A new study from Joe Nation of Stanford’s Institute for Economic Policy Research entitled “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030,” says that the devastating consequences of the ill-advised, Cadillac pensions doled out to America’s public employees over the past several decades are only getting started.
Looking back at taxpayer contributions to public pensions in California, Nation found that they’ve increased by 5 times since 2002-2003 and are very likely to double again by 2029-2030. Not surprisingly, that kind of hyper-inflationary growth has massively outstripped increases in tax revenue, even in the great progressive state of California (shocking, we know), meaning that pension contributions now account for 11.4% of California’s operating budget, up 3x from the 3.9% it consumed in 2002-2003.
For more than a decade, public pension costs have been rising sharply in California. There is contentious debate about what is driving these cost increases—significant retroactive benefit increases, unrealistic assumptions about investment earnings, operational practices that mask or delay recognition of true system costs, poor governance, 1 to name the most commonly cited. But there is agreement on one fact: public pension costs are making it harder to provide services that have traditionally been considered part of government’s core mission.
- Employer pension contributions (i.e., pension contributions plus debt service on any Pension Obligation Bonds) from 2002-03 to 2017-18 expanded on average 400%, i.e., contributions in nominal dollars are now five times greater.
- Employer contributions are projected to rise an additional 76% on average from 2017-18 to 2029-30 in the baseline projection and 117%, i.e., more than double, in the alternative projection.
- Employer pension contributions from 2002-03 to 2017-18 have increased at a much faster rate than operating expenditures. As noted, pension contributions increased an average of 400%; operating expenditures grew 46%. As a result, pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03.
- The pension share of operating expenditures is projected to increase further by 2029-30: to 14.0% under the baseline projection—that is, even if all system assumptions, including assumed investment rates of return, are met—or to 17.5% under the alternative projection.
- The average employer funding amount expressed as a percent of active member payroll, i.e., the employer contribution rate,5 has increased from 17.7% in 2008-09 to 30.8% in 2017-18. By 2029-30, it reaches 35.2% under the baseline projection and 44.2% under the alternative projection.
- On a market basis, the average funded ratio fell from 58.5% in 2008 to 43.0% in 2015. By 2029 it improves to 48.2% in the baseline projection, but falls to 39.0% in the alternative projection. The unfunded liability per jurisdiction household on an actuarial basis also rose from an average $1,682 in 2008 to $5,071 in 2015; the unfunded liability per household on a market basis is $21,491, up from $9,127 in 2008.
Here’s a graphical depiction of California taxpayers getting steamrolled…
…or as a percent of total operating expenditure, if you prefer…
What’s getting cut from California’s budget to make room for these exorbitant pension payouts? Well, basically everything else…
As discussed above, the pension expenditure share of the state’s operating budget increased from 2.1% in 2002-03 to 4.9% in 2008-09; it is estimated at 7.1% in 2017-18. This increasing share, despite an expanding budget, has shifted $6.0 billion in 2017-18 from other state expenditures to pensions.
Changes in state expenditures by agency and department suggest that this reduction has come primarily from social services and higher education. For example, the expenditure share for the Department of Social Services (DSS) fell from 10.7% in 2002-03 to 6.0% in 2014-15 before climbing to 7.0% in 2017-18. The higher education share of operating expenditures fell from 11.3% in 2002-03 to 9.8% in 2014-15, although it increased to 10.5% in 2017-18.
In addition, expenditure shares fell in several smaller departments from 2002-03 through 2014-15: the Department of Justice (0.4% to 0.2%), Department of Parks and Recreation (0.2% to 0.1%), and Department of Water Resources (0.2% to 0.1%).
So good luck with that whole education thing kiddos because you’re grandparents are about to crush your future.
Here is the full study: