The California State Senate is considering a pension increase bill, AB 1383. Some journalists have been comparing AB 1383 with another pension increase bill, SB 400, signed into law in 1999 by then-Governor Gray Davis.
In 1999, the state pension fund (CalPERS) assumed an 8.25% annual investment return (see page 88 here). That means that CalPERS expected every $1 invested with it in 1999 would turn into $4.88 by 2019, 20 years later. Based on that assumption, the California Legislature and Governor Davis felt comfortable granting a pension increase to state employees that would be covered by investment earnings.
CalPERS earned an actual annual return of 5.8% over that 20-year period. That means that every $1 invested with CalPERS in 1999 actually turned into $3.09 by 2019, a healthy gain but not as much as forecast. The $1.79 difference between the expected and actual returns became an unfunded liability that taxpayers are responsible for paying off, as explained here. Normal pension costs are split 50/50 between employees and taxpayers but unfunded liabilities are paid for only by taxpayers.
AB 1383 would allow local governments to hike pension benefits for public safety employees. Currently CalPERS assumes a 6.8% annual investment return. In comparison, Warren Buffett assumes his pension funds will earn 6.4% and long term US Treasuries currently earn 5.2%. Taxpayers are 100% on the hook if CalPERS earns less than 6.8%. Should the State Senate pass the bill?
