The Pension Debate: Our Focus is on the Future
September 28, 2016
By Richard Costigan, Dana Hollinger, and Bill Slaton
The recent back-and-forth debate over pensions for public employees always lands on important issues like employer contributions and discount rates. Lost in the discord, though, is what’s ultimately at stake: the financial future of millions of Americans.
So let's get to the point and not fall into the tired trap of looking back: It's time to put SB 400, the 1999 California legislation that changed benefits for public workers, behind us. That bill, passed by the state legislature, signed by Governor Gray Davis and supported by the California Public Employees' Retirement System (CalPERS) Board of Administration, was a product of its time. Retirement security is too important today to get caught in a debate about the past.
When SB 400 became law, CalPERS was 137 percent funded and contributions by the public agencies that were members of the Pension Fund had dropped to near zero. Those agencies - the fire and water districts, cities, counties, and school districts that serve millions of Californians across the state - had saved billions of dollars in lower or no contributions for several years.
Even allowing for the severe economic downturn brought on by the dot-com bust in the early 2000s, CalPERS entered 2008 more than a 100 percent funded. No one saw what happened next.
The worst recession since the Great Depression hit - and investors across the globe watched as trillions of dollars in asset values were wiped out. Over the next two years, CalPERS' funded status dropped by 40 percent due to investment losses, leading to the difficult funding challenges we face today. The changes outlined in 1999 were considered a reasonable way to give state workers, who hadn't seen pay increases in several years, a chance to participate in booming economic times.
Hindsight is 20/20. This is the time for a new direction and new decisions designed to sustain the pension fund now and for generations to come. We began planning several years ago and have taken a proactive role to addressing the new environment.
Four years ago, we hired our first chief financial officer, and in 2012 and 2014 representatives from the insurance industry and public sector, both with financial experience, joined our Board. We established a process to take an innovative, integrated view of our assets and liabilities. We cut $300 million annually in investment fees, exited hedge funds, and eliminated high-fee Wall Street investment managers. We promote good governance in the companies in which we invest to improve value and further cut risk in our portfolio; and we’ve designed a carefully measured policy to reduce it even more.
We're in a tough economic environment, and we know it will be hard to achieve strong returns over the next few years. As a Board, we'll be examining our assets and liabilities from every conceivable angle, reviewing every economic assumption out there, to strengthen our fund and meet our obligation to our 1.8 million members.
Even as fiscal conservatives, we are committed to defined benefit plans. We strongly believe everyone should have a secure retirement. But we're also committed to honestly and openly tackling the financial issues we face. The continued focus on the past distracts from all the work we've done to tackle the future head on.Richard Costigan is chair of CalPERS Finance and Administration Committee and former deputy chief of staff for Governor Arnold Schwarzenegger. Dana Hollinger is vice chair and a Governor appointee to the CalPERS Board representing the insurance industry. Bill Slaton is a Governor appointee representing local governments.