For Immediate Release
May 18, 2016
California Policy Center
Contact: Will Swaim
SACRAMENTO – America’s already troubled public-employee pension funds will go broke in the next economic slowdown, creating the likelihood that millions of public employees will see their retirements slashed – even as state and local governments raise taxes dramatically and scramble to find new sources of cash.
That’s analyst Ed Ring’s conclusion in “The Coming Public Pension Apocalypse, and What to Do About It,” a path-breaking new study from the California Policy Center.
“It’ll be the worst financial crisis in nearly a century, and California is destined to be among the hardest hit,” said Ring, president of the California Policy Center.
Ring cites as evidence three nearly unprecedented trends already visible in the U.S. economy:
- HISTORIC DEBT: “Consumer debt, commercial debt, financial debt, state and federal debt (not including unfunded liabilities, by the way), is now estimated at 340% of U.S. GDP. The last time it was this high was 1929” – the year of the stock market crash that signaled the beginning of the Great Depression.
- LIMITED LIQUIDITY: Because of that debt, few consumers and business can take advantage of historic low rates on borrowing. That eliminates interest rates as a key tool of economic stimulus. “Low interest rates – now at or near zero – no longer stimulate a net increase in total borrowing,” concludes Ring.
- EXAGGERATED RETURNS ON PENSION INVESTMENTS: In determining their debt, pension funds estimate returns on investments of 7.5%. That’s already generally higher than actual investment returns. Any future stock market drop will lead to far lower returns on investments for all public-employee pension plans – and that will generate a crisis in payouts to retirees.
In his most important contribution, Ring calculates California governments’ total required pension contributions at various returns on investment and breaks out the normal versus the unfunded contributions. That has never been done.
“The implications of this are staggering,” Ring says. “A city that pays 10% of its total revenues into the pension funds – and there are plenty of them – at an ROI (return of investment) of 7.5% and an honest repayment plan for the unfunded liability, should in fact be paying 17% of their revenues into the pension systems.” If investment returns drop one percentage point, to 6.5%, “these cities would have to pay 24% of their revenue to pensions. At 5.5%, that number becomes 32%, and so on.
“It is impossible for these levels of payments to be sustained, but that’s exactly what will be necessary if the markets drop, and reforms are not implemented.”
The coming crisis – normally understated, