California's public employee pension systems face hundreds of billions of dollars of debt largely because of unrealistic assumptions about future investment returns needed to fund overly generous retirement benefits.
For years, political pressure has overridden fiduciary responsibility. On Tuesday, key leaders of the California Public Employees' Retirement System, the nation's largest government pension system, demonstrated that they still haven't learned.
For the second year in a row, they ignored their own expert's advice as they continued gambling our children's financial future to avoid short-term pain.
The culprits include state Controller John Chiang and representatives of state Treasurer Bill Lockyer and Gov. Jerry Brown's administration.
The three statewide officeholders preach fiscal responsibility but, in the end, they fail to walk the talk.
CalPERS board members have been advised to get real about investment returns. Their chief actuary, Alan Milligan, recommends that they lower their long-term projections from 7.75 percent annually to 7.25 percent.
Here's why this is important: The lower the assumed rate of return, the more money employers and employees must contribute now, and the greater the chance there will be adequate funds to pay pension benefits in the future.
Conversely, the higher the assumed rate, the greater the likelihood the pension system will later come up short. If it does, future
Nevertheless, a committee of the labor-dominated Cal- PERS board recommended kicking the can further down the road. The full board most likely will rubber stamp the decision Wednesday.
Last year, the board ignored Milligan's advice to lower the rate to 7.5 percent. This year, the committee opted for the 7.5 percent rate when Milligan was advising 7.25 percent.
Many experts argue that even that is way too optimistic. We agree with them. Indeed, Milligan told the Cal- PERS committee on Tuesday that there's only a 54 percent chance of meeting the 7.25 percent rate over the next 19 years, and the chance of meeting the 7.5 percent rate is only 50 percent.
Think about that: We are guaranteeing pension benefits to current workers when they retire. But we will be funding them based on a gamble that is just as likely to fall short as to meet the target.
We understand that lowering the assumed rate will pressure state and local government employers and employees to pay more now.
It will not be easy. It will lead to more job cuts.
But we cannot continue to dig ourselves deeper into a hole. CalPERS currently has only 75 percent of the funds it should. Other public pension systems are similarly deeply in debt.
Ignoring the problem won't make it go away.