When Lunatics Run the Asylum You Get Monty Python
Steven Greenhut
by

Sacramento

California’s pension funds continue to face a fusillade of bad news, including new reports showing that retirement benefits consume 20 percent of Los Angeles’ general-fund budget. Put another way, one out of every five dollars the city spends goes to a retired city worker, a percentage that has quadrupled in the past 14 years. That’s an astounding number that is crowding out other public services. Things are even more troubling in San Jose, where pensions and retiree health care now consume nearly 28 percent of the budget.

State officials have been giddy that the budget is “balanced” and are eager to spend more money on new programs. But reports a few months ago show the state deeply in the red ($175 billion) under new accounting procedures that reflect pension debts. The California Public Employees’ Retirement System, CalPERS, had investment returns of a measly 0.6 percent last year. Even that union-dominated fund’s top investment officials seem concerned.

During a presentation at the CalPERS Board of Administration meetings earlier this month, Chief Investment Officer Ted Eliopoulos played a video interviewing investment gurus who suggested that CalPERS’ expected rates of return are unrealistically high. In public-pension funds, it’s all about the return rates. For private-sector peons, a rate of return is a rate of return. If I invest in a mutual fund and get a 7 percent rate of return, that’s what I get. If it’s 2 percent, that’s that. I live either with the benefits of soaring investments or the bad news if my investment choices are subpar.

In the public sector, it’s a giant game through which officials can present as rosy an investment scenario as possible. Government employees are guaranteed specific pension benefits based on a formula. Pension funds invest contributions set aside by employers and employees and make a guess at their future returns. If investments outperform, there will be few “unfunded liabilities.” If they underperform, these debts amass and local governmental employers are forced to increase their contribution rates. This means diverting more money from their budgets and, ultimately, taking more from taxpayers.

So when top investment staff at a pension board provide evidence that assumed rates should be lowered, that’s astounding news. Many California cities already are headed toward “service insolvency” — a fancy term for municipalities that can pay their bills but can’t provide adequate levels of public services. If 20 percent of a city’s budget goes to retirees, it has far less money available for road maintenance and parks, after all.

This is what happens when the lunatics run the asylum, or at least when those who benefit from certain policies (government workers) elect their own bosses.

So what is CalPERS doing as the latest mess unfolds? Well, one of its committees will meet next month to discuss possibly lowering the assumed rate by a small amount. The board might vote on a reduction at its February meeting. In addition, CalPERS is hosting — along with Stanford University and California Controller Betty Yee (an ex-officio CalPERS board member) — a major conference designed to advance diversity in private corporations.

That captures the “bubble” mentality at the agency. There’s nothing its officials like better than to use their enormous investment clout to bully corporations into embracing the latest social investing idea, whether we’re dealing with divesting from coal, gun manufacturers, or tobacco companies.

With CalPERS and other pension funds, profits are privatized and risks are socialized. In other words, when their investments do well, their members get to reap the rewards by demanding higher retirement formulas or lower contribution rates. When the investments go south, the taxpayers get to backfill the hole. It’s easier for the agency to promote social causes than it is for other businesses, which can’t typically offload their problems on taxpayers. But the fixation on board diversity is a matter of particular hilarity.

CalPERS’ own board is hardly a paragon of diversity. That’s not because it’s dominated by frumpy older white guys. It’s a union-dominated board filled with people who benefit — or represent those who benefit — from the board’s policies. The six elected members represent retirees or employees. Three members are appointed by the governor and Legislature. In California, this means they are appointed by Democratic officials who curry public-employee support. The four ex-officio members are state officials, who also typically have ties to state workers. That’s how it is legally designed given that the boards of pension funds board are dedicated to benefiting their members. But taxpayers ultimately are on the hook, yet have little say here.

The current pension mess was exacerbated in 1999, when legislators and the governor (Democrat Gray Davis) rammed through a law (S.B. 400) that gave the California Highway Patrol the coveted “3 percent at 50” retirement formula. Highway patrol officers thus could retire at age 50 with 90 percent of their final year’s pay (plus spiking gimmicks). They received it retroactively — meaning even if an officer was about to retire in a couple of days, he or she would get the 50 percent benefit boost dating back to the date of hire.

Legislators knew the hike would spread across the state like an August wildfire in the San Gabriel Mountains. The law explains much about those $200,000 pension deals and $1 million payouts the media regularly report on. Many Republicans eagerly joined Democrats in this effort, given their support of police, firefighters, and prison guards. And those “public safety” benefits are at the heart of the problem, because they are so generous.

What does CalPERS, which at the time promised that this massive benefit increase wouldn’t cost taxpayers a dime, have to say about it now?

“So let’s get to the point and not fall into the tired trap of looking back: It’s time to put S.B. 400, the 1999 California legislation that changed benefits for public workers, behind us.… Retirement security is too important today to get caught in a debate about the past.” That was in a Sept. 28 op-ed by three of the CalPERS board’s more fiscally responsible members.

It reminds me of one of my favorite (and oft-quoted!) scenes from Monty Python and the Holy Grail. Sir Lancelot begins slaughtering guests at a wedding party, but realizes his mistake and patches things up with the king. As people are bleeding and dying, the king announces, “Please! This is supposed to be a happy occasion. Let’s not bicker and argue over who killed who.” Oh no, let’s not argue over who created the monster — let’s just find new ways to feed it.

Los Angeles has its own pension funds distinct from CalPERS. But its problems echo those across the state. Like most reforms, L.A.’s “have not cut the city’s pension costs; at best, they have modestly slowed their rate of growth,” according to the Los Angeles Times. The courts have forbid governments here from cutting benefits for current employees even going forward. Cuts for new hires will take many years to make a difference.

Unless something dramatic happens, cities like Los Angeles will continue to fall into deep disrepair, pension debts will soar, and taxes will rise. The only solution — a devoted effort to confront public-employee unions — is an impossibility given union power in the Capitol. There’s little question the bad news will continue.

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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