Pension crater bigger than thought

APRIL 12, 2010

A new report from Stanford University’s well-respected economic policy institute has revealed that those of us who have been warning about California’s severely underfunded public employee retirement systems have, quite frankly, been wrong.

We have been understating the scope of the problem.

Pension critics, myself included, have been complaining about an unfunded liability – basically, the debt the government has run up to make good on current pension promises – in the neighborhood of $60 billion to $100 billion. Those seemed like big numbers, but, as the Stanford study reveals, the truth is exponentially worse than previous numbers suggested. The study pins the liability as more than a half-trillion bucks, and that doesn’t include the debt to pay for public employee health care – an amount that has typically been double the pension liability.

Union leaders and the politicians they basically own have lashed out at pension reformers, but the data continue to make it clear that decades of union dominance and pension-hiking deals are taking their toll on government budgets and on the fiscal health of the nation. Could anyone really think it wouldn’t cost anything to create a class of government workers who can retire in their 50s with 80 percent, 90 percent – or even more than 100 percent – of their generous salaries?

Pension reformers also were right that California governments have been woefully understating the size of their pension obligations, just as the pension funds have been trying to cover up this fiscal mess by spreading investment losses further out into the future, as part of a disreputable but legal process known as “smoothing.”

The California Public Employees’ Retirement System, which has been embroiled in a pay-to-play scandal that has earned the attention of federal investigators, has faced enormous losses. So have the other major state pension funds. As the systems are set up, when these funds score big on risky investments, public employees have a decent chance of sharing in the spoils. When the investments go bust – as many have, including CalPERS’ ridiculous leveraged investments in risky housing projects at the most inflated point in the bubble – the taxpayer picks up the slack, one way or another.

The New York Times recently reported that, just as private companies are taking fewer risks with their pension funds to deal with tough times, governments are taking unusually high risks to try to make up losses. As one investor told the newspaper, “In effect, they’re going to Las Vegas. Double up to catch up.”

It’s easy to see why. Let’s say you could go to Vegas and keep all your gains, but could dump your losses on someone else. How would you bet?

Yet the union class warriors and their mostly Democratic allies aren’t yammering about greed right now. They save that for the corporations and the taxpayers (they want us to pay more to make up for their excesses). Yet there are few things as greedy as running up debt and lobbying for more taxes from the peons so that an elite class can keep retiring earlier with ever-greater pensions and other benefits.

“California taxpayers are on the hook for over a half-trillion dollars,” Gov Arnold Schwarzenegger said in a statement after the report’s release. “That’s nearly six times the size of our entire state budget. The consequences are clear: Increasingly large portions of state funding for programs Californians hold dear, such as schools, parks and health care, will be diverted to pay for this debt. That is bad enough, but without reform, pension debt will only grow.”

Schwarzenegger’s quote offers some insight into one realistic way that the problem will be managed by governments – the depletion of public services. I recently wrote a piece about the bankrupt city of Vallejo in the northern San Francisco Bay Area. Despite the bankruptcy, the union-dominated City Council won’t void existing pension deals (although it has reduced pension benefits for firefighters going forward) but has, instead, slashed public services. It has cut its police force by a third, even as captains earn a compensation package of more than $300,000 a year. This should be the new government ad slogan: “Pay more, get less!”

The Stanford study offers some modest proposals: improving accounting standards so municipalities cannot easily hide pension obligations, invest in less-volatile assets and offer a less-generous tier of benefits for new employees than the absurd packages employees receive today.

Yet I’ve watched how the political class in Sacramento has dealt with serious pension reformproposals. The ballpark chance of successful pension reform is somewhere around zero. And even if a new mandatory second pension tier is implemented, something needs to be done about the tsunami of promises to current pensioners. More than 15,000 California public employee retirees (in all systems) receive more than $100,000 a year, cost-of-living-adjusted, courtesy of California’s taxpayers. Those numbers, according the California Foundation for Fiscal Responsibility, will increase dramatically in coming years.

Maybe we could try this modest proposal: Every California family can cut a check for about $36,000 and send it to the Franchise Tax Board to cover its share of the pension liability. (If you want to be a good American and help the federal government clean up the unfunded liabilities for Social Security and Medicare, simply send a $330,000 check for each member of your family to your nearest friendly Internal Revenue Service office.) Those numbers give you a sense of the scope of the problem.

Don’t believe the lies government officials and union lobbyists tell you. This situation is not caused mainly by a downturn in the economy. When the economy was booming, government went on a spending binge. It had to slow down eventually. The real reason, as Schwarzenegger adviser David Crane wrote recently, is: “For decades – and without voter consent – state leaders have been issuing billions of dollars of debt in the form of unfunded pension and health care promises, then gaming accounting rules in order to understate the size of those promises.”

As someone who wrote about Orange County politics for a long time, I’ll remind you that Republican politicians were as eager about doing this as Democrats.

It’s time for a reality check, and for serious cuts in pension and health care benefits. Believe me. The problem is worse than it seems.

–Steven Greenhut