Crazifornia: CalPERS Death Star looming nearer still

Newport Beach Fire Department FerrariMay 3, 2013

By Laer Pearce

I have a financial planner friend who often includes tax-free municipal bonds in his customers’ portfolios and therefore closely tracks matters like the Stockton bankruptcy’s potential impact on municipal bond rates. He definitely did not smile as he took the accompanying photo near his Newport Beach office.

The license plate translates as “Ex Newport Beach Fire Department” and it’s affixed to a 2013 Ferrari California 30, a car that retails for $208,000 before all the costly extras and options Ferrari offers are added.  It didn’t help that earlier in the week he saw another very expensive car — a Shelby Cobra 427 — with the license plate “I ♥ STERS,” as in CalSTERS, the California State Teachers’ Retirement System. And keeping up the car/pension theme, he knows a retired water district general manager who recently spent $200,000 on a professional rebuild of his late 1960s Oldsmobile 442.

It’s possible these three well off former “public servants” could have lucrative side businesses, but more likely they’ve just got great retirement benefits. It’s common for a retired fire chief, for example, to receive a retirement pension of $200,000 a year or more, along with Cadillac (or Ferrari) medical coverage.

To add salt to the taxpayer’s wound, Newport Beach currently pays 94 percent of fire employees’ pension costs, with the firefighters contributing just six percent. It’s actually considered a significant pension reform by some within government that the city’s contribution will drop to “only” 80 percent of the costs in 2014.

The death of CalPERS?

Ferrari pensions — even Buick pensions — given away for just pennies on the dollar are proving to be unsustainable, as reflected by the recent announcement from CalPERS that it is going to hike employer contributions by 50 percent. Sure, they’re going to phase it in over six years, but a 50 percent hike is still a 50 percent hike. And when you multiply it by 1.6 million, the number of California government workers covered by CalPERS, you’re looking at some very serious financial impacts on municipal and state budgets.

The rate increase was foretold by a recent California Public Policy Center report, covered in as California’s pension Death Star, that predicted CalPERS’ pension costs would increase by 50 to 100 percent of the net property tax income of six Northern California counties it studied.

To see how the new increase hits home, look at the small town of Canyon Lake in Riverside County. CalPERS already has increased the town’s contribution rate from 12.8 percent of an employee’s salary to 17.9 percent over the last three years, and the City Council was looking at its contribution going to 26.8 percent this summer — before the 50 percent rate hike starts to kick in.

In response, the Canyon Lake city council did what any logical person would do: It voted to quit CalPERS. According to news reports, saying farewell is going to cost the tiny city $660,000, the amount of unfunded liability CalPERS is carrying on Canyon Lake’s small employee base. The city figures the cost of financing the $660,000 will be less than the cost of putting up with CalPERS jacking up rates instead of paring down benefits.

Bigger settlements

Cities with more employees, especially those who have been shorting CalPERS because of their own financial woes, would be looking at much bigger settlements, should they decide to divorce CalPERS. They’re looking, nonetheless.

San Jose recently found it would cost $5.7 million just to end CalPERS pensions for its city council; and Modesto determined it would have to pay $1.1 billion to fully exit the retirement system. I know of one special district that is developing a strategy for raising the money needed to divorce itself from the system without raising rates, and I’m sure the newest CalPERS rate hike will swell the numbers of municipalities looking at a CalPERS divorce.

If American business ingenuity kicks in, as I suspect it will, you’ll see new financing tools to fund CalPERS split-ups. When that happens, the move toward more sustainable pensions could become a stampede, which would leave the nation’s biggest pension plan little more than a big chunk of space junk.

In Crazifornia, my recent book, I predict it is likely California will only reform itself one catastrophe at a time. If so, we should hope the pension catastrophe will arrive before things get too much worse — and increasingly, it’s looking like it might.

Laer Pearce, a 30-year veteran of California public affairs, is the author of Crazifornia: Tales from the Tarnished State.

Death Star Wars

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