Four years after the state Legislature passed a bailout of the California State Teachers’ Retirement System that will nearly double annual direct contributions to the giant pension fund, a newly released internal report raises the prospect that the infusion of extra dollars may not protect CalSTRS from future disaster.

The 2014 changes in funding required districts to more than double their CalSTRS contributions, phasing in an increase from 8.25 percent of teacher pay in 2013-14 to 19.1 percent in 2020-21. Individual teachers and the state government also were required to pay more. But about 70 percent of the new funding – which will push total annual contributions from nearly $6 billion in 2013-14 to $11 billion in 2021 – is coming from districts.

The assumption in 2014 was that this extra funding was so significant that CalSTRS’ long-term viability was assured. The nonpartisan Legislative Analyst’s Office billed the hikes as a “major state accomplishment.”

On Nov. 8, however, the CalSTRS board was presented with a “risk report” that included both upbeat and gloomy scenarios. As Ed Mendel reported on the Calpensions website, the report found that if investment returns met their 7 percent target, CalSTRS’ retirement liabilities would be 100 percent funded by 2046 – a vast improvement on the present 70 percent.

50% chance fund hits point of no return threshold

But whether a 7 percent projected annual return is reasonable isn’t just questioned by pension watchdogs like Stanford professor Joe Nation and former Schwarzenegger policy adviser David Crane. CalSTRS’ number crunchers concluded that “even with the new rate increases, there is still a 50 percent probability that the CalSTRS funding level will drop below 50 percent in the next 30 years, according to 5,000 simulations based on the current asset allocation,” Mendel reported. Going below the 50 percent threshold is considered by many pension experts the point of no return, with little prospect that stricken retirement funds could ever rebound.

The problem for CalSTRS isn’t just consistently hitting or surpassing the 7 percent annual return goal. It’s that as few as one or two bad years of returns have a compound effect on long-term liabilities. The weak performances by CalSTRS and the California Public Employees’ Retirement System when the Great Recession hit more than a decade ago still haunt the funds, which are the two largest government pension agencies in the U.S. CalSTRS went from being 100 percent funded in October 2007 to 60 percent funded in March 2009, according to a Calpensions report.

CalSTRS’ and CalPERS’ grim numbers are a big reason why state Democrats are pushing for major changes in Proposition 13, the state’s landmark 1978 measure capping property tax increases at 2 percent a year. An initiative ending the protection for commercial and industrial properties will be on the 2020 state ballot and has the potential to generate $11 billion in new revenue a year.

School districts growing desperate over budgets

It may be a tough sell in an era in which the state has run surpluses for several years – including a $15.8 billion windfall expected in fiscal 2019-2020. But the “split roll” change sought for Proposition 13 reflects in many ways the deep concerns in the education establishment that the cost of the 2014 CalSTRS bailout is making it increasingly difficult for school districts to craft balanced budgets.

As CalWatchdog reported Oct. 1, one reason that the Legislature adopted new rules on permissible levels of lead in school drinking water that some health experts thought didn’t go nearly far enough was that the California School Boards Association worried that tougher standards would have been far more costly. The new standards for state schools were seen as still leaving students at risk of developing the severe cognitive and behavioral problems associated with children and adolescents being exposed to lead.

As of July, CalSTRS had $224 billion in assets. It would need to have $320 billion in hand to be considered fully funded.

One of those was the pledge to use a portion of cap-and-trade funds to directly help poor people make ends meet, since the increase in energy costs resulting from the law would have a regressive effect. (Yes, in the old days, people didn’t actually pretend that AB 32 would make energy cheaper.)

Here’s what I wrote in early 2012:

I remember a discussion with former Schwarzenegger adviser David Crane and other fans of AB 32 about the fact that higher energy costs are going to be much harder on poor people than the middle class or rich. I was told, no, the cap-and-trade fees would be used to insulate them from the economic pain caused by the regressive effects of higher energy costs.

Instead, the governor is claiming a big chunk for his insane bullet-train project. And the rest of the cap-and-trade fees? They’re viewed as just another source of funds for legislative pork, with regional interests duking it out over who gets the earmarks. This is from the L.A. Times:

Bay Area public officials are challenging a state plan to spend hundreds of millions of dollars to fight climate change by cleaning the air in some of California’s poorest and most polluted communities, most of which are in Southern California.

The officials say the state’s method of determining which communities are helped is flawed because it would exclude some of their region’s most at-risk residents.

The funds come from the state’s cap-and-trade program, which began in 2012 and requires companies to buy carbon pollution permits at auctions. State law requires at least 25% of the proceeds to go to greenhouse gas-cutting projects that benefit disadvantaged communities. Another 25% is set aside for the high-speed rail project between Los Angeles and San Francisco and the rest can be spent to reduce carbon emissions across the state.

To pinpoint the neediest communities, the California Environmental Protection Agency spent years and about $1.5 million developing a screening tool that uses 19 measures of environmental exposure, health risk and socioeconomic status.

Using that analysis, more than half the funds would go to Los Angeles County communities and most of the rest to other areas of Southern California and the San Joaquin Valley. Less than 5% would go to the Bay Area.

Projects, to be chosen and administered by about a dozen state agencies, could include tree plantings in urban neighborhoods, financial assistance for low-income residents to install solar panels and more efficient appliances and rebates for zero-emissions cars, trucks and buses aimed at communities near heavy traffic. …

In a letter to Cal/EPA last month, 20 state legislators from the Bay Area said the state’s analysis “overlooks a large number of communities that, by any measure, are some of the most polluted and disadvantaged in the state.”

So much for helping the poor with higher energy costs

Does this sound like a careful attempt to help poor people deal with high energy costs? Or just the really lame reality that cap-and-trade funds are going to pay for the standard liberal agenda — porky stuff which has no track record of actually, yunno, helping poor people deal with the fact that all energy will cost more under AB 32?

Obviously, it’s the latter.

Hey, David Crane: Are tree plantings in urban neighborhoods what you had in mind when you were fretting about how to deal with the regressive cost of AB 32?

In his novel “The Sun Also Rises,” California novelist Ernest Hemingway wrote, “How do you go bankrupt? Two ways: Gradually, then suddenly.”

Case in point: the City of San Bernardino, which filed for bankruptcy in 2012. The pace of municipal bankruptcy there has been slow because in 2013 the city resumed making its pension fund payments to the California Public Employees Retirement System.

The city’s recently elected mayor, Carey Davis, has been telling CalPERS to stand in line with other creditors and be prepared to take a loss on its unpaid past pension payments.  From August 2012 to July 2013, the city failed to make $17 million in payments to CalPERS, a sum the city now wants CalPERS to absorb.

The wrangling is part of the ongoing court case, where some progress apparently is being made even though CalPERS still is contesting an earlier court ruling that the city is eligible to file for bankruptcy. The Riverside Press-Enterprise reported:

“Nearly two years after San Bernardino declared bankruptcy, the city had good news for U.S. Bankruptcy Court Judge Meredith Jury at a recent hearing.

“ ‘There has been significant and substantial progress as a result of extended good-faith negotiations with CalPERS,’ said lawyer Paul Glassman, who represents the city in the Chapter 9 municipal bankruptcy case.

“The announcement was stunning, given that the California Public Employees Retirement System fought San Bernardino’s bankruptcy filing from the start and is still fighting Jury’s ruling that the city is eligible for bankruptcy protection.”

CalPERS realizes that, if San Bernardino succeeds in using bankruptcy to write down unpaid debts, more cities in California will do so.  The sudden domino effect of distressed California cities lining up for bankruptcy would have political repercussions beyond just CalPERS.  San Bernardino has $400 million in debts owed subject to bankruptcy, many of them to other public agencies.

Settlement

The San Bernardino City Professional Firefighters union’s lawyer, David Goodrich, indicated it might be willing to consider a settlement with the city through the court-appointed mediator if the outcome is kept confidential from its union members.

It isn’t just the pensions. Cash-strapped cities like San Bernardino have been forced into bankruptcy partly because they must now pick up the tab for the state’s lower spending on local government services.   The situation will get worse when the state can no longer ignore $6 billion in annual unfunded health care costs for government retirees and teachers’ pensions.

The City of San Bernardino’s bankruptcy isn’t all due to its own financial mismanagement.  It is due to the state’s pension systems crowding out local government services.

Gov. Jerry Brown’s January budget proposal for fiscal year 2014-15, which begins on July 1, conceded that $4.5 billion a year more will be needed to keep solvent the California State Teachers’ Retirement System. But the budget did not include any solutions to the CalSTRS deficit, postponing them to the future. The budget did include some whittling away at what he calls the state’s Wall of Debt, estimated to total more than $300 billion.

The governor’s May Revision to his budget will released early next month. But it likely will not include any solutions to that problem because the governor is in re-election mode and wants to get past November to undertake any new big projects.

In the meantime, the sun is just beginning to rise in San Bernardino and elsewhere as to the consequences of California’s lucrative guaranteed government pensions.

So how is it possible that in 2014, a struggling multibillion-dollar enterprise seeking a huge public bailout can send its top executive to a legislative hearing and offer a completely distorted account of his enterprise’s finances?

Because he’s from the public sector, where standards of the sort the SEC and Congress have imposed on Wall Street are nonexistent.

Which brings us to David Crane. Writing in Fox & Hounds Daily, the former Schwarzenegger administration official shreds the claim of California State Teachers’ Retirement System CEO Jack Ehnes that the main reason CalSTRS needs a huge public bailout is because of investment losses during the Great Recession of 2008 and 2009.

Crane looks at CalSTRS’ funding history and demolishes this claim. He also notes who agrees with him: CalSTRS’ own actuary, who reported “earlier this year that more than 70% of CalSTRS’s [$240 billion] deficit is attributable to other factors. ”

Taking a page from WorldCom, Enron, AIG

Crane says this shabby behavior must not be tolerated:

“Needless to say, any organization — especially a public organization run by public employees — seeking billions in public assistance should be completely forthcoming. CalSTRS is a huge financial intermediary, just like AIG was before its bailout in 2008, and no different than AIG’s CEO at that time, CalSTRS’s CEO must level with the authorities from which it seeks help.

“But that’s not the only reason CalSTRS should provide full and clear disclosure.  Unlike AIG – which paid back its public assistance, plus a profit — Californians will never get back the money they are being asked to provide CalSTRS. Instead, they’ll just avoid having to spend more money. That’s because if CalSTRS does not get its $240 billion, Californians will have to inject more than $600 billion at the time CalSTRS runs out of money.   Given those facts and that CalSTRS is seeking one of the largest injections of public assistance in U.S. history, one would expect its leadership to go overboard in providing the fullest possible explanation to the citizens of whom it is asking for such a large sacrifice.

“One way or another, CalSTRS must get its $240 billion.  If not, public education in California will not survive and the next generation will be thrown into chaos.  But first, citizens deserve the truth.  CalSTRS’s representatives must be completely forthcoming – and the sooner the better.”

One standard for business, another for government

Not for the first time, I pose this general question: Why are accounting standards so ridiculously lax in the public sector? Why are executives allowed to treat public funds so much more cavalierly than stockholder funds?

I don’t think it’s a partisan thing. I don’t know why any group would be part of a constituency that supports dishonesty from government.

Maybe it’s tolerated due to the low expectations we have of government. But that doesn’t make California’s government version of Enron any less appalling.

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.

May 22, 2013

By Wayne Lusvardi

David Crane has come up with a tax reform proposal, “Jerry Brown’s Last Chance to Save California.” A Democrat, he was an economic adviser to former Gov. Arnold Schwarzenegger, especially on pensions. Crane wants to change Proposition 13, the landmark 1978 tax limitation initiative.

There are some merits to Crane’s proposal to end the effects of the boom and bust system of taxation on government, the university system and public schools.  But as he concedes, tampering with Prop. 13 would bring a firestorm of opposition from anti-tax groups and voters.

‘Uncertain revenues’

Crane sees the major problem of California’s tax system as one of “uncertain revenues” dependent on the swings of the stock market to produce capital gains taxes.  Crane believes the Commission on the 21st Century and the Think Long Committee for California have come up with reforms that are defective because Prop. 13 is left untouched.

Instead, Crane’s solution proposes to end Prop. 13 and impose an oil and gas severance tax.  Crane sees California’s problem as reliance on sales and income taxes that are mobile.  Thus, people and corporations are able to escape taxation by moving across state and legal corporate lines.  He wants to shift the bulk of the tax base to immovable assets such as real estate, oil and gas.

The mistake is that Crane views taxes mechanistically instead of historically. His proposal would return us to the 1970s. The ups and downs of taxes would be shifted back onto homeowners and small businesses. It would be back to 1975, when widows’ homes were sold to pay skyrocketing taxes from inflating home prices.

California sometimes has real estate busts, as was painfully clear from 2007-09. But generally, prices keep going up, especially in coastal areas. If real estate taxes are allowed to rise apace, then it really would be a rerun of “That ’70s Show.”

Growth controls 

Yes, Prop. 13 affects housing prices by encouraging home ownership. But more important are California’s basin geography, which limits the supply of land; and unique growth controls, such as the California Coastal Commission, which was enacted by another 1970s initiative.

Nothing can be done, of course, to make our beautiful California coastline as flat and seemingly endless as the land in and around Houston, Tex., which has some of the cheapest real estate in America. And there’s no chance the CCC will be repealed. So we’re stuck with these limits.

And it’s these limits — geography and the CCC — that would produce a boom and bust cycle in real estate even if Prop. 13 didn’t exist. If Prop. 13 were eliminated, property tax receipts would jump up and down with the booms and busts in property. So the tendency of the state government to spend too much when revenues surge would continue, in turn producing the inevitable deficits during slumps.

Indeed, getting rid of Prop. 13 might not even help with the state budget. Real estate markets would adjust property values downward due to the larger and more unpredictable tax load.  

Ironically, any large shift of taxes back onto homeowners well could lead to a revitalization of the moribund Republican Party. Homeowners’ tax rates now are fixed by Prop. 13, so there’s little incentive to worry too much about real-estate politics. But if Prop. 13 were repealed, Republicans low-tax stances would make them more attractive to homeowners resisting tax increases.

Pensions

Crane is one of the most astute analysts of California’s budget problems, especially the pension crisis. As he wrote in his article, “Governments would first need to reduce pension and health-care liabilities because, if not, most of the new revenue raised from lifting Proposition 13 would go to retired employees, instead of to current services.”

So although his proposal to get rid of Prop. 13 should be a non-starter, he’s right that any budget reform must be preceded by pension and health-care liability reform.

There are other ideas for reforming the yo-yo budget problem. One would be to bring back the Gann Limit, which lasted from 1979 to 1990. It successfully limited state spending increases to the increases in population plus inflation. Excess revenue actually was returned to taxpayers with rebate checks in 1987.

Another idea came from former Rep. Tom Campbell during his run for governor in 2010: Limit one year’s spending to the receipts from the previous year.

And Arthur Laffer has proposed a simple, flat income tax that would include repealing all other state taxes.

David Crane has advanced the discussion with his proposal. But the discussion needs to retain Prop. 13.

By John Seiler

As Bill Clinton might put it, it’s in the math.

In the lead up to the November 6 election last fall, CalWatchdog.com ran several articles on Proposition 30 and pensions. We warned that the $7 billion tax increase would go not to schools, as advertised by Gov. Jerry Brown and others in TV ads, but to teacher pensions and other spending. I’ll quote some below.

The news now is that this is exactly what is happening. David Crane, a Democrat who was a budget adviser to Republican Gov. Arnold Schwarzenegger, has the facts in a Bloomberg article:

“Most Californians would be surprised to learn that 100 percent of education’s share of the tax increase proposed by Governor Jerry Brown will go to pensions instead of classrooms. But that would be no surprise to longtime observers of the California State Teachers’ Retirement System, which administers teacher pensions.

“Here’s why: After retirement, teachers are unconditionally guaranteed lifetime pensions by their school districts. Everything works out fine if CalSTRS, as the retirement system is known, earns the investment returns it forecasts and from which upfront contributions are derived.

“But if they fall short, school districts must make up the difference. Because of compounding, the failure to earn forecasted earnings translates into huge deficiencies down the road.

“Unfortunately, ‘down the road’ is where school districts are now.”

He noted something Katy Grimes reported here in March on a Legislative Analyst Report, which found that the California State Teachers Retirement System needs $4.5 billion a year in new funding to keep afloat. Prop. 30 now is expected to bring in $7 billion in new revenues. Crane noted that, because of Proposition 98, about 40 percent of any new revenue must go to schools. He wrote, “[T]hat means almost $3 billion a year for the schools to use for pensions, or two-thirds of the CalSTRS $4.5 billion request. A good start to meeting pension costs, but none of the tax increase will benefit students.”

So the pensions will eat up all the $3 billion from Prop. 30 going to “schools” — plus another $1.5 billion from other general-fund dollars.

How did CalSTRS get in the mess? Crane explained:

“In short, it failed to take Warren Buffett’s advice. In 1999, Buffett said that long-term investors, such as pension funds, should assume investment returns of roughly 6 percent a year, not far from the actual return earned since then. Had CalSTRS used his figure for its projections of the fund’s growth, it would have required larger contributions from school districts, employees and the state, and CalSTRS would be healthier now.

“But the retirement fund’s board — made up of the state’s chief financial officials and others — chose to forecast much higher investment returns that, as Buffett later pointed out, implicitly predicted the stock market portion of the CalSTRS portfolio to perform 10 times better than stocks did in the 20th century.”

CalWatchdog.com predicted the Prop. 30 legerdemain

All of this was known to readers of CalWatchdog.com before the election because we reported on it.

I wrote on Sept. 12 in an article titled, “California Budget Project analysis of Prop. 30 slights slam to business, jobs”:

“Being pushed by Gov. Jerry Brown and the state’s powerful government-worker unions, Prop. 30 would increase sales and income taxes taxes by from $6 billion to $8.5 billion a year. Supposedly the money would preclude cuts in K-12 and college education. But there’s no guarantee the higher taxes wouldn’t go toward the state’s burgeoning pension costs for retired government workers. All government money is fungible.”

I  also wrote on Oct. 27 in an article titled, “Yes, Prop. 30 would fund pensions”:

“If Proposition 30 passes, the $6 billion it would soak from taxpayers would just go straight to public-employee pensions….

“In sum, the $6 billion from Prop. 30 would go to pay $6.4 billion in state pension payments.

“Everything else is a deception.”

On Oct. 31, Steven Greenhut wrote in an article titled, “Pay soars in the public sector”:

“Californians are stuck watching those dreadful union-financed campaign TV ads supporting Proposition 30, which would push our highest income-tax rates to the stratosphere and boost sales taxes. The main rationale for high taxes, we’re told, is that California is slashing public school funding and laying off teachers….

“What will happen if California voters approve Prop. 30? Check out the many bills that moved through the Legislature this session, as legislators crafted new proposed programs and benefit increases for their public-employee constituents.”

On Nov. 2, Wayne Lusvardi wrote in an article titled, “Prop. 30 would make budget roller coaster more scary”:

“Declaring that K-12 public school budgets would have to be cut [unless Prop. 30 passed] is the way the state socially constructs and manages a budget crisis.  It is never portrayed that it is the Medi-Cal or public pension funds that are running a deficit. Public school children are used as poster children every year for any revenue shortfalls in health and welfare programs, pensions, or bond debts….

“In the above table [in the Lusvardi article], it appears that the hole in the state budget is in the Bond Fund. This would include the liability for public pensions. Retirement benefit costs have increased from $1.4 billion in 1999 to $6.5 billion this fiscal year.”

For reference, here’s one of the misleading TV ads the Prop. 30 campaign ran:

By Chris Reed

The conventional wisdom about the 400,000 members of the California Teachers Association and the 120,000 members of the California Federation of Teachers is difficult to dispute:  Their unions dominate Sacramento in a way no other special interest remotely rivals.

Aside from charter schools way back in 1992, the only fundamental school reform to get through the Legislature the past 20 years is the one that swelled the CTA’s and the CFT’s ranks: classroom-size reduction. No other special interest gets promised future multibillion-dollar payoffs to go along with tough budgets, as the teacher unions secured in 2009.

But in early 2013, we could see that conventional wisdom tested in a way without modern precedent. The issue is how to shore up the struggling California State Teachers’ Retirement System, which as of Oct. 31 had $154.8 billion in investments and an unfunded liability of $64.5 billion, meaning it is only 71 percent funded.

The state Legislature sets the contribution rates for teachers that each school district must pay. The status quo has long been that employers contribute 8.25 percent of pay, teachers 8 percent of pay and the state 2 percent of pay.

But Gov. Jerry Brown signed a pension reform plan in September, AB 340 by Assemblyman Warren Furutani, D-Gardena. Under the reform, government agencies in California must adopt contracts going forward that have employers and employees equally share the normal cost of pension liabilities by 2018.

Bank accounts would shrink

If that happens, it means a sharp cut in take-home pay for every CTA and CFT member. As Ed Mendel laid out in calpensions.com, actuaries say teachers hired going forward under the less generous terms of the new state pension will need to pay 15.9 percent of pay — nearly double the current 8 percent contribution. Meanwhile, veteran teachers would need to pay 18.3 percent of pay — 10.3 percentage points more than they now pay and more than the total that is now set aside by all three contributors combined (teachers, districts and the state treasury).

This 50-50 required split of pension costs is jaw-dropping given what the CalSTRS board recommended when the topic of shoring up the teachers’ pension fund came up in 2007. It wanted teachers to go from contributing 8 percent to 8.5 percent; for districts to gradually go from 8.25 percent to a maximum of 13 percent; and for the state to gradually go from 2 percent to a maximum of 3.25 percent.

Or, to put the plan in a context that more readily shows its outrageousness, CalSTRS wanted teachers to increase their contributions by 6.25 percent — and for taxpayers to increase their contributions by 59 percent, nearly 10 times as much! The result would have been a pension system in which taxpayers had roughly twice the obligation (66 percent) as teachers (34 percent).

With the state economy rapidly slowing and the Schwarzenegger administration strongly opposed, the Legislature never passed the CalSTRS proposal.  That the CalSTRS board put the plan forward as a serious policy alternative showed that the CTA and CFT were calling the shots — just as Senate Democrats wanted.

In a 2006 Senate committee vote, State Sens. Don Perata, Debra Bowen and Gil Cedillo rejected Gov. Arnold Schwarzenegger’s nomination of David Crane to the California State Teachers Retirement System board. A Democrat himself, Crane is a sharp San Francisco financier and government reformer. Crane’s disqualification? “The three Democrats on the five-member Senate (Rules Committee) agreed that Crane seemed too concerned about the burden of pension shortfalls on taxpayers,” The Los Angeles Times reported.

Teachers’ unions unaccustomed to treatment

The CTA and the CFT must daydream about the good old days. The unions can’t even be very confident that the Legislature will do rope-a-dope with Brown’s pension reform by just never changing the present contribution rules for CalSTRS. That’s because state lawmakers also passed a bill that directs CalSTRS to prepare three alternatives that address the pension underfunding and to formally present it to the Legislature by Feb. 15, 2013.

So, in a rational world, the teachers’ unions would appear to be trapped, likely to face a permanent cut in take-home pay of about 10 percent. They are sure to sue and claim that existing funding formulas amount to a vested pension benefit, as a CalSTRS legal opinion concludes. Yet that legal view seems shakier than ever given the readiness of so many collective bargaining units to accept increases in their contributions and to make concessions in recent years. There’s also no question that judges are influenced by the headlines of the era.

But that’s forecasting what would happen in a rational world, not Sacramento — and especially not in the Assembly, where union power is so intense that 21 Democrats actually voted against a bill to overturn school regulations that allowed only union nurses to give medical help to students suffering life-threatening epileptic seizures. The 21 included Speaker John Perez, D-Los Angeles.

So expect an epic, years-long battle over AB 340. It may be law, but laws can be changed, ignored or sabotaged — and the CTA and the CFT can’t live with the new status quo that the governor’s pension reform portends.

CalPERS, whose main goal is to defend the most absurdly generous pension plans, now insists that excess pension benefits are not the cause of bankruptcy in Stockton, San Bernardino and elsewhere. Officials there insist that the pension situation is just hype, just as union spokespeople such as Treasurer Bill Lockyer insist that those of us who criticize the growing list of $100,000 pension club members are merely showing our “pension envy.” Apparently, the rest of us should be good subjects and simply agree to hand over more tax money to the state officials who created this mess and silently accept the slashes in public services that are taking place so that government workers can retire at age 50 with pensions worth $2 million or more.

But now we really see what CalPERS is all about. After a Bermuda-based bond-insurance company named Assured Guaranty complained about Stockton’s plan to stiff bond holders rather than trim the outsized pensions enjoyed by the city’s current workers and retirees, CalPERS said, in essence, “tough luck.”

Wrote Assured Guaranty: “Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another. Among the small number of municipalities to file for bankruptcy (43 since 1981), none of the cases resulted in implementing cuts to principal owed bondholders.  Stockton’s attempt to transfer the cost of lucrative, above-market employee wages and benefits granted when tax revenues were flush to capital markets creditors by haircutting bond principal is unprecedented, a contortion of the bankruptcy process and will foreclose Stockton’s access to the capital markets for the foreseeable future.”

Here’s CalPERS’ response:” The obligations owed to the public workers of the City have priority over those of general unsecured creditors including bondholders. Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks. CalPERS is committed to working within the legal system to reach resolution of these difficult issues.”

Here is my Bloomberg column from yesterday about this situation. CalPERS shouldn’t be so arrogant given that its rate of returns were barely over 1 percent last year and it continues to insist that a 7.5 percent rate of return is perfectly reasonable. Then again, whether CalPERS predicts a 29,000 Dow Jones or even 20 percent rates of return are irrelevant. Taxpayers are on the hook to make up for any missed predictions and foolish investments. And, CalPERS believes, bondholders can be stiffed when cities go bankrupt.

Aren’t there any adults in California state government to provide some supervision?

AUGUST 10, 2012

By John Seiler

“Humankind cannot bear very much reality,” said T.S. Eliot. Nowdays, of course, American university professors brand him a “sexist” because he didn’t say “peoplekind.” “Human” implies “man,” which excludes “woman,” and so is sexist.

But he sure was right about California politics. Consider the new blog by Brian Calle, our editor-in-chief. He writes about Steve Maviglio, the omnipresent Democratic activist, objecting to one of the state’s major pension reform reporters, Daniel Borenstein. I’ve relied on Borenstein’s excellent work for years.

Calle quotes Borenstein:

“Spotting my scheduled appearance on an upcoming conservative think-tank panel to discuss public-employee pensions, union spokesman Steve Maviglio went into Twitter attack mode last week.”

“@stevenmaviglio branded me a ‘pension basher’ and called my ethics into question. His sad attempt to divert the debate badly mischaracterizes my position and further undermines serious discussion of a complex issue.”

And that’s what we need: a serious discussion — including from Maviglio.

Here are two news reports today:

S&P douses Democratic idea to forego budget reserve

And:

Fitch on new California budget problems: Don’t panic

It shows who’s really in control in California. It’s not Maviglio. It’s not Gov. Jerry Brown. It’s not the Democratic Party. It’s not the risible Republican Party. It’s not Treasurer Bill Lockyer.

It sure ain’t the voters of California.

It’s the bond houses.

It’s like what happens if you max out your credit cards. You’re frozen. You have to pay off that debt before you can do anything else. And it’s hard to pay off.

Can you work harder to earn more money? Maybe. But what if you’re already working 16 hours in a day, seven days a week? Then you can’t work more. That’s why California can’t raise taxes: Because we’re already maxed out on what we are able pay.

And the state treasury still spends too much. And state and local governments owe $1 trillion, according to Dan Walters.

For many people and companies, the solution is simple: Leave the state.

But California can’t leave itself. So it’s stuck.

Soon, not just future pensions will be cut, but existing pensions. Brown’s proposed budget includes $4 billion to pay pensions of current retirees. That’s almost half the $8.5 billion he’s calling for in tax increases. That $4 billion is just going to grow. Cities, also, are facing massively increasing pension payments, which is why some of them are headed to bankruptcy.

Because there’s no money. And no chance of ever getting more.

Does the state constitution guarantee the payments? The bond houses don’t care about the constitution. They want their money. And they’re running the show.

Tweet that, Steve Maviglio!