Rising pension costs throughout the state will continue to crowd out resources needed for tangible services for years to come, according to a new report by the Stanford Institute for Economic Policy Research.
"There is contentious debate about what is driving these cost increases — significant retroactive benefit increases, unrealistic assumptions about investment earnings, policies that mask or delay recognition of true costs, poor governance, to name the most commonly cited," explained former Assemblyman Joe Nation, who authored the report. "(B)ut there is agreement on one fact: rising pension costs are making it harder to provide services traditionally considered part of government's core mission.
As the report notes, while the state contribution to CalPERS and CalSTRS was just $1.6 billion in 2002-03, by 2008-09 contributions had risen to $4.3 billion. The report projects that by 2029-30, state contributions will hit $19.5 billion.
As a proportion of state operating expenditures, pension contributions have ballooned from 2.1 percent in 2002-03 to 4.9 percent in 2008-09, and are on track to hit an estimated 7.1 percent in the current fiscal year and could account for 10.1 or 11.4 percent of state spending by 2029-30.
There is no other way to look at it. The greater the share of the state budget pension costs account for, the less money there is to spend on anything else. As the report points out, over the time period from 2002-03 to 2017-18, social services and higher education have seen the greatest reductions in spending as a share of the state budget, with Department of Social Services spending dropping from 10.7 percent of the state operating expenses to 7 percent.
With pension costs expected to continue to rise over the next decade, more cuts are to be expected. The report notes that among the ways the state can accommodate the projected increases in pension costs by 2029-30 is a 4 percent cut across the board or an additional 27 percent reduction in DSS and higher expenditures.
It is important to keep in mind that the state finds itself in this situation despite having raised taxes and fees many times and even passing tepid pension reforms.
Of course, it isn't just the state which is grappling with growing pension costs, but local governments and school districts. As the Legislative Analyst's Office reported earlier this year, from just 2013-14 through 2020-21, districts across the state will experience a tripling of pension contributions — with contributions to CalPERS and CalSTRS growing from just over $3 billion to $9.455 billion.
The SIEPR report provides a few case studies to illustrate the real world impact, including the Los Angeles Unified School District. As a proportion of the district's budget, pension costs have grown from 6 percent of operating expenditures in 2002-03 to nearly 9 percent now and on track to hit 12 percent or 13.3 percent by 2029-30. This naturally means less money for programs and classrooms. To accommodate such pension cost increases, SIEPR estimates the district would either have to reduce salary expenditures by 5 percent or cut all spending by 3 percent.
It is imperative that we not allow this problem to get worse or allow squeamish politicians to keep sweeping the problem under the rug. Governments exist to serve not the public, not to sustain unsustainable pension benefits. Self-respecting taxpayers should not allow this to go on.