The Los Angeles Times is in the midst of publishing one of the most important series on a public policy issue in California’s history—one that holds the key to the very survival of the Golden State and future generations of Californians.
That is none other than the state’s pension crisis, which people see in the media all the time, yet very few, if any, mainstream elected politicians are doing anything about the problem.
One of the most interesting aspects of the series has been the clear illustration of a significant, troubling divide between the current political rhetoric on the pension issue and the actual facts regarding the severity of the problem.
Politicians are essentially saying there is no problem because they have passed “far-reaching” reforms or reforms that are a “game-changer” to address the pension problem. But the facts, as told by the media and other independent experts, tell a far different story.
To illustrate, a recent LA Times report states that “[Governor] Jerry Brown touted his pension reforms as a game-changer. But they’ve done little to rein in costs.”
“The state’s annual bill for retirement obligations is expected to reach $11 billion by the time Brown leaves office in January 2019—nearly double what it was eight years earlier,” states the LA Times report.
“Since the 2012 law applied mainly to newly hired employees, savings will trickle in slowly over many years. Pension contributions required from state and local governments will continue to increase—although they are estimated to be 1% to 5% less than they would have been without the changes,” according to the LA Times.
Another example of this apparent gross misrepresentation of the rhetoric regarding recent “pension reform” is detailed in a recent LA Times report focusing on the City of Los Angeles.
According to the LA Times report, “former Mayor Antonio Villaraigosa said the changes he oversaw in 2011 and 2012, which included lower pensions for new employees and higher retirement contributions from city workers, were the “most far-reaching effort in the nation.” Mayor Eric Garcetti echoed this this assertion this year, saying L.A. had “done the most pension reform in the country of any big city.”
But according to the LA Times, “the city’s general fund payments for pensions and retiree healthcare reached $1.04 billion last year, eating up more than 20% of operating revenue—compared with less than 5% in 2012.
Moreover, these reforms, which were billed as the “toughest in the nation,” “have not cut the city’s pension costs; at best they have modestly slowed their rate of growth,” according to the LA Times.
“Since the changes took effect, general fund contributions to the retirement system have grown an average of $66.6 million a year—roughly twice as fast as all other spending controlled by the Mayor and City Council,” concludes the Times report.
Similar stories are seen in almost every major city in California—pension costs continue to eat public budgets alive, yet politicians downplay or even refuse to acknowledge or address the problem in a substantive way.
According to former City of San Jose Councilmember Pierreluigi Oliverio, it was recently announced that the city’s annual pension payment will increase next year by between $30 and $40 million, which is more than the city’s annual road paving budget.
Furthermore, “the city’s increased pension costs may negate all the new tax revenue coming in from the sales tax voters passed in June 2016,” according to Oliverio, who noted that the increased sales tax passed by voters in June is estimated to raises approximately $30 million per year, compared to the estimated $37 million increase in the city’s annual pension payment.
This increase will bring the city’s total annual pension payment to an estimated $367 million, which is higher than the entire police budget of $344 million, according to Oliverio’s report.
According to a recent report by Pensions and Investments, “CalPERS’ chief investment officer and its two key consultants told a board committee Tuesday [November 15, 2016] that the pension fund’s 7.5% assumed rate of return is too high, setting in motion a potential board vote in February to lower the rate of return.”
But any move to significantly lower the assumed rate of return will send pension costs even higher, suggesting that California needs to seriously consider reducing its extremely high level of pension benefits which are widely believe to be unaffordable to most if not all public agencies in California, particularly when examined in the context of other pressing budget priorities.
Thus the most likely result, will be an extremely small 0.25% lowering in Calpers 7.5% rate of return, and then more “asset smoothing” and “amortization” of the increased costs over 30 years to try to keep California’s exploding pension liabilities at bay, at least on paper under wholly unrealistic assumptions, for another few years until the actual facts of the issue reach another “breaking point.”
David Kersten is the president of the Bay Area-based Kersten Institute for Governance and Public Policy—a public policy think tank and consulting organization. Kersten also serves as an adjunct professor of public budgeting at the University of San Francisco.
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