It's been a little more than 20 years since the California Legislature passed, and Gov. Gray Davis signed, Senate Bill 400, which granted 50-percent pension hikes to employees of the California Highway Patrol. The law's clear intent was for every other California agency to follow its model. They mostly did. So, these pension deals spread across the state like a contagion—leaving a debilitating level of pension liabilities that threaten to obliterate city and county budgets and push some less affluent localities toward insolvency.
The legislation granted the pension increases retroactively, which meant that government employees didn't just gain these additional benefits beginning on the day of its passage. The increases were granted back to the day the employee started on the job, even if it were 30 years ago or more. This was more than your garden-variety gift of public funds, but it passed overwhelmingly on a bipartisan basis, and with virtually no public debate. Those few officials who raised red flags were derided, even though their warnings were prescient.
Lawmakers apparently gleaned a cynical—but useful—lesson from Orange County's bankruptcy, which took place five years earlier. (Its 25th anniversary was last Friday.) In that debacle, Treasurer Bob Citron had brought in unbelievable returns for the county investment pool by leveraging assets to make investments tied to interest rates. He was betting on lower rates. It all worked perfectly, until it didn't—and then the Fed's rising rates led to what was, at the time, the largest municipal bankruptcy in U.S. history. County officials had enjoyed the windfall and seemed angriest at the few voices who warned about the coming unpleasantness.
What's the lesson? It's best summarized by the great Baltimore journalist, H.L. Mencken, who wrote, "The men (Americans) detest most violently are those who try to tell them the truth." In other words, don't level with the public, especially if you have plans for higher office. Tell everyone what they want to hear—or at least stick to the rosiest scenarios. Promise people something for nothing, and by no means take on the role of a Cassandra.
During the SB 400 debate, supporters said it wouldn't cost taxpayers a dime because of ongoing boisterous stock-market returns. The California Public Employees' Retirement System (CalPERS) promised that "no increase over current employer contributions is needed for these benefit improvements." It would mostly be funded from excess returns on retirement systems that were so awash in cash that they really – I swear – had no other choice but to give it away to their union friends.
Obviously, these predictions never panned out as the stock market fell. The state's pension funds now struggle with troublingly low 70-percent funding levels, even after a long-running bull market. There are no excess returns, but insufficient ones to pay for growing membership in the "$100,000 Pension Club." Once the market falls again—and it will fall, as former Gov. Brown frequently warned—these funds could hit the skids. On hindsight, who could have ever believed those ridiculous assurances?
Now, pension liabilities grow, but legislators have no appetite for reform. There have been plenty of warnings, from members of both major political parties, and from people with serious actuarial acumen. It doesn't matter, though. Legislators rather think happy thoughts, lest the public-employee unions come gunning for them.
The latest ominous sign comes from a new CalPERS report showing that pension costs for California police officers and firefighters has hit 50 percent of their pay, as Ed Mendel explains in the Calpensions blog. It's an astounding—and escalating—number. These amounts are "unsustainable," according to the decade-old prediction of a CalPERS' former chief actuary that he quotes. Consider this shocker: "A few safety plans have reached 100 percent of pay," Mendel added, meaning that "for every $1 of base salary, the local government must pay another $1" to CalPERS. Dire predictions are coming true.
A California city manager told a newspaper that cities have become pension providers that offer a few services on the side. At this rate, cities won't have the money to provide any services at all, let alone ones on the side. Good for CalPERS for providing useful data, but don't expect the pension fund to lobby for changes to the pension plans or call for anything other than higher contributions from city and state taxpayers.
Seriously, why should politicians stick out their necks? Name any SB 400 backer (or Citron defender) who paid a political price. The bill's principal co-author, Lou Correa of Orange County, has been promoted to member of Congress. The sad lesson, from two of California's biggest financial debacles, is there's no point in politicians warning the public about impending fiscal crisis. Mencken probably was right. That doesn't mean California lawmakers will never reform the pension system; it just means they won't do it until the red ink hits the fan.
This column was first published in the Orange County Register.