Suddenly, a Shifting Pension Paradigm?
Steven Greenhut
by

Sacramento

Last month, I wrote a dour column for the Spectator doubting that a significant new appeals court decision in a major pension case would ultimately change the financial trajectory of our state’s pension systems. Bottom line: A court finally agreed that oversized pensions for public-sector workers could be cut going forward, just as is allowed in the private sector.

It was great news, given the so-called “California Rule” has left cities with no choice but to slash public services and raise taxes to pay pension benefits that typically are reserved for multimillionaires. (That’s no exaggeration. One would need millions of dollars in the bank to have a guaranteed six-figure, cost-of-living-adjusted salary for life.)

But unions here control almost everything and past experiences gives us little reason to think such a sane decision will survive its many hurdles. I stick with my pessimistic assessment, but in recent weeks, the cold, hard actuarial reality has set in as the state is being forced to spend such a significant amount of money to plug its gaping pension hole.

Even the mainstream media are noticing. On Sept. 17, the New York Times published a lengthy article about California’s ongoing pension woes, “A Sour Surprise for Public Pensions: Two Sets of Books.” It reported on a tiny pest-control district in the Southern California desert that serves a mere six people. The Citrus Pest Control District No. 2 was trying to convert its employees to a 401(k) plan from its existing defined-benefit plan and was slapped with a massive exit fee from the California Public Employees’ Retirement System, the nation’s largest state pension fund.

Per the Times:

It turns out CalPERS, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the ‘market value’ of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.

This “two sets of books” issue is significant. I reported on it in 2011, in fact. For the sake of public consumption, CalPERS says there’s little problem because it expects a rate of return on its investments of 7.5 percent (lowered from 7.75 percent). If it gets that return every year, there will be plenty of money to pay all the promises into the future. CalPERS says the public can rely on this “official” number, but its “market” statistics tell a more dismal story.

Here’s what I found in my 2011 Orange County Register column:

When the taxpayer is backing up the entire liability for the pensions received by members of the California Public Employees Retirement System, then CalPERS officials are exuberant about the stock market. They insist that a predicted rate of return of 7.75 percent is perfectly realistic. When their own funds are on the line, however, CalPERS can be extremely conservative as it embraces one of the lowest annual return rates imaginable: 3.8 percent.

At the time, some cities were trying to exit the pension fund, just as the little pest-control district was trying to do in the New York Times profile. Here’s the Times:

CalPERS says it must bill departing governments for every penny their pensions could possibly cost because once they cash out, CalPERS has no way of going back and getting more money from them if something goes wrong.

Well, exactly. As I had opined, this second number proves pension critics have been right all along. When taxpayer money is on the line, CalPERS is a big spender. Only the finest and highest pension formulas will do for its public workers. They deserve it. Don’t worry. It will all pay for itself, which is what CalPERS argued in the Legislature when it was championing the 1999 pension legislation that started the ensuing pension-spiking spree.

But when its own money from its own investment pool is at stake, the agency suddenly gets very conservative. In 2011, it was using the 3.8-percent rate-of-return number. Lately, according to the Times article, it is using a measly 2.56 percent rate of return. The lower the return, the higher the unfunded pension liabilities, or debt. Using the “official” numbers, CalPERS has a big debt problem. Using the “market” numbers it has a potential catastrophe on its hands.

Don’t expect the state’s coddled class of union workers to figure out what this means, but unless something dramatic changes, they might not get everything they were promised in their retirement years. On Tuesday, Service Employees International Union 1021 members “shut down the San Joaquin County Board of Supervisors evening work session on public safety, demanding higher wages,” according to a Stockton Record article. They’re unhappy with a 6 percent proposed raise over the next three years.

Here’s the rolling-on-the-floor-laughing moment. The lead union negotiator was quoted as follows: “The county has the money to solve this, but instead, they choose to put that money into its pension fund.” Well, yeah, the county has to put in money to prop up the underfunded pensions union workers will receive. It’s still going to their compensation. This county is home to Stockton, which recently emerged from a bankruptcy due in part to the garish pension formulas and “Lamborghini-style” health plan it gave to employees.

On Sept. 18, The Los Angeles Times published a CALmatters piece about the above-mentioned 1999 pension deal (S.B. 400) that retroactively increased pensions for the California Highway Patrol; the measure also gave a green light for agencies across California to do the exact same thing. I’ve been screaming about that ramrodded travesty for years, but recognition in the major media of the mess that bill caused is nevertheless encouraging.

“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,” according to the report.

Proponents sold the measure in 1999 with the promise that it would impose no new costs on California taxpayers.… They were off — by billions of dollars — and taxpayers will bear the consequences for decades to come. This year, state employee pensions will cost taxpayers $5.4 billion, according to the Department of Finance. That’s more than the state will spend on environmental protection, fighting wildfires and the emergency response to the drought combined.

And the state general fund’s contribution is a pittance (proportionally) compared to what it is doing to counties and cities. Many localities now face “service insolvency,” meaning they can pay their employees and retirees, but not offer much in the way of services.

Since passage of that fateful law, California has been engaged in an unparalleled effort to transfer as much private-sector wealth as possible to public-sector employees. There’s a reason cities open arenas to handle applicants for a handful of firefighting openings. Consider this new statistic from one Orange County suburb. The average compensation for a Costa Mesa firefighter: $241,000 a year. It’s typical and includes a guaranteed pension of 90 percent or more of their final pay beginning at age 50.

There’s a quasi-serious term called the “Viagra Effect.” Public employees are retiring at such early ages that many of them are hooking up with young new spouses. So if Bob the firefighter retires at 50 with a $225,000 a year payday and then marries 32-year-old Mary, the actuaries have to figure out how the taxpayer-backed system is going to pay that amount until Mary joins Bob in that big firehouse in the sky. CalPERS statistics, by the way, show that the best-pensioned employees (cops and firefighters) live the longest — well into their 80s.

I wish everyone a long and happy life and plenty of Viagra if needed, but it’s time that we, the taxpayer, stop getting screwed by all of this. I’m a little less dour than last month. When this greed mongering gets prominent coverage in such important mainstream sources, it seems likely the paradigm is shifting. Maybe there’s hope for ending the California Rule, after all.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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