Pension Crisis

Ignoring Pension Past, California Risks Future Problems

Lawmakers don't want to re-litigate prior bad decisions even as they keep making them.

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It's one of the oldest ploys. After officials at a government agency or business are caught in an embarrassing situation, it's typical for them to deny there's anything to the scandal for as long as possible. Eventually, after the facts are obvious to everyone, expect them to declare, "That's old news. Let's focus instead on the future."

In last week's column, I wrote about renewed attention on California's expanding public pension mess. Major newspapers have reported on something we've been covering at the Register for many years: In 1999, the California Legislature rammed through (quickly and with abbreviated hearings), and Gov. Gray Davis signed, a law that began 16 years of retroactive pension expansions in state and local agencies across California.

The end result has been large, unfunded, taxpayer-backed liabilities that are crowding out public services, leading to tax hikes and even insolvency in some locales. It's a huge mess. In fact, The New York Times noted the California Public Employees' Retirement System (CalPERS) has two sets of books—one with rosy predictions and the other that paints a dismal picture for taxpayers.

CalPERS—which in 1999 claimed the pension boost (Senate Bill 400, which had then-Assemblyman Lou Correa of Santa Ana as a principal co-author) would pay for itself through continuing stock-market increases—came back with a rebuttal this past week.

Referring to "the recent back-and-forth debate over pensions," three of its officials warned against falling "into the tired trap of looking back: It's time to put SB 400 [behind us.] Retirement security is too important today to get caught in a debate about the past." How convenient for an agency that has for years been denying major pension-debt problems that it should now want to avoid talking about that history.

Sorry, but the past debate is crucial, and not just because California taxpayers will eventually be forced to clean up the mess caused by years of miscalculation and, yes, greed. Thanks to Gov. Jerry Brown's signature Thursday on Senate Bill 1234, the state is moving forward rapidly on a new "Secure Choice" retirement program for Californians that is designed to be something of a state-run mini-Social Security system for private workers. CalPERS is on the sidelines of this debate, but it could play a key role in investing the dollars deducted from employees' paychecks.

State officials point to the real retirement crisis among 6.3 million California workers who do not have access to retirement accounts. The basics are simple. Employers (with five or more employees) would be required to participate in this state-run program in which employees would have 3 percent of their salaries deducted. Employees would be allowed to opt out. The details are in flux, but the money would be invested in a low-risk investment most likely tied to the Treasury bond.

It's backed by Democratic leaders and unions. As state Treasurer John Chiang wrote (rebutting my criticisms): "Secure Choice statutes do more than 'promise' that taxpayers will not be on the hook. Under no interpretation of the law can the program exist unless it can be operated at no cost to taxpayers. Secure Choice would not be a pension. As an automatic-enrollment IRA plan, Secure Choice would allow California's workers to save for themselves with no contributions from employers and no costs or liability to taxpayers."

Yes, for now. This brings me back to SB 400. Sure, state officials don't want to relive 16-year-old battles. But wouldn't it be wise to review the state's predictions on past retirement deals before we consider any predictions on new ones?

In a statement, the Investment Company Institute, a D.C.-based trade association, argued, "Although legislation authorizing the program limits the state's liability, future state policymakers are likely to feel an obligation to cover any shortfalls or excessive expenses that the program incurs."

Officials are starting a program that will take on a life of its own. If the current predictions go awry and millions depend on the program, what happens then? What will stop future legislators from expanding its scope?

As ICI's president noted last month, "The analysis used to advance this legislation paints an overly optimistic picture of this program's success and dangerously understates the economic risks to the state of California. Implementing Secure Choice as it stands now could damage California's fiscal health and create a new financial liability for state taxpayers."

Even if it works as planned, the program will provide a pittance to private-sector workers—especially compared to the overly generous and unsustainable pensions public employees receive. Indeed, the idea behind "Secure Choice" was floated by union allies to solve a political problem. They saw that taxpayers were having "pension envy," so they came up with this measure as a positive way to tamp down all the criticism.

But once something's started, "Katy, bar the door." You can trust me on that one—or trust the folks who told you a massive, retroactive pension increase for public employees across the state wouldn't cost taxpayers a dime.

