Pension Crisis

CalPERS Is Shocked—Just Shocked—To Find Cities Reeling Under Growing Pension Debt

California's pension fund looks to shift blame and avoid responsibility.

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The California Public Employees' Retirement System's union defenders feign shock whenever pension reformers accuse it of "kicking the can down the road" in dealing with the state's mounting pension debt. It's like the scene from Casablanca, when Captain Louis Renault is absolutely shocked to find gambling going on in a gambling house.

CalPERS is never going to state the obvious: "We know these massive, underfunded pensions are not sustainable, but we're going to do everything possible to push the problem into the future and blame everyone else for the problem." But the pension fund's board might as well have said as much after two actions it took at last week's Sacramento meeting.

In one case, it decided to seek a legislative sponsor for a bill that would enable it to shift the blame to local agencies whenever such agencies decide to stop making their payments to the fund and retiree pensions are cut as a result. In the second case, at the urging of cities CalPERS decided to delay a vote on a more actuarially sound means of paying off pension debt—rather than risk a fifth rate hike to local governments, and risk a mutiny among hard-pressed local governments.

Both of these actions maintain the status quo and—you got it—kick the can down the road.

The first action involved the fate of two local agencies that have exited the pension fund because they couldn't afford to keep making their payments. As California Policy Center previously reported, the tiny Sierra Nevada town of Loyalton in 2013 decided to exit the plan, but then was hammered with a $1.66 million termination fee that it couldn't possibly afford. The town's entire annual budget is $1 million and it couldn't even make its $3,500 month payments to the fund.

Furthermore, the East San Gabriel Valley Human Resources Consortium, known as LA Works, shut its doors in 2014, but was likewise penalized by CalPERS for stopping its payments. The end result: Loyalton's four retirees have their pension benefits sliced by 60 percent, and LA Works' retirees lost as much as 63 percent of their pension checks.

In making an example of these small agencies, CalPERS revealed an ugly truth. The pension fund assumes a rate of return of 7 percent to 7.5 percent on its investments. The higher the assumed rate, of course, the less debt on its books. It's in the union-controlled fund's interests to assume the highest-possible rates and maintain the status quo—even if that means that taxpayers ultimately will have to pick up any slack.

When agencies decide to leave the fund, however, CalPERS puts them in a Terminated Agency Pool, where CalPERS assumes a rate of return of a measly 2 percent. Upon departure, these agencies can no longer expect future earnings or taxpayers to pick up the shortfall, so the 2 percent rate is the actual risk-free rate that CalPERS expects from its investments.

The legislation the fund seeks, facetiously referred to as the Anti-Loyalton Bill, would "require a terminating agency to notify past and present employees of its intention to terminate," according to the language approved by the full CalPERS board last Wednesday. Bottom line: CalPERS wants local agencies to provide the bad news to employees and retirees so that they, rather than the massive pension fund, receive the brickbats.

The proposed bill is not a big deal per se, but it's yet another example of how CalPERS is more interested in hiding—rather than dealing with—its pension debt. Basically, this is a public-relations strategy designed to discourage agencies from leaving the fund. It's a way to tighten the golden handcuffs and punish agencies that want to exit the fund.

In reality, if 2 percent is the earning rate that CalPERS can safely expect on its long-term investments, then that should be the rate that it assumes for all of its investments. But lowering the assumed earnings to such a realistic number would cause mass panic, as municipalities would need to come up with dramatically increased payments. They already are struggling with their current payments.

Under that scenario, the state's pension debt would be around $1.3 trillion, according to some estimates—and it would become implausible to push the problem down the road. Even with the current high assumption rates and even after a great year of earnings of 11.2 percent, CalPERS is only funded at a troubling 68 percent. (The California State Teachers' Retirement System had even better returns last year, but is funded only at 64 percent.)

In its second major action last week, "CalPERS delayed action… on the chief actuary's proposal to shorten the period for paying off new pension debt from 30 years to 20 years, a cost-cutting reform that would end the current policy not recommended by professional groups," explained Ed Mendel, on his respected Calpensions blog.

