By Chris Reed

Perhaps the single smartest guy in the Schwarzenegger administration, David Crane, continues to be a wrecking ball when it comes to the arguments offered by apologists for California’s ruinous state finances. In his latest Bloomberg News column, Crane takes on the defenders of the status quo who try to reframe the narrative by saying pension funds aren’t underfunded because benefits are ridiculously generous, it’s because of Larger Economic Factors That Came Out Of Nowhere.

“The reason for rising pension costs has nothing to do with the recession or short-term declines on Wall Street. Public pension costs are increasing simply because liabilities are growing faster than assets.

“Calpers is a good example. As an intermediary that administers pension promises made by the state of California and other public-sector employers to their employees, it collects contributions from employers and employees, invests those funds to generate earnings, and uses the proceeds to pay benefits to retired employees.

“In 2007, Calpers reported that the pension liabilities of its largest pool of employers totaled $248 billion. By 2011, just four years later, those liabilities had grown 32 percent, to $328 billion. That rapid growth happens because pension liabilities grow (‘accrete’) at the rate used to discount those obligations to present value, which at Calpers is a very high 7.5 percent per year. Pension assets must grow at that “hurdle” rate or pension costs rise. For example, to meet the rate at which pension liabilities were increasing in 2007, Calpers needed the Dow to reach 20,000 by now. Because it is at 75 percent of that level, pension costs must rise to make up the difference.

“This isn’t a new phenomenon. To meet the rate at which pension liabilities were growing in 1999, Calpers needed the Dow to reach 30,000 by now. Because it is half that level, California has spent $20 billion more on public pensions than would have been the case had pension assets grown at the hurdle rate.”

Projecting Dow at 30,000 epitomizes insanity of 1999

In key ways, 1999 was the year that brought the pension tsunami more toward shore than in any other year. That’s when CalPERS lobbied for a retroactive 50 percent increase in pensions for state employees, triggering a wave of giveaways by local governments who were encouraged by CalPERS’ insane claim that it would be easy to fund the much more expensive benefits.

What was driving that assumption? As Crane notes, the idea that the Dow Jones Industrial Average would be at 30,000 this year. Nothing epitomizes the civic arson committed by CalPERS in 1999 better than that ridiculous factoid.

By Chris Reed

The California Public Employees’ Retirement System is a piece of work. For years, it has downplayed the pension crisis, ignored its central role in the crisis by encouraging a 50 percent retroactive giveaway to all state employees in 1999, and depicted its critics as hateful ideologues, not people who understand basic math.

So the governor got through a fairly sweeping pension reform, which is the best proof possible in Democrat-dominated Sacramento that the problems are huge and unavoidable — and CalPERS is still pretending it is one of the good guys in the pension fight. The method: depicting attacks on CalPERS for its many mistakes and for its horrible counsel to local governments as an attack on innocent, aged retirees:

CalPERS officials say retirees are being scapegoated for problems caused by foolhardy local officials who overspent their budgets and Wall Street bondholders who should have understood that lending money to municipalities carries the risk of not getting repaid. … 

In 1999, CalPERS persuaded the Legislature to substantially increase state worker pensions, saying the costs could be borne by booming investment returns. CalPERS predicted the state’s annual pension contributions would remain at $766 million or less for at least a decade. Many local governments responded by boosting their own workers’ pensions.

When the investment markets sagged and the state’s annual contribution to CalPERS zoomed past $3 billion, Republican lawmakers and others began attacking benefit levels as too generous.

CalPERS was quick to defend itself, noting that the average pensioner receives under $30,000 a year and shouldn’t get blamed for weak investment results.