Public Pensions Crowding Out Services

APRIL 12, 2011

By WAYNE LUSVARDI

A Chinese folk tale tells of a sculptor that placed fake money on a tree to trick villagers into cutting it down for him.  But so many people believed the tree to be sacred that the sculptor was warned that if he cut down the tree he would be cursed.  At the end of the tale the sculptor is bribed not to harm the tree.

Conversely, California’s municipal pension funds seem to have been cursed for failing to cut down the redevelopment money tree.

Cutting Services to Fund Pensions

In the mid 1970’s, the City of Pasadena planted ficus trees along the parkways of its then new downtown mall, convention center and famed Playhouse District built with the seeming endless money tree of redevelopment funds. By 2011, both the parkway trees and the redevelopment money tree didn’t end up as planned, but Pasadena continues to fight for the continuation of both.

Today, some of California’s wealthiest cities, such as Pasadena, are starting to roll their shortfall in funding for public pension obligations into bonds — which are essentially low interest credit cards. Bonds mean paying interest, which typically doubles the cost of the project. This is what the New York city did in the mid-1970’s, when it went bankrupt after funding social services with general obligation bonds.

But California’s most wealthy cities are unlikely to default on their debts.  Such cities as Pasadena, Palo Alto, Burbank, Carlsbad, San Jose, Newport Beach and Manhattan Beach all have AAA bond ratings.   But even they are facing the reality of having to cut back services to pay for pensions.

Pasadena is cutting $8 million per year in services out of its General Fund budget to meet unfunded pension obligations. The City Council of Pasadena announced on March 29 that it had approved a $65 million pension bond bailout to plug a $74 million funding gap in its Firefighter and Police Retirement System (FPRS).

Pasadena’s Senate Bill 481

Pasadena’s problem is that, in 2015, an $81 million balloon payment is due on an existing pension bond and there are no new contributions coming in to its now closed fire and police pension system.

Pasadena’s pension problem started over two decades ago under the regimes of Democratic mayors Bill Bogaard and John Crowley. In 1987, Pasadena got the State legislature to pass a special law, SB 481, allowing it to divert property tax revenue from its downtown redevelopment project area to pay for police and firefighter pensions.

Redevelopment Money Tree

Pasadena’s Fire and Police Pension Fund was predicated on a 7 percent annual return that unrealistically never planned for economic recessions. Ironically, such recessions were caused partly by overbuilding with cheap tax-exempt redevelopment bonds, inflated housing prices and rents, and easy money loans all primed to help puff up real estate investment returns to plug the unfunded gap in public pensions.  At the time, redevelopment was viewed as sort of a perpetual motion machine that would never run out of money or suffer any downtime.

It was a scheme to let the taxpayers think that money grew on trees grown by redevelopment agencies.  Taxpayers obviously went along with this plan, as they didn’t have to have their property taxes raised. And this scheme did not trigger a supermajority vote for raising taxes, as required by Proposition 13, so it generated safe political capital for local politicians as well.

The Affordable Housing Curse

The only opposition to SB 481 in 1987 in Pasadena came from affordable housing advocates who claimed that this would rob the 20 percent of redevelopment funds set aside for low-income housing and divert it to pensions.

This became the germination of “inclusionary housing” laws that shifted the burden of funding low-income housing onto buyers and renters of new condos and apartments in upscale redevelopment projects. Property taxes from redevelopment projects could be diverted to pensions and affordable housing could still be developed by shifting the burden of paying for it onto new home buyers and apartment renters. Inclusionary housing, in tandem with redevelopment, was like printing free money.

Inclusionary housing tacks about a 25 percent premium onto sales and rentals of trendy redevelopment housing in order to pay for subsidized condos and apartments in downtown upscale commercial locations. With the spread of inclusionary housing programs, the definition of affordable housing in California changed from providing rent subsidies in older housing units to providing new luxury housing with pools, spas and gyms co-located with high-priced retail and grocery stores next to light rail transit stations. This artificially inflated the price of housing and created a demand for sub-prime loans.

It was as if another free money tree of no-cost housing subsidies could magically be grafted onto the existing money tree of redevelopment, while still diverting free money into public pensions. Who would ever want to cut down such a money tree?

Cutting Redevelopment to Solve Pension Crisis

By 2010, Pasadena merchants demanded the removal of overgrown ficus trees along store fronts due to the nuisance and cost of unsafe uplifted sidewalks, slippery berries that dyed sidewalks purple and the cost of roto-rooting sewer lines clogged with tree roots. Hundreds of “tree people” came out to oppose the removal of the obviously annoying and damaging trees after the city in the dead of night removed them.

In Pasadena, citizens are more worried about having to remove overgrown ficus trees in its downtown district than in how overgrown redevelopment may have facilitated a financial and budgetary pension fund disaster both locally and statewide.

However, unlike the Chinese folk tale of the money tree, Pasadena and the state of California seem to be living under a curse of failing to cut down the redevelopment money tree.  Pasadena’s situation may be somewhat unique due to SB 481.

But California needs to cut out redevelopment not only to help fund schools and social services in the short term, but also to solve its public pension crisis in the long term.  California can’t continue to rely on sales tax incubators and hot houses called redevelopment to bail out its over-promised public pension funds. Redevelopment is a economic bubble-manufacturing machine that produces fictional money trees.