Localities already have faced four major rate increases since 2012. CalPERS assesses the increases to make up for the unfunded liabilities, and recent studies suggest that local governments are slashing public services to come up with the cash. Had CalPERS decided to pay off new debt in a shorter time frame, it would have meant a fifth increase, according to Mendel. He quoted the League of California Cities' official Dane Hutchings with these words of warning: "The well is running dry."

It's a mess. If CalPERS does the right thing, it exacerbates local governments' current problems. But maintaining the status quo will make them worse down the road. As Mendel explained, under CalPERS' current payment approach, "the debt continues to grow for the first nine years" with the payment not even covering the interest. "(T)he payments do not begin reducing the original debt until year 18, more than halfway through the period."

In other words, I have a great 30-year plan for paying off your credit-card debt: You make minimum payments for the next 18 years and then worry about it then. Isn't that the very definition of kicking the can down the road?

It's hard to feel too sorry for these struggling cities. Do you remember when they warned about the impending disaster if the state legislature passed a 1999 bill, promoted by the California Public Employees' Retirement System, that would retroactively raised pensions across the state by 50 percent? Do you remember when city managers angrily resisted union-backed efforts to raise pensions at their city councils? Neither do I.

Unfortunately, their efforts to avoid another rate hike only helps CalPERS do what it likes to do most—remind us that all is well and that the stock market will pay for all the pension promises. It might, but then again it might not. If the market slows, there will be a lot of California officials shocked to find a dead end up ahead.

This column was first published by the California Policy Center.

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  1. If you know someone who is a retired cop, teacher, bureaucrat, let them know that you don’t appreciate parasites. Or, if you are a Libertarian, you can write an article about it and evade personal confrontation.

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    2. You’re a parasite. There, said it.

    3. If you know someone who is a retired cop, teacher, bureaucrat, let them know that you don’t appreciate parasites. Or, if you are a Libertarian, you can write an article about it and evade personal confrontation.

      Why assume we do not?

      It’s hard to justify the pensions bureaucrats receive. Feel free to try, though.

    4. CALPERS promises are well outside the norm for public servants. A number of their rules that guide pensions are non starters almost anywhere else in the US.

    5. The PRIVATIZE EVERYTHING t-shirts help too.

  2. Or CalPers could begin investing in profitable stocks again instead of low-yield, politically correct investments

    1. “Or CalPers could begin investing in profitable stocks again instead of low-yield, politically correct investments”

      That would help but assuming a constant 7% ROI is ridiculous; even gun makers aren’t going to provide that sort of scratch now that Obo isn’t in office.

      1. To be fair, they weren’t expecting 7% ROI every year, just that that would be the long-term ROI over many years. Not unreasonable considering nobody could have foreseen 0-0.5% fed rates lasting for 8 years.

        1. “To be fair, they weren’t expecting 7% ROI every year, just that that would be the long-term ROI over many years.”

          So what? Are you trying to come up with some excuse for the lying?

      2. Isn’t 7% just the long term index fund average? Could it be that Calpers is so incompetent that they can’t even manage that?

        1. ^^^^^^^^^^^^^^^^^^
          Exactly!

  3. Reminds me that the other day there was some professor guy on the news pontificating about how terrible Trump’s tax bill would be for the middle class and when somebody objected on the grounds that he was referring to people making $250k per annum as “middle class” he pointed out that there are lots of police and firemen and teachers and so on – hard-working middle-class public servants all – that make $200k or more and that’s not hardly “the rich”, is it? First, the guy’s so out of touch he thinks $200-250k is an “average” amount of income and secondly he thinks the average person like me is going to be sympathetic to public servants making more money than the average taxpayer? Sorry the government’s screwing these folks, but last time I checked these folks *are* the government.

    1. Sadly, if he’s from a major metro area of CA he isn’t as unrealistic as you think.

  4. “The pension fund assumes a rate of return of 7 percent to 7.5 percent on its investments”

    “…setting us up to achieve pension solvency, a fossil-fuel free economy and World Socialism in just 5 years!”

  5. Oh hell, they’re going to go hat in hand to the fedgov and hope that a Dem is in charge. Surely you wouldn’t begrudge our hardworking, honest public servants the meager $200k pensions they were PROMISED, would you?>

    1. Doesn’t matter who is in charge. Do you honestly believe the Grand Coward Party will do anything to stop a federal bailout? They might talk a bit tough but then MSNBC will trot out some 70 year old Teacher who is going to end up homeless eating cat food if there is no bailout and the Republicans will cave so as not to appear mean.

      1. The GOP won’t hesitate to screw california. There are no electoral votes to win there.

        1. We earned that! And thus, deserve it.

          Sadly, it won’t make a dent in our Utopian ideals.

        2. You seriously expect those cowards to grow a spine? They will do nothing to stop it especially if the Dems take the Senate in 2018. They might talk tough but just like we have seen with the ACA and Tax Reform the political cowards like McCain and Collins won’t do a damm thing and let the Dems get their way and a fat chunk of dough will head out to CalPERs.

  6. Assumptions, expectations, blah blah blah. No one is that stupid; they’re just parasites sucking money out of the system and forming whatever sounds and words they can to keep the gravy train going.

    You can’t use logic to dissuade someone of their emotional positions, and you similarly can’t use it to convince them they should stop lying to your face when they already know they’re wrong.

    1. That is what is happening on my local Nextdoor blog where a fireman has come crying about not receiving a raise in years and things being so bad – this is Vallejo mind you. Yes, that bankrupt city thanks to fire and police pensions beyond belief – that all of the fireman are leaving for other cities with better pay and benefits.

      Turns out, union negotiations are ongoing right now.

      No matter how hard many tried to politely tell him to quit his bellyaching and be glad for what he had, he continued to argue.

      Finally, someone went to Transparent California and revealed this guy’s pay and benefits to all. More than $250/year total IIRC. That seemed to turn the cop/fire worshipers towards questions and the Mr. Firefighting hero dropped off.

  7. Lighting the ‘retiredfire’ signal:
    The person with that handle usually shows up on these threads to complain that the parasites are owed this since ‘the government’ already agreed to it, and it’s just some bad times that keeps CalPERS from being fully funded.
    And then we also get a visit from some sophomoric idiot who claims the workers aren’t at fault, it was the union leadership.
    Let’s see if we get such visitations…

    1. If you don’t like paying for pensions for retired California Coastal Commission smelt counters, you should move to Somalia. I hear they have great food.

      1. And if you love paying for government waste, you could move to Venezuela. I hear they have bad TP there, so you could wipe your ass with your fingers.

  8. Too many retired or pending retired drawing unsustainably big pensions?

    How about a bounty system? Any retiree who takes out another gets to keep 10% of that “eliminated” state obligation.

    1. Similar to the plan to reduce Social Security in Christopher Buckley’s “Boomsday”: incentivize suicide.

      1. But this could be more fun. And with marketable TV rights.

  9. Has CalPERS hit the 7 percent growth expectation in years? I’m fairly sure it hasn’t come close.

    1. https://tinyurl.com/y98l7tuv

      Over 20 years? Yes. Just barely.

      Today? Not so much.

      Here’s a though to protect the public as well as public pension retirees. They can assume no better rate of return than fed 10 year treasury rates.

      1. But if they do that then California won’t be able to show a balanced budget on paper. Their insane projections allowed them to under-fund the pension system allowing them to show their little progressive plan works. Meanwhile the ticking you hear in the background is the time bomb of the pension system obligations. I expect a fed bailout within the next couple of years especially if the Dems take back the Senate in 2018. The Cowards in the GOP will do nothing to stop it and CalPERS and the politicians beholden to the unions will not change a damm thing. Meanwhile all of us outside CA will get to pay for their irresponsibility.

  10. People forget that this issue will not be resolved by management. Ever. They participate in the Calpers as well and receive even more than most. As do many city/county elected officials.

    It’s going to take a public revolt to put and end to the unsustainable, government defined benefit pension plans and some judges with the cajones to rule that, like everything else in life, pension promises are irrevocable if they haven’t been fully vested and/or paid out.

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