Pension Crisis

Lavish Pension Hikes True Cause of Growing Liabilities

Orange County report paints a bleak, but unsurprising picture

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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.

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  1. The OC is mainly white, so who cares?

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    2. It’s less than 50% white today

      1. Correct. It’s dominated now by Latinos (Santa Ana) and Asians (Irvine, Westminster).

        Still, no matter what race he or she is, the taxpayer cares about getting gouged.

  2. Pols are determined to get their hands into every pot of money, everywhere. Invariably those pots end up empty.

    They aint called looters for nothin’.

  3. The sweeter it gets, the harder it is to sustain this scheme?and the more governments have to cut back in other areas.

    Sounds like voters should have thought ahead and got a signed contractual agreement with the county to provide services like workers did to provide big payouts.

  4. San Diego issued pension bonds back in the 90’s. For the life of me, I’ve never understood who would be stupid enough to buy them.

  5. “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.”

    So a fully funded pension fund has to beat the market averages just to keep up. Yeah, that’s not a problem at all.

  6. “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.”

    So a fully funded pension fund has to beat the market averages just to keep up. Yeah, that’s not a problem at all.

  7. “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.”

    So a fully funded pension fund has to beat the market averages just to keep up. Yeah, that’s not a problem at all.

    1. Well, I pissed off the squirrels this morning.

    2. Its worse than that. Pensions have to be partly invested in debt/bonds. Usually around 50%. Bonds are returning about, call it 3% these days, to be optimistic. That means the other 50% of the portfolio has to make up the slack.

      Which drives pensions into riskier investments chasing returns, which means they are more exposed to volatility, etc.

  8. Problems with pension have their place in every country. Retired people who spent most of their life time working hard, still do no receive pension they deserve. They could have earned even more money working as freelancer at http://essaydune.com/ completing papers for students for money. Not difficult task and salary would be even higher then their pension. I still hope that “Californian Rule will not be violated and government employers will never be entitled to cut pension.

    1. completing papers for students for money

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    2. Shit, the spam bots are LEARNING

  9. Non-Californians, put your hands on your wallets. You won’t feel that again for a while. We’re all going to be on the hook when the inevitable federal bailout happens.

    1. Everybody forgot the pension crisis while the fed inflated the stock market again. Now it’s going to come roaring back.

    2. What’s the opposite of “secession,” i.e. an instance of the Republic cutting off one of its states?

      1. Ejection, I guess. Hopefully a violent volcanic or seismic ejection of California. I say that, and I live in Calif!

  10. see the news from the great state of Illinois? As an Iowan. our retarded neighbor never ceases to amaze.

    http://kwqc.com/2016/06/22/ill…..statewide/

    1. Which means that the I-88 logjam from construction will be frozen in place. No way they’ll just re-open it, we need to cause as much symbolic inconvenience as possible.

      1. Yes and here in the Quad Cities, there is major construction on the I74 bridge which is the main Iowa-Illinois connector. It was originally slated to be done in august but now they are just going to stop where they are at…

        We are in the process (20 year process) of building a new I74 bridge. the joke is Iowa will have its share, the feds will have their share, and Illinois won’t be able to cover their share so we will have a bridge that extends two-thirds of the way from Iowa to Illinois..

  11. OT:

    “Blockbuster book due out Monday paints Clinton as a shrewish, paranoid ‘Bridezilla’ monster who verbally abused Secret Service at every turn
    Some turned to drinking, drugs and even prostitutes to blow off steam from Hillary-related stress, writes author Gary Byrne ”

    Agent: I’m sorry honey. I’ve been out whoring because, well, darn it, there’s so much stress at work!
    Wife: I know, dear. Having to throw yourself in front of a bullet to save the president must be such a big —
    Agent: No, actually. His wife called me a poopy head today.
    Wife: Say again?

    http://www.dailymail.co.uk/new…..House.html

    1. Doesn’t surprise me. Back in the late 90s I worked at a restaurant in Kennebunkport Maine, where the Bush clan has what they call a “camp” (and anyone else would call an mansion). So when they came to town they had a Secret Service entourage with them of course. Well, these SS guys would go to drink after work, and many ended up at my place of employment. After a few drinks the stories would come out, many about Hillary. Basically they painted her as a mean and disgusting lesbian with a fetish for perfume parties.

      1. Is “perfume parties” a euphemism for anything? I’m not up to date on alternative lifestyle slang.

      2. I have heard “mean and disgusting lesbian stories” about Hillary through a totally different source that worked in the White House. Nothing about perfume parties but definitely taking women to her bedroom at night.

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