NEXT: Libertarian Debate News: L.P. To Get a Day in Court Against Debate Access Restrictions, But Too Late for 2016; Florida Senate Candidate Paul Stanton Excluded from Debate

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  1. three of its officials warned against falling “into the tired trap of looking back: It’s time to put SB 400 [behind us.]

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  3. the state is moving forward rapidly on a new “Secure Choice” retirement program for Californians that is designed to be something of a state-run mini-Social Security system for private workers.

    What could possibly go wrong?

    1. Nothing could go wrong – it’s a secure choice. It’s right there in the name, ya idjit.

      Although, as I understand it, this is something akin to Obamacare where the financially healthy are required to pool their investment insurance with the financially cancerous in order to make the system financially stable – i.e., the people who have good retirement plans are going to be forced to share their good luck with those who had the bad luck to not have good retirement plans. The government hasn’t yet gleaned the last few grains of other people’s money but they’re definitely scraping the bottom of the barrel. Or the wagon or whatever it is you glean grain from. What do I look like, a farmer?

  4. How long till the Fed starts buying pension bonds?

    1. The federal government already takes over private pensions, even lobby group pensions

      They took over Bnai Brith International pension debts

      http://www.timesofisrael.com/u…..ps-future/

  5. Hmmm, compelling Americans to buy Treasury Bonds?

    Is that like a sign that the Treasury is having a hard time finding buyers for it’s new bond issues?

    1. Social Security must be finally running out of the funds to buy them

    2. Oh, its coming. I predict that after the next financial crash, the feds will say that 401ks are just too risky, that to keep the tax-advantaged status they will have to have X% of their assets in “safe” investments, defined as government bonds.

      Its a slow motion confiscation of 401ks, taking your cash and leaving you with an IOU from a government that is insolvent by any rational definition.

      It was floated after the last crash. After the next one, it will be a done deal.

      1. I brought it up with my CPA in 2008 concerning IRAs and whether it would be worth it to take the hit and get out of it now. He looked at me like I was nuts.

  6. “We can’t be broke. We still have checks left.”

  7. Every pension program can be fixed with two words:. Defined contribution.

  8. For some real financial WTF, check this out

    The Federal Reserve could get benefits from buying assets other than long-term U.S. debt if in a future downturn it could not buy any more government bonds, Fed Chair Janet Yellen said on Thursday.

    Referring to asset purchase stimulus programs in a video conference with a minority bankers meeting in Kansas City, Yellen said: “If we found, I think as other countries did, that they could reach the limits in terms of purchasing safe assets like longer-term government bonds, it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions.”

    She added that buying equities and corporate bonds could have costs and benefits.

      1. That’s off the charts stupid, not to mention it opens up numerous avenues for blatant corruption and perverse incentives.

    1. it could be useful to be able to intervene directly in assets where the prices have a more direct link to spending decisions

      Does anybody else smell burnt toast?

  9. It’s one of the oldest ploys. After officials at a government agency or business are caught in an embarrassing situation, it’s typical for them to deny there’s anything to the scandal for as long as possible. Eventually, after the facts are obvious to everyone, expect them to declare, “That’s old news. Let’s focus instead on the future.”

    But enough about Hillary.

  10. She added that buying equities and corporate bonds could have costs and benefits.

    No kidding. I wonder which is more likely.

    Also- listening to the business news in the background; some woman was babbling about how the Fed is analyzing the jobs report to consider their next move. Because the Fed creates jobs, presumably.

    These people have got things totally ass-backwards.

    1. Enormous benefits for the politically connected. The rest of us, not so much.

  11. Dear Janet Yellin-

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    Act now, before it’s too late!

    Sorry- Cash only. No livestock will be accepted in trade.

  12. Commie-kid assures us there is no problem. Moonbeam found some change under the sofa cushions and CA now has a balanced budget!
    I swear, he seems to be serious about that.

  13. It’s one of the oldest ploys. After officials at a government agency or business are caught in an embarrassing situation, it’s typical for them to deny there’s anything to the scandal for as long as possible. Eventually, after the facts are obvious to everyone, expect them to declare, “That’s old news. Let’s focus instead on the future.”

    The Four Stage Solution

  14. California will do what it always does; raise taxes to pay for about a quarter of the deficiency and ignore the rest. If I were them I’d get to the head of the line for a federal bailout before Illinois.

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