Counties Still Ignore Pension Tsunami
By WAYNE LUSVARDI
The desire for imaginary benefits often involves the loss of present blessings. — Aesop’s Fables.
In Kern County, things evaporate. The County once had a 100-square mile seasonal body of water called Buena Vista Lake near its center that dried up when Lake Isabella Dam and the California Aqueduct were built in 1953. The size of the lake swelled and shrank wildly depending on intermittent rainfall.
Now, a Kern County labor leader has charged that the notion that the County’s pension fund has dried up has been “made up” to extract concessions from county employees.
The problem in Kern County is reality. The original Lake Buena Vista no longer exists, although it is shown on old maps. And Kern County’s pension fund has not so much evaporated as the promised level of benefits was imaginary in the first place.
As the Northwestern University Kellogg School of Management reported in October 2010, Kern County is facing a situation in the “best case” where 51 percent of its General Fund would have to be dedicated to paying pensions by 2019. And in the “worst case” situation, 82 percent of its operating budget would have to paid for pensions by 2015:
Percent Municipal Revenues Consumed by Pensions
|San Diego Co.||62%||119%|
|San Bernardino County||45%||90%|
Kern County apparently is on track for the worst-case scenario. But labor leaders are still true believers, just as Bernie Madoff’s investors were.
Labor leader Regina Kane, president of Chapter 521 of the SEIU, issued a press release this week stating:
We have been told to sacrifice the price of our medical coverage and promised retirement benefits for a made-up financial crisis so the supervisors can call themselves pension reformers, in keeping with the current political fashion.
Such rhetoric is expected in hotly contested labor negotiations, but may mislead union members into believing they are getting the shaft from an unfair game of political football. Social psychologists call this “cognitive dissonance” – when a prophecy has been shown to be false, those who believed in it don’t abandon their faith. Instead their beliefs just get stronger.
Blame the Stock Market?
Another true disbeliever is economist Dean Baker of the left-leaning Center for Economic Policy and Research, who has stated that the major driver of the County’s pension fund shortfall was the stock market crash of 2008, not “ever-increasing or overpromised benefits to employees.”
Apparently even economists’ opinions are also based on beliefs and unrealistic assumptions. Kern County’s pension fund was based on linear projections of annual compounded returns on investments, lasting forever, to plug the gap between promised benefits and actual contributions from employees. But financial markets are not linear and upward; they are cyclical, as history has proven and everyone knows. Seasonal lakes dry up or are drained and imaginary pension benefits evaporate or recede when financial markets panic.
This is especially so for the 2008 financial market bubble that was invested in speculative sub-prime real estate mortgages and retail real estate projects “puffed” by local redevelopment schemes. In essence, local pension funds, growth management plans, affordable housing quotas and redevelopment were a connected house of cards.
Of 459 cities in California, 413 of them have redevelopment agencies. And over 100 cities had inclusionary housing ordinances as of 2003.
Creating Redevelopment Funds
To pump up sales taxes for municipal pension funds, redevelopment projects were created based on overpriced retail outlets and “inclusionary” housing that inflated prices of retail goods and services, condos and apartments. Union leaders and advocate economists can blame the bogeyman of Wall Street, but this was also a crisis that was cooked up locally.
Financiers may have packaged globalized mortgage-backed securities, but municipal governments acted locally to bring it all about by a combustible package of slow-growth zoning, inclusionary housing laws, affordable housing mandates and redevelopment. In a quid pro quo, redevelopment promised to avoid developing in NIMBYs‘ back yards if the NIMBYS would just allow the redevelopers to build mixed-use housing and retail in older, hollowed-out downtowns.
The public seems to have never caught on that, to build one unit of inclusionary housing, about four units of market-rate housing have to be built at an over-market price to subsidize that one affordable unit. This is called a bubble.
Developers, planners and city councilpersons can respond to the anti-growth NIMBYs that they are forced to build overpriced market-rate housing just to meet affordable-housing mandates. So state affordable housing mandates are the cart that drives the horse of local development, so to speak.
This is why affordable housing mandates are artificial and have no bearing in reality as to whether a city has enough older affordable housing stock or not.
True affordable housing is old, obsolescent and located further from commercial services and transit centers.
But in recent years, “affordable housing” has been redefined as a lack of brand new condos or apartments built on pricey commercial land with pools, spas and gyms, and located next to light-rail transit stations. In other words, affordable housing is imaginary and has been redefined as lack of luxury housing for the poor — an oxymoron. Affordable Cadillacs can’t be far behind.
The story of local complicity in the national financial panic has largely not been told, however. A Cato Institute study, “How Urban Planners Caused the Bubble,” found:
- * Cities with no growth management plans experienced 40 percent appreciation in home price from 1995 to 2008, while those with such plans appreciated from 100 percent to 150 percent.
* Home prices did not bubble in 29 states, only one of which had a growth management law. Conversely, home prices bubbled in 16 of 21 states with such laws.
* Between 2000 and 2008, the Atlanta, Dallas-Fort Worth and Houston metropolitan populations each grew by more than 125,000 per year without out experiencing bubbles, while having no strong growth-management plans.
- * There was a strong correlation of foreclosure rates and growth management induced housing bubbles.
Such studies, however, have failed to see how growth management plans, redevelopment, affordable housing quotas and inclusionary housing combined to induce a housing price fever to generate more sales taxes and a larger property tax base to pay for overcommitted pension funds. By definition, redevelopment is an economic bubble not manufactured on Wall Street but on Main Street. Redevelopment projects functioned as Potemkin casinos that cities bet their futures on and lost.
The Redevelopment Ideology
Redevelopment is also not just physical real estate, tax increment financing or a bubble — but an ideology. An ideology is not a lie, deception, propaganda or trickery. By definition, the liar knows he is lying, the ideologist does not. Those advocating saving redevelopment in California are perfectly sincere. Just look at the beautiful projects they have created (they would say)!
But ideologies frequently serve a vested interest and distort reality where it is beneficial for them to do so. You can tell when an ideology has been operating when those beneficiaries claim that when things didn’t work out right, it must be imaginary.
They say in Kern County that once a year you can see a mirage of the former Buena Vista Lake.
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