Pension Crisis

What, Us Worry? California Lawmakers Still Ignoring Dark Pension Clouds.

The guiding principle for California policymakers seems to be: Tell everyone what they want to hear—or at least stick to the rosiest scenarios.

|

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.

Advertisement

NEXT: New in Science: "Evidence, Alarm and the Debate Over E-Cigarettes"

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. SQRLSY One
    December.12.2019 at 6:06 pm
    “Is anyone with knowledge of the operation alleging ICE promised an actuall education…”

    Please get yourself an ACTUAL education on how to use simple spell-check that’s even embedded into the posting software right here! OK, I am a grammar (and spelling) NAZI, so be it… When you are lazy about these things, readers will assume that you are ALSO lazy about BASIC THINKING about what is right and what is wrong! ICE is lying out their ass in order to trap and punish people! Real human beings are the victim here! You want this done to YOU? If not, don’t support it! And ICE is NOT using their LYING to prevent murder or mayhem either!

    Hints about single v/s double v/s triple “L” use:

    The one-L lama, he’s a beast,
    The two-LL llama, he’s a priest,

    The 3-LLL lllama, he’s deceased!

    (“Deceased” roughly = non-existent).

    AHAHAHAHAHAAHHAAHAHAHHAAHHAAHAHHAHAHAHAHAHAHAAHAHHAHA

    IDIOT

    AHAHAAHAHAHAHAHAHAHHAAHAHAHAHAHAHAHAH

  2. Lawmakers apparently gleaned a cynical—but useful—lesson from Orange County’s bankruptcy,
    Pass legislation to legalize your schemes?

  3. My guess is that the plan is to have the Feds take over the plans and let the rest of the country pay them off.

    1. And they can fuck themselves instead.

      1. It seems pretty likely to me that the blue team will lack one of the things they need (majority in the House, and the Senate, and the presidency) when California’s bill finally comes due. They have successfully managed to suppress anyone who isn’t part of the party machine there for so long, I wonder if they realized that was going to bite them in the ass later – because the red team can just shrug and say “well we don’t get any votes from that area anyways, so why bail them out?”

  4. Government is full of life’s failures, those who thought Algebra and Calculus were forms of torture. Pension risk analysis isnt even complex analysis, it is a simple analysis. Yet government doesnt care. They will lie always to win a vote. California is the canary in the coal mine along with chicago. Never let a liberal take over with empty promises or you’ll end up dead and broke.

  5. Politicians long term view is the next election. Pensions require a 40 year view. Government is the worst entity to trust with a pension.

  6. “leaving a debilitating level of pension liabilities that threaten to obliterate city and county budgets and push some less affluent localities toward insolvency.”

    Since the plan is to have the state government take over local governments, this seems to be working quite well. Once the state takes over the counties and cities, the elites in SD, LA, SF, and Sacramento can stop worrying about the rubes in the rest of the state.

  7. Here’s what “firefighters” in my town earn:
    https://transparentcalifornia.com/salaries/2018/novato-fire-protection-district/
    They spend 3% of their time responding to fires and basically run an ambulance service. They also get 13 sick days, 13 paid holidays, 3 personal days and 4 weeks vacation after a few years.

    1. They spend 3% of their time responding to fires and basically run an ambulance service.

      Hey, at least it gives them something to do to earn their paycheck. Nothing wrong with consolidating government functions.

      1. Consolidate?! hahahahahaha…how cute.

        In my home town of San Rafael, CA, a firetruck accompanies an ambulance/Fire EMT truck. It’s in addition, not instead of.
        There are so few fires, they need something to do.

  8. Cities going bankrupt is one thing. The state bails them out. But when the state goes bankrupt, what then? It can’t happen. Well it can, but the Fed ain’t gonna bail them out. So the Democrat super-majority in California are going to jack up taxes to keep their pensions, and it will usher in a huge switch to Republicans. And I hope that’s followed up with prison sentences for hundreds of the elected officials who lorded over the pension scams.

    The good thing about bankruptcy is that it lets you clean house. But it hurts like hell while it’s happening.

    I don’t ever see California going back to the social conservative past, but bankruptcy has a way of focusing the taxpayer’s mind on fiscal conservatism.

  9. But, but, but they always tell us how they are the 7th largest economy in the world. On paper anything can be made to look rosie by liars and cheats.

    1. Funny thing, that whole “X Largest Economy” crap. The last time I looked, CA has 12.5% of the US population and produces approx 13.3% of US GDP. GDP is flawed, but if that’s the metric, fine.

      Per capita GDP of CA is not really that spectacular.

      1. Per capita GDP means even less when paired with a very high cost of living. One thing CA seldom brags about is the highest poverty rate (supplemental) in the entire nation.

  10. Amazing how those supporting these exorbitant pension plans can STILL claim that government employees are undercompensated AND at the same time bemoan the fact that not enough tax dollars are going to our much needed infrastructure needs.

    Political partisanship trumps coming to grips with economic realities.

  11. WOW! And I thought Illinois politicians were corrupt!

Please to post comments

Comments are closed.