CalPERS’ strong investment returns do not justify higher pension increases.

The California Public Employees’ Retirement System (CalPERS) recently reported an impressive investment return of 14.8% for the past year, marking the highest annual return for the largest pension fund in the United States in a decade. This robust performance is a significant development for taxpayers, as it serves to enhance the funding status of the pension system while also easing CalPERS’ substantial debt.

However, this positive financial news may be short-lived, as state legislators appear poised to capitalize on these gains by proposing considerable pension benefit increases for influential public safety unions. In light of California’s ongoing struggle with public pension debt, legislators would do well to exercise caution rather than leverage favorable returns to impose further financial burdens on taxpayers.

This situation highlights a cycle reminiscent of the late 1990s, a period characterized by exorbitant market returns driven by a technological boom. During that decade, CalPERS reported returns exceeding 20% in 1997, leading to a doubling of its asset base compared to the previous ten years. At that juncture, lawmakers faced a pivotal decision: should they bolster the pension system’s reserve to safeguard against eventual economic downturns or allocate these increased returns to enhance benefits for government employees?

Regrettably, the choice was to indulge in the latter. By 1999, California’s legislature had substantially increased pension benefits for government employees without suitable funding mechanisms, banking on the continuation of robust investment returns—a gamble that yielded disastrous outcomes. The subsequent decade witnessed a series of economic crises, including the bursting of the dot-com and housing bubbles, culminating in the Great Recession. As a result, CalPERS found itself grappling with massive financial obligations, accumulating 5 billion in debt by 2009.

In response to this crisis, lawmakers enacted the Public Employees’ Pension Reform Act (PEPRA) in 2012, aimed at curbing pension benefits and initiating debt repayments for previously promised unfunded benefits. While PEPRA has contributed to gradual funding improvements, experts estimate that the state remains a decade or more away from effectively managing its pension liabilities.

Despite the system’s need for prudent fiscal management, recent legislative proposals, such as Assembly Bill 1383, threaten to undermine the hard-won reforms established by PEPRA. This proposed legislation seeks to grant unfunded benefit increases to first responders by lowering their retirement age and raising the compensation cap for additional pension benefits from 0,000 to 5,000, substantially benefitting higher-paid government employees.

Proponents argue that these changes aim to improve recruitment and retention among first responders. However, data indicates that retention rates among California’s public safety workforce have remained stable, with the median tenure among these employees doubling since 1983 to an average of 13 years, significantly exceeding the national average of nine years.

Moreover, concerns persist regarding the fiscal implications of these proposed benefit increases. CalPERS has indicated that AB 1383 could impose an additional .8 billion in costs to state and local governments, ultimately financing these expenses through taxpayer contributions. Projections suggest that, over a 30-year horizon, these additional burdens could escalate to .3 billion under favorable economic conditions, and potentially reach .5 billion should economic downturns occur.

With CalPERS already grappling with 6 billion in debt, the recent strong investment returns offer only marginal relief. It raises alarm that lawmakers are seemingly on course to repeat the costly mistakes of the past. While positive investment returns provide a welcome boost, they should not be misconstrued as justification for enacting unfunded pension benefit increases. The financial health of California’s public pension system and its taxpayers could hang in the balance.