Pensions

Pension Mess Can't Go On; That's No Reason to Ignore It

You can deal with it now or deal with it later, but eventually you will have to deal with it.

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President Richard Nixon's economic adviser, the late Herbert Stein, still is knon for his dictum: "If something cannot go on forever, it won't." It should be the rallying cry for California's pension reformers. The numbers don't lie, they say. Services are being cut to pay for oversized pensions, they note. Something must be done because the debt cannot keep growing forever.

They're right. And it won't go on forever. It can't go on forever. At some point, even the most dogged public-pension defenders will realize the gravy train—six-figure guaranteed lifetime pensions inflated by myriad spiking gimmicks—will end because the math must catch up with the wishful thinking.

New York and Chicago already pay for more retired cops than for officers patrolling the streets. Some cities have gone belly up, with Stockton and Vallejo the most visible California examples of what happens without adult supervision. Even healthy cities are slashing services and raising taxes to meet escalating pension bills, to pay for those who often receive far more in retirement than most residents earn during their working years.

Even the rest of the media have come to the party, however late. At the Orange County Register, writers have been pointing to the disastrous fiscal effects of Senate Bill 400 for years. That's the 1999 legislation that started a wave of unsustainable, retroactive pension increases, not just in state government, but in cities and counties across California.

As reported in the Los Angeles Times last week, "With the stroke of a pen, California Gov. Gray Davis signed legislation that gave prison guards, park rangers, Cal State professors and other state employees the kind of retirement security normally reserved for the wealthy… California Highway Patrol officers could retire at 50 and receive as much as 90 percent of their peak pay for as long as they lived." The deal was promised to pay for itself, but instead has plunged California into an unsustainable fiscal mess. Surprise.

Indeed, Stein was right that unsustainable things ultimately will be, err, unsustainable. But there's no underestimating the ability of officials to delay the day of reckoning—at least until they are comfortably retired at their beachfront condos. One website covers the coming "pension tsunami." It's great imagery, but the problem is less "tsunami" and more "steadily rising floodwaters." The result is the same, but timing is everything.

Sometimes it takes decades for problems to wreak havoc. Those who make predictions sometimes have to wait until the audience becomes receptive to their message. Those pension reformers have been warning about the flood for years. They've attempted legislative fixes. They've taken local reform measures to the ballot. They've tried to qualify measures statewide. They've gone to court. Usually they are stymied by the more politically powerful public-employee unions.

In a fit of despair, I wrote that reformers ought to abandon ship. That's not because they are wrong actuarially, but because they are politically outmatched in our union-dominated state. But once again, pension reform is resurfacing.

Last month, a state appeals court rebuked a Marin County public-employee union that was challenging the state's modest effort to rein in some pension "enhancements," or spiking. In doing so, the court ruled that the so-called "California Rule" (forbidding the state from reducing pension benefits for current hires, even going forward) could be jettisoned.

As Judge James Richman ruled, "(W)hile a public employee does have a 'vested right' to a pension, that right is only to a 'reasonable' pension—not an immutable entitlement to the most optimal formula of calculating that pension." That's big news because the pension mess cannot be fixed merely by lowering benefits for new hires, most of whom won't retire for decades.

More impetus for reform came from The New York Times, which reported recently that the California Public Employees' Retirement System has two sets of books to evaluate the size of the state's pension debt. It has its "official," rosier estimates, which say the system can count on a rate of return on its investments of 7.5 percent annually (higher returns make the taxpayer-backed unfunded liabilities seem smaller).

Then there are the "market" estimates—the much lower (2.64 percent) expected rates of return CalPERS uses to calculate how much agencies must pay it if they want to leave the system. Most reformers say these numbers are closer to reality. The Times article said such "market" estimates result in a cost projection that is "alarmingly large."

This is nothing new. In a 2011 column, I argued the situation was unsustainable. It can't go on forever, but it would be nice if the state's leaders would muster some courage and fix it, rather than just waiting to see if Stein had a point.

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  1. As Judge James Richman ruled, “(W)hile a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension?not an immutable entitlement to the most optimal formula of calculating that pension.”

    Look out, public employees: “reasonable” is govspeak for “fuck promises.”

    1. It can and will go on. It must go on.

      We are in full on parabolic mode in this country. As we accelerate towards the apex, the rescue measures get more and more grandiose, thus raising the apex even higher and making the arc steeper.

      That is why the crash, whenever it happens, will have us staring at the abyss like the beginning of the first Terminator.

      Going to be one hell of a show. I hope I make it through it or maybe not.

      1. Uhm, the apex was about 1983. We’ve been on the down stroke of the parabola since. The X-axis is in full view of the cockpit. Don’t be fooled by that full can of coke and extra bag of peanuts you’ve been enjoying.It’s the last of it.

        1. I think the beginning of the end of this country was the 90s, right around the time of the first gulf war, OJ verdict, Branch Davidians, Clintons, every other sort of moral decay, no fly zone indiscriminate bombing, wag the dog bombings to cover blow jobs.

          The end of the beginning was 9/11. We are watching the end play out now.

          1. Oh, and the UE passing in the mid 90s and the lead up to its formation, total obvious corruption of all european politics like we have here now, the internet with all of its wonders also forged the path to a lot of stupidity and malaise, all the while making life better all the way around.

            Rap and new country of course. They are scourges along with almost every famous douche on he planet. Seinfeld was the last clever funny sitcom.

            Like Southpark, the majority of the world used this awesome technology to make themselves dumber.

            Basically we started to become Sabido Gigante at that time.

