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.

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  1. truthsquad
    truthsquad 12 April, 2011, 10:49

    Retirement security for civil servants were at risk not because of their increases, but because of the fall of the banks and Wall Street. The funds have recovered quite nicely. CalPERS is up 12% this year. Killing public pension funds would mean more money for Wall Street while punishing the middle class.

    Reply this comment
  2. Wayne Lusvardi
    Wayne Lusvardi 12 April, 2011, 16:10

    Dear trughsquad
    Just so you know who the author of the article is – I am a former civil servant who is a member of CalPERS.

    And for your edification, a 12% return is a junk bond rate – very very risky and prone to wipe out of your investment. That is what happened with CalPERS’ real estate investments.

    I also once worked for a redevelopment agency. If you learn about state and local pension crises, you will find that there would have been a shortfall in pension funds even if Wall Street did not crash.

    But the reason that Wall Street crashed was all the trillions of dollars in public pension funds invested seeking risky returns in mortgage bonds backed by sub prime loans so that the pension fund could get a 7% annual return.

    Reply this comment
  3. Kris Hunt
    Kris Hunt 13 April, 2011, 14:34

    Great article and glad to learn your background Wayne.

    Reply this comment
  4. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 13 April, 2011, 22:56

    Retirement security for civil servants were at risk not because of their increases, but because of the fall of the banks and Wall Street.
    =============
    Trough feeder, that whopper won’t fly here, we are WAY TOO SMART.

    Try it at an SEIU beach part 🙂

    Reply this comment
  5. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 13 April, 2011, 22:58

    The funds have recovered quite nicely. CalPERS is up 12% this year.
    =======
    CalTRDS is at 60% funded level, down more than 40% of full fudning, and they have a 10 year ROI of 2.41%, and that is considered “critical”,

    In California actuarial methods show the Public Employee Retirement Fund (Calpers) at a funding ratio of 87 percent but when private sector market valuation is applied to Calpers, the funding ratio drops to 48 percent, according to the Bigg’s study. Likewise, California teachers’ funding (Calstrs) ratio under current actuarial methods is also 87 percent, as opposed to 46 percent when private sector market valuation is applied. Pension experts say funding levels below 80 percent place the long-term viability of pensions in jeopardy and are nearly impossible to overcome without massive borrowing, painful tax increases, cuts to benefits and increased contributions. Pensions with less than 80 percent of the assets needed to cover present and projected liabilities are considered “endangered,” while those below 65 percent are classified as “critical” under the Pension Protection Act of 2006.

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