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March 17, 2011

The DOOM! That Dare Not Speak Its Name

I haven't given California a good rhetorical kick in the nuts for a while, and it's past time.

A little while ago, CalPERS (California's giant pension system) was pondering reducing their "expected rate of return" calculation from a ludicrous 7.75% to a merely ridiculous 7.5%. This was ostensibly to bring future funding rates into closer contact with reality. (Not much closer, though; the actual rate of return considered "safe" is around 4%.)

Well, apparently this twenty-five basis point reduction caused the blood of several municipalities to run cold, because it would have meant millions of dollars in additional contributions would be required this year. So CalPERS decided to leave their ludicrous rate-of-return expectations alone for the time being. Pull quote:

A decrease in the Calpers rate of return to 7.5% would have bumped up what local California governments pay on behalf of government workers by 1.5% to 3% of payroll costs each year and 3% to 5% of what they pay on behalf of police officers, firefighters and other public-safety officers, a Calpers spokeswoman said.

Also, a decrease in the rate, also referred to by public pension plans as the discount rate, drives down the funded status of a pension plan, or the difference between its assets and long-term liabilities. Calpers is about 70% funded, it says.

Now, here's the thing...everyone involved knows that the 7.75% return rate is probably bullshit. CalPERS knows it, the municipalities know it, and the actuaries know it. The great bull market of the 1980-2000 period is long gone, so 20-year averages are going to be skewed by the outsized rates of return of the 1990's. If you only count the 10-year averages, things don't look so rosy; and they look even worse going into the next decade. But if the states actually had to honestly account for their pension obligations, they'd immediately go into a fiscal crisis due to the huge amount of contributions needed to bring their pensions to "fully funded" status (about 80%).

So a 7.75% rate of return is only possible if CalPERS (and the other broke states) take some pretty huge risks with their capital. The exact same kind of risks that burned them during the 2008 crash. (Which exacerbated, but did not cause, their pension problems, by the way. States have been shorting their pension funds for years and years.) But admitting the truth is not only politically unpalatable, but would also mean jacking up contributions to completely ruinous levels.

Illinois is in the same boat, as is New Jersey and many other states. Chronic underfunding of pension plans is how many city councils balance the books every year. Need an extra ten mil for some project or other? Just bump the rate-of-return on your pension fund twenty-five basis points or so, and then pay ten million less into your pension plan! Presto! The actuaries will play along because they can't prove you're wrong; full of shit, maybe, but not completely insane. It's possible that the market might turn around and generate those returns. Maybe.

Then years go by and the economy turns as it is wont to do. You have too many retirees and too few taxpayers and all your costs have skyrocketed and it's all of a sudden costing you half or more of your city's general fund just to cover pension costs because the investment return rates didn't quite pan out the way you'd hoped. This means tax hikes, service cuts, bond issues (debt), and/or personnel cuts in the public service. It's a shit-sandwich that no mayor or governor ever wants to eat, yet they prepared the meal themselves years earlier as city councilmen and selectmen when they approved these ludicrous pension scenarios.

There is an old saying that figures don't lie, but liars can figure. Much of the calamity now facing the cities and states in this nation is a direct result of the truth of that statement.

California: boned. Illinois: boned. New Jersey: boned. In fact, there are probably 30 to 35 states that are facing fiscal Armageddon at some point due to out-of-control public-employee pension and healthcare costs. The number of municipalities in distress probably runs into the thousands.

The Loyal Order of the Terminally Boned (LOTB) grows apace.


Hobo cat wants to know if you can spare some change:


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posted by Monty at 09:12 AM

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