Last week, Stanford's Institute for Economic Policy Research and California Common Sense released a report that confirmed what Californians have come to realize, yet many leaders still deny. From Stockton to San Diego, government pension costs are crushing local governments.
Among cities and counties with pension systems outside of CalPERS, i.e., "independent" systems, pension expenditures have increased 11.4 percent annually since 1999, faster than any other category. Based on economic and finance standards used everywhere except in the public pension world, the top 24 independent pension systems are collectively $136 billion in debt and have only 54 cents for every dollar they owe. In nearly every municipality, employee pensions are being prioritized over libraries, parks, street maintenance, health care and public safety.
You wouldn't know it from the debate in Sacramento, but this isn't a partisan issue. Rather, this is about the crumbling of basic services that citizens expect from their government.
How did we get here?
Primarily through deceptive accounting and unrealistic assumptions. SB 400, approved in 1999, dramatically increased retirement benefits, including permitting some employees to retire at age 50 with 90 percent of their salary.
Pension system administrators also assumed an annual investment rate of return of nearly 8 percent, the equivalent of the stock market doubling in value at least every nine years. (By the way, they still assume this today – which is equivalent to betting that the Dow will reach 11,000,000 by 2100.) Investment guru Warren Buffett calls the investment rates of return used today "crazy," and instead argues for a rate between 6 percent and 6.5 percent.
Pension system administrators also grossly understated the true value of benefits owed. (Yes, theystill use assumptions that underreport liabilities today.) In fact, back in 1999, state and local pension systems convinced lawmakers that pension funds were overfunded. In reality, even in 1999, they were already underfunded.
If pension systems were underfunded then, imagine their status now after several years of poor investment returns and increasingly generous benefits. Even with government employer contributions increasing more than 11 percent per year, independent systems are in far worse shape today than a decade ago.
For example, Sacramento County's system is just 55 percent funded, with unfunded liabilities of $4.8 billion. Annual contributions to that system increased from $47 million in 1999 to $183 million in 2011, outpacing the growth of spending on public assistance, public protection, health and sanitation, public ways and facilities, and recreation and cultural services.
As bad as it is today, it will almost certainly get worse.
What is the path that will help us emerge from this fiscal train wreck?
• Step one: Acknowledge the problem. Gov. Jerry Brown appears to understand the severity of this crisis and has laid out the first of many required steps.
Who will follow his lead?
• Step two: Honor commitments made to date, but change benefits going forward. No one seriously suggests slashing benefits for current retirees or benefits that current workers have earned to date. But the commitment to pensioners must also be balanced with the obligation of government to provide essential services to all residents. Few question the financial imperative to reduce benefits prospectively from their current, unsustainable high levels, including for current employees.
• Step three: Require honest accounting. Prohibit public pension systems from continuing to use the same fuzzy math that got us into this mess.
There is no reason that public systems should not use most of the accounting rules that are required by law in the private sector.
• Step four: Fully fund pensions, so that we do not once again simply "kick the can down the road." Every day that we fail to act guarantees higher future costs.
Do we expect Sacramento to follow this path? Not really. Instead, we expect high-profile news conferences touting "reforms" that ignore the magnitude of the problem, fail to address benefit levels, and permit the continued use of fuzzy math.
If that occurs, pension costs will continue to crush local governments, and services we once took for granted – public safety, parks and open space, roads and public transit, and health care for the poorest among us – will disappear along with the California dream.
As originally written in The Sacramento Bee: http://www.sacbee.com/2012/02/29/4298826/pension-costs-are-crushing-local.html