            1. *shakes fist at kids on the lawn*

    2. Unfortunately for judge Richman, who will get his head handed to him, on this, the U.S. Constitution, which forbids states from passing laws “impairing the Obligation of Contracts”, which is what an employment agreement is, the word “reasonable” isn’t part of Article 1, Section 10.
      The blame, here lies, purely with the politicians, who made promises they have failed to keep, by not maintaining full funding of the pension systems. They were going along, fat and happy, when returns were high and their end of the contributions were low, but refused to bite the bullet and cut back on other spending, or raise taxes, to keep these systems flush, when the economy turned sour.
      Contracts cannot, by the Supreme Law of the Land, be unilaterally revoked by any government action. That’s why some private companies have gotten away with it, but the only way to rein in public pension costs is to begin with new hires, who don’t have the promises made, that current ones do. It is being done, in some places, but will take a while to bear fruit.

    3. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6570 this – 4 weeks past. I began this 6-months ago and immediately was bringing home at least $98 per hour. Go to this website and go to tech tab to start your work… http://tinyurl.com/GoJob92

  2. No reason to ignore it???!!!

    Of course there is reason to ignore it, any politician who talks about actually solving the problem will be swiftly voted out of office.

    We have created a political class that guarantees that all the solutions that cause limited pain and devastation will not be allowed, the problem WILL be ignored until it is completely unsolvable and total collapse is the only option.

    We do not elect representatives to enact good policy anymore, we elect Santa Claus, and we’re going to be really really pissed off when we find out Mommy and Daddy state have maxed out the credit cards to make the Santa State look good.

    1. Aye. You could say “no reason to ignore it” about social security or the national debt too, but the majority of American voters immediately expunge from office anyone who legitimately tries to address them, because by necessity addressing them requires some sacrifice.

      “Look bub, I paid my taxes, so I damn well better to be able to collect the same checks for 30 years that my grandpa did when life expectancy was 15 years!”

      1. The life expectancy was about 3-4 years. Eleanor admitted that the math was off in the early 50’s. Pretty amazing since we all know our Betters, especially if they’re from the rarefied gentry of the Northeast, are rarely ever wrong.

    2. If GM couldn’t renegotiate without going into bankruptcy (and even then the taxpayer got fucked), there’s no reason to believe the government would ever overhaul those contracts.

      We have an ignorant electorate, there’s no easy solutions.

      1. Lee Genes–And don’t forget my favorite example, Hostess. Hostess gave the employees of the choice between reducing pensions or the company going bankrupt and closing shop. Of course the employees chose to be unemployed instead of reforming pensions.

        1. Thereby earning the real minimum wage: $0.00/hr.

          1. This literally can not be repeated often enough.

            1. Technically speaking, the (real) minimum wage is not $0.00/hr. The principle is called “The Disutility of Labor,” meaning that folks won’t work without some type of perceivable benefit (pay). For instance, in China and India there are about 1.8 billion people who work for less that $2.00 per day. It’s pretty cheap labor, by our standards, but it’s not $0.00/hr.

              Thus, while there may be lots of folks who don’t earn anything by being unemployed, you’d be hard pressed to find anyone working for $0.00/hr.

  3. In my small California city the local fire department, where annual compensation averages $227,000 a year, gets 600 applicants for every new position. Average pension is $128,000 with lifetime health care benefits, all this for basically running an ambulance service; actual firefighting encompassing 3% of their total work load.

    1. But 9/11!

      Somehow public service went from having a cake job with job security to a cake job, job security, compensation well above the private sector, ludicrous benefits, and animosity towards the people that pay their salaries.

      Class warfare is a powerful tool.

      1. On 9/11/01 there were 343 public employees, who weren’t doing a “cake job” – and that was just from the FDNY.

        1. Holy shit, you built that straw man so big there is not enough left to make adobe bricks. No bricks, no houses for the childrens….why do you hate the childrens?

  4. I wouldn’t be surprised if they try to put off the inevitable by seeking a federal bailout. I would find that infuriating but have little faith that our so-called representatives will have the stones to say “no”.

  5. Right at this moment you can count the votes to fix this on one hand, even if you had a couple of fingers amputated.

  6. These hard working public servants won’t get their six figure pensions because 1%ers won pay their fair share, such a shame.

  7. Really Nice Post. Thanks for sharing with us.

  8. Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this – 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go? to tech tab for work detail,,,,,,,
    ——————>>> http://www.4cyberworks.com

  9. RE: Pension Mess Can’t Go On; That’s No Reason to Ignore It
    You can deal with it now or deal with it later, but eventually you will have to deal with it.

    Resolving the pension mess is easy.
    Just keep taxing the little people.
    They have loads of excess capital to give away.

  10. Steve is doing fantastic work on this. The public sector should not pay better retirement than the premium private sector jobs. And I work in in Silly Valley and I can tell you Uber and Facebook have 401k’s. The public employees should get smart. If the pension system goes belly up no one is going to save them. California voters are just going to say tough luck. They got pension reform in Arizona and I think the public employees were supporting it. They will get their 401k’s, they will get something they can count on. But when technology momentum stocks go back to normal ratio’s like they did in 2000, and the state goes into the red again, all the public employees are going to have is a bunch of people looking at them and saying “sorry”.

    1. Union representatives only care about the next few years. They care only about current political power. In this, they are not so different from other politicians. They don’t care about the members. Only about the dues they can extract from them. Much like many politicians only care about how much taxes can be wrung from the taxpayers. As long as the inevitable can be delayed, it will be.

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