The California Constitution prohibits the Legislature from creating any debt or liability exceeding $300,000 without a two-thirds vote from both legislative houses and voter approval, except in times of war. However, the Legislature routinely creates millions of dollars in new liabilities without public vote.
To get a sense of how this works, let’s say your cousin is a 40 year old employee of the state’s Department of Motor Vehicles who will retire at age 60 after which he is promised a pension by the state. To finance that pension, the state and your cousin contribute money while your cousin is working to a pension fund that will invest the funds to meet the future pension payments. The pension fund determines how much your cousin and the state must contribute upfront and bases that determination on the rate the pension fund expects to earn from investing the money. But if the pension fund earns less than it assumed, the state is liable for the difference so that, no matter what, your cousin will receive the pension payments he was promised.
If the pension fund invested the money in US Treasury securities that will mature when the pension payments are due, the state would have no liability. In that case all that has to happen for your cousin to get his pension payments is for the US Treasury securities to mature. But that’s not what the pension fund does. Instead, it assumes it will earn more — much more — than US Treasuries. For example, currently the state pension fund assumes it will earn an annual return of 6.8 percent, 54 percent more than the rate currently earned on 20 year US Treasury bonds. Even though there is no guarantee that the pension fund will earn 6.8 percent and the state is liable if it does not, the Legislature also assumes that the pension fund will earn that return. By making that assumption, the Legislature has not been asking voters to approve those liabilities. This has been going on for years, and because the state’s pension fund has fallen short of past assumed rates of return, the state has had to dip into its pocket for more than $100 billion just over the last ten years. That spending will continue rising because the state pension fund assumed even higher rates of return in the past.
So long as the state is not relying on a guaranteed rate of return on funds invested to meet pension promises, the Legislature is creating a liability whenever the state makes a new pension promise to an employee. In doing so, the Legislature is violating the Constitution. That practice must stop immediately. Either the rate that the state pension fund uses to determine upfront contributions must be guaranteed or voters must be asked to approve pension promises.
