Lavish Pension Hikes True Cause of Growing Liabilities

Orange County report paints a bleak, but unsurprising picture

The Orange County grand jury's report on the state of the California county's pension plans painted a bleak but not unexpected snapshot of a challenging long-term fiscal situation. The Orange County Employees Retirement System touted some of the good—or, actually, less bad—news from the report, but it's time to stop sugarcoating the problem. By the way, the problems in this one California county echo those found across the state and in many parts of the country.

Orange County's "unfunded pension liability exploded from 2000 to 2012, going from a surplus in 2000 to a $4.5 billion liability in 2012," according to the new report. "In January 2016 the county issued pension obligation bonds in the amount of $334 million. The numbers are huge." Indeed they are, even though the liability fell a bit since 2012. (Those bonds, by the way, are fiscally irresponsible—similar to taking a loan to pay off credit cards.)

"Unfunded pension liabilities" are, in effect, the debt backed by taxpayers to pay all the pension promises elected officials have made to current employees and retirees. Money is set aside to pay these inordinately lucrative benefits. But the system—like most systems statewide—is still falling billions short. (The report, OCERS notes, deals only with the county and not with other public agencies that participate in the system.)

OCERS Chief Executive Officer Steve Delaney, in a statement, pointed to "a number of encouraging aspects" that mitigated some of the grand jury's concerns. "The grand jury found that OCERS is funded at the median point for public pensions plans," he noted. Yet it's troubling that 70 percent funding would be considered relatively good news."

"They should only be down at 80 percent in a bear market and we're at the end of a bull market," said Ed Ring, president of the Tustin-based California Policy Center, which advocates pension reform. "When pension systems are 100-percent funded, their returns have to average at least 7.25 percent a year just to keep the unfunded liability from getting bigger. When the system is only 70 percent funded, they have to average 10.4 percent a year."

If you know an investment that can guarantee more than 10 percent annually for the next 30 years, please let me know. Those are aggressive and unrealistic goals. These "return on investment" games are the result of the way these defined-benefit systems are devised. Suffice it to say, they are designed to benefit public employees, not taxpayers.

In the private sector, most employees receive defined-contribution plans (such as a 401(k)). The employee contributes and the employer sometimes matches a portion of the contribution. The dollars are invested in a fund, which rises and falls based on the market. No one incurs debts or liabilities. In the public sector, employees receive a formula that guarantees a set return for life—usually 80 percent or more of their final year's pay. If the fund's returns don't pan out, public liabilities go up. Taxpayers are on the hook for shortfalls.

There are many pension-spiking gimmicks that let these public employees drive up their retirement payout above what they earned during their most lucrative working years. (Note the rapid growth in the $100,000 Pension Club.) And there are disability pensions and other benefits that sweeten the pie. The sweeter it gets, the harder it is to sustain this scheme—and the more governments have to cut back in other areas.

"Are there challenges ahead for public pension systems in an era of low market returns? Absolutely," said OCERS' Delaney in his statement. This would be a good place to insert one of those "roll my eyes" emojis. Pension-fund officials act as if a volatile stock market is the cause of their woes. In reality, pension-fund problems mainly are caused by politicians who have been ratcheting up pay and benefit levels to please a particularly powerful constituency.

The report points to 2000 as a year when the system last had surpluses. Hint: In 2001, Orange County supervisors gave deputy sheriffs a 50 percent retroactive pension boost, thus allowing them to retire at age 50 with 90 percent of their final year's pay. The Board of Supervisors in 2004 granted "miscellaneous" employees (and themselves) another massive retroactive boost.

Courts have upheld the "California Rule," which forbids government employers from reducing pension benefits even going forward. So localities kick the can forward, occasionally trimming benefits for new hires only. There's not much we can do about union-controlled state officials and those court decisions that limit action, but the grand jury still is right that Orange County and OCERS can be "more aggressive" in dealing with this problem.