Your eyes on California Government

DEC. 28, 2011

By WAYNE LUSVARDI

The following joke is posted at the Wall Street Journal: Gov. Jerry Brown’s pension reform plan “reminds me of a pastor of an old church I attended who upon retirement into his church-paid pension, joined another church about a mile away.”

It seems the number of California public officials who all of a sudden have converted to a different religion about public pension reform is growing.

From Pension Pushers to Pension Reformers

Ventura City Manager Rick Cole recently stated public pensions need “reform, repair, and rebooting.”  Cole is also former mayor of Pasadena.

Cole was on the Pasadena City Council in 1987 when the city convinced the Legislature to pass Senate Bill 481 allowing the city to divert redevelopment property tax revenue to pay for police and firefighter pensions.  Pasadena now has a $74 million pension deficit – $148 million with interest – that it has rolled into a pension obligation bond.

Like Cole, Gov. Jerry Brown originally authorized collective bargaining in California for public employees back in the 1970’s.  Now both Cole and Brown have switched religious affiliations and are leaders in the church of pension reform.  Cole endorses Gov. Brown’s pension reform plan.  But will Gov. Brown’s pension reform proposal work?

Brown’s Plan

Gov. Brown’s 12-point pension reform plan includes:

• Increasing the retirement age from 55 to 67 (with a lower age to be spelled out for public safety workers);
• Replacing the current “defined benefit” pensions with a hybrid program that includes a defined benefit component, but also a 401(k)-like defined contribution component;
• Prohibiting retroactive pension increases;
• Requiring all employees to contribute at least 50 percent of the cost of their pensions.

Richard Rider of San Diego Tax Fighters says: “Eventually Gov. Brown will stand up to the unions – sorta, anyway. Our job as California voters is to provide the adult supervision needed – blocking any tax increases so that Sacramento runs out of options, and reform is the only choice left.”

A question remains, however: “Are the proposed reforms adequate enough to fix the problem?”

Former State Finance Director Michael Genest believes Brown’s proposals are half measures that won’t fix the entire problem. Sacramento Bee columnist Dan Walters thinks that Brown’s proposal is just a “ploy.”

Does a new pension study by Stanford University shed any more light on the situation?

New Stanford Study Questions Brown’s Pension Plan

A new study by the Stanford University Institute for Economic Policy Research indicates that even with Brown’s reforms there will be a shortfall of $100 billion.  The study indicates there is an 82 percent chance of pension assets falling short of obligations. Even worse: CalPERS (the California Public Employees’ Retirement System) must achieve a 9 percent annual return per year for the next 16 years merely to keep assets at 80 percent of pension liabilities.

The CalPERS pension funds earned 8.4 percent over the past 20 years. But that was during the “go-go” years of the Mortgage Money and Dot.com Bubbles. CalPERS has already discounted Stanford’s study as “alarmist” (no longer posted online). But the study was conducted by former Democratic state Assemblyman Joe Nation.  Nation can hardly be dubbed anti-government or anti-union.

Legislative Analyst Warns of Increased Costs, Not Just Savings

The State Legislative Analyst Office (LAO) review of Gov. Brown’s pension reform ballot proposal warns that it may not be ratified by the courts and it will impose some added costs, not just savings.  According to the LAO, Brown’s proposal will require that local governments raise ALL salaries or offset retirement cost savings somewhere else in the compensation package.

The LAO report says there may be long-term cost savings but in the short run there are added costs.  Moreover, shifting to what are called “hybrid” and “defined contribution plans” may result in a decrease in pension fund investment returns.  Public employers may thus have increase pension costs in the short term.

And the LAO cautions that neither Brown’s reform plan or that of California Pension Reform (CPR) will put a dent in government pension costs for decades.

Is Only Solution Privatization?

Rider believes the only ultimate answer is to convert most of the state and local government work force to private contractors.  Rider says that only law enforcement and the justice system are the only ones that cannot be privatized.

But would politicians let go of government-created jobs programs that buy votes and patronage?

Rider assumes that a ballot proposition can overturn constitutionally guaranteed pension benefit levels.  He may be right. But until we have a court ruling we don’t know what hole in the pension pinball machine that public pensions might roll into.

In the meantime, cities and counties are basing their pension fund reforms on inflated prophecies about the future.

Pensions Will Reduce City Services 25 Percent

Ventura’s Cole may be embracing Brown’s public pension reform. But he isn’t telling everyone that more than half of former city manager of the city of Bell Robert Rizzo’s infamous $600,000 a year pension will be paid by taxpayers in 140 California cities.  Included is Ventura. Reportedly, the California pension liability pool is responsible for paying Rizzo’s pension.

CalPERS holds $312 million in assets for the city of Ventura public pension plan. Ventura has $48 million in reported unmet pension liabilities.  In other words, Ventura’s pension plan is 87 percent funded.  But can its fund earn $48 million more in the coming years to close the unfunded pension gap?

By 2016 CalPERS estimates that Ventura’s total pension contributions will consume 30 percent of general public employee’s salaries and 46 percent of public safety employees.  If salaries reflect 70 percent of the operating budget of Ventura, that would indicate that pensions may crowd out about 25 percent of municipal operating budgets.  Howard Cure, Director of Municipal Bond Credit for Evercore Financial Management in New York, states that pensions typically take up 4 percent to 9 percent of a city’s operating budget today. In other words, a cut of from 15 percent to 20 percent of existing city services can be anticipated to cover future pension commitments.

Cole avoids telling the residents of Ventura what city services will be cut back to afford future public pensions.

Shift from Give-Away to Take-Away Politics

Economist Robert Samuelson says we are shifting from “give away politics” to “take away politics.”  Ironically, the same politicians that embraced “give away” politics in the past are the same we now have to depend on to prevent municipal budget insolvency or deep cuts to public services.

But Democratic politicians in California want more spending.  They don’t really want to have to play “take away politics.”  They are counting on a flood of tax propositions on the November 2012 ballot to cure the structural debt problem.

The so-called rich in California – which is about anyone who has sold a median-priced home – cannot bail out the pension system.

Samuelson says we may be muddling through the pension crisis to a “messy consensus.”  But projections that the unfunded public pension liability gap will be solved are based on faith, not financial science. As Samuelson also warns: “Political leaders assume that financial markets won’t ever choke on U.S. debt and force higher interest rates, stiff spending cuts and tax increases.”

So what California might get is both newly imposed taxes followed by a sharp correction in financial markets that takes it all away.  But that would be a religious apocalypse that the public pension fund religious prophets don’t believe will every happen.