By Adam Shapiro Published December 20, 2016 Retirement FOXBusiness
The unthinkable just happened in Loyalton, California, a small remote city nestled high in the Sierra Nevada Mountains.
For the first time in its 85-year history, the California Public Employees Retirement System, CalPERS, is drastically cutting benefits for public retirees. Starting January 1st, four retired City of Loyalton public employees will have their pensions cut 60 percent. For 71-year-old Patsy Jardin, that means her pension will drop from about $49,000 a year to a little more than $19,000.
In an interview with the FOX Business Network, Patsy asked, “How am I going to make it now? What am I going to do?”
Fellow Loyalton retiree John Cussins is asking the same question since his pension will also drop 60 percent, to $1,523 a month.
“It’s not cheap to live here when you’ve got to go on a 100-mile trip just to go to a hospital or a doctor to get your groceries and things and stuff,” he said. “Now, not to have that money we’re going to have to skimp on everything we got.”
John worked about 22 years for the City of Loyalton, Patsy worked there for 34 years. Both of them thought their pensions were safe when they retired since the city had always paid its CalPERS bills in full.
But three years ago, the City Council in Loyalton voted to leave CalPERS in order to save money. At that time, CalPERS informed the city its pension accounts were only 40 percent funded despite the fact Loyalton had paid all its previous bills.
“The City of Loyalton defaulted on their retirees,” CalPERS Deputy Executive Officer Brad Pacheco said. “They made a bad decision and those retirees are going to suffer for it.”
John and Patsy say CalPERS cares more about the 3,000-plus cities towns and municipal entities that pay into the fund than the people the pension fund is supposed to cover in retirement.
Like Loyalton, CalPERS is far from fully funded, only 65 percent. That means right now CalPERS has 65 cents for every dollar that it needs to provide pension benefits for almost two million people.
Some of them are still working and not yet receiving pension benefits. The rest are retired and drawing funds from CalPERS.
Pacheco, the CalPERS spokesperson, told FOX Business network the pension fund is healthy but in a negative cash flow position.
“We are paying out more in benefits than we are taking in in contributions,” he said.
CalPERS pension debt is roughly $164 billion and mostly likely will grow larger in coming years.
For several decades, CalPERS predicted its investments would earn a 7.5% return. Pension funds call that return on investment a “discount rate”. A higher “discount rate” like 7.5% allows politicians to avoid raising taxes or cut spending to meet their obligations to public employees.
A lower “discount rate” requires cities to pay more each year into the pension fund to keep it solvent. CalPERS is actually considering cutting its “discount rate” to just 6.4% to reflect what it expects to be smaller returns in the future. That will require cities, towns and other municipal entities in the CalPERS system to pay more money to cover their employees. Some may have to raise taxes to do it. Others may opt to leave CalPERS just as Loyalton did.
But those that leave may be shocked to learn their pensions are less than fully funded. That’s why Patsy Jardin thinks CalPERS is using her plight to send a message to other California public employees and cities, that despite tight budgets, dropping CalPERS may come with consequences.
She said: “I just think they are setting an example out of the four of us, I really do. I just think we are the ones who are going to pay for this, for all retirees.”