers in this “State Retirement and Health Care Contributions” chart on page 101 of the Governor’s January Budget, the pension cost portion of which adds up to $105 billion over ten fiscal years:

State Retirement and Health Care Contributions, Dollars in Millions, for fiscal years 2015-16 through 2024-25.

But buried in the footnotes is an additional $20 billion of “Supplemental” pension payments:

Supplemental pension payments footnote

Those Supplemental payments were discretionarily appropriated by the governor and legislature to pay down unfunded pension liabilities. Normally, paying down liabilities would be laudatory but in this case the liabilities being paid down were manufactured by pension fund boards acting in the interests of public sector unions and never should have been created in the first place.

Don’t blame public sector unions. They are just doing their jobs. Blame your elected officials for not doing theirs. A majority of CalSTRS’s and CalPERS’s board members are constitutional officers, appointed by the governor or legislative leadership, or confirmed by the legislature.

*See page 136 of CalPERS ACFR and page 136 of CalSTRS ACFR.