Pension Tsunami

When the city of Vallejo filed for bankruptcy earlier this year it made national news. Among the alleged reasons for this financial debacle was as usual Proposition 13. Same urban myth different city.

Recall that Prop 13 was also blamed when Orange County went bankrupt. In spite of the clearly documented evidence of the Orange County Treasurer’s criminal wrongdoing and the fact that he used an astrologer to assist him in making investments of public dollars in some quarters it is always Proposition 13’s fault when any government entity runs short of money.

Nor is Proposition 13 culpable in Vallejo’s budget shortfall. During more prosperous times Vallejo promised its employees compensation packages it cannot now afford to pay. And that is just the good news.

Vallejo’s predicament is not unique and it may be just the harbinger of many community bankruptcies to come.

The California Public Employees’ Retirement System (CalPERS)is now warning California’s cities that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers reports the Wall Street Journal. Some communities are already cutting municipal services and they are blaming CalPERS not Proposition 13. Dan Cort mayor of Pacific Grove has been quoted as saying "CalPERS could bankrupt us faster than anything else."

According to the Journal CalPERS has lost almost a quarter of the $239 billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund’s distress but less well known is that CalPERS makes extensive investments in real estate — investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money. While this worked well in a rising market now that real estate has tanked CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year ending in June.

"The use of debt is unconscionable" County Supervisor John Moorlach told the Orange County Register in commenting on CalPERS’ mismanagement of its funds. Moorlach is the former county treasurer who predicted that the unsound investment practices of his predecessor would result in bankruptcy.

Essentially CalPERS officials rolled the dice and lost but the burden will ultimately fall on the taxpayers.

Currently the average employer contribution rate for public entities is 13 percent of payroll. However if CalPERS’ assets are down just 20 percent at the end of the fiscal year it would trigger an increase payroll costs of two percent to five percent the Journal reports. This could have a major impact on city and county budgets already out of balance not to mention the state which now estimates a $40 billion shortfall for the next year and a half.

Of course this train wreck has been predicted for decades. When politicians sell out to public employees’ unions by guaranteeing a generous defined benefit retirement — where any retirement fund shortfall must be made up by the taxpayers — the disastrous results are easy to predict. Haven’t any of these people ever heard of economic cycles? There is a compelling reason why the private sector has transitioned to providing a defined contribution to individual retirement accounts each month. (Except of course the American auto industry and look how well they’ve done).

When governments are in crisis the Proposition 13 critics always ignore the elephant in the room: the cost of public employee compensation benefits and especially costly pensions — something internet blogger Jack Dean calls on his website the "pension tsunami" due to the problem’s size and onrushing consequences.

So next time someone blames Proposition 13 for the problems of struggling governments tell them they are using the wrong "p" word. The correct word is "pensions."

Jon Coupal is President of the Howard Jarvis Taxpayers Association
— California’s largest taxpayer organization — which is dedicated
to the protection of Proposition 13 and promoting taxpayers’ rights.