An Open Letter To Tina McKinnor, Tim Grayson, et al.
AB 1383 must be amended.
Dear Assembly Members McKinnor, Addis, Ahrens, Alanis, Ávila Farías, Boerner, Calderon, Castillo, Chen, Connolly, Flora, Hoover, Krell, Nguyen, Ortega, Pacheco, Patel, Patterson, Ramos, Ransom, Sharp-Collins, and Solache and Senators Cortese, Gonzalez, Grayson, and Pérez:
You are sponsors of Assembly Bill 1383, which proposes to enhance pension benefits for certain public employees. While your bill correctly discloses that the normal costs of the pension enhancements are shared by employees and taxpayers, it does not disclose that, under current law, taxpayers are obligated to pay 100% of the costs of any unfunded liability (UAAL) arising from the enhancements. UAALs arise whenever the investment earnings of public pension funds fall short of the earnings they assumed when setting normal costs. Because pension liabilities tend to have very long durations, UAALs tend to end up costing multiples of normal costs.
That’s why taxpayers are already paying an extra $25 billion every year for UAALs arising from CalPERS and CalSTRS falling short of the returns they assumed in the past when setting normal costs. That $25 billion cost to taxpayers of servicing existing UAALs is more than twice as much as the $11 billion per year taxpayers and employees are each paying in normal costs. Local taxpayers in the 20 counties (such as Los Angeles and San Francisco) that are not part of CalPERS or CalSTRS and that run their own pension funds — and that will be greatly affected by AB 1383 — are also already paying billions more for UAALs in addition to normal costs.
UAAL risk is the single biggest risk taxpayers face from AB 1383— yet you neither disclose it nor address it. But you must. At a minimum, employees and taxpayers should split UAAL costs just as they split normal costs. But an even fairer result would be to allocate 100% of the responsibility for UAALs to employees. That’s because employees will receive 100% of the financial benefit of the enhancements and, unlike employees, taxpayers have no influence over the rates of returns California’s public pension funds assume when setting normal costs. Under Proposition 162 (1992), California’s public pension fund boards can’t even consider taxpayer interests and must prioritize the interests of its participants — ie, employees and retirees who are members of politically-powerful public sector unions. That gives pension fund boards an incentive to minimize normal costs even though that increases the risk of UAALs.
You should amend your bill to hold taxpayers harmless from any UAAL Costs that arise from the enhancements. Taxpayers should bear no risk of public pension funds failing to earn the returns they assume when setting normal costs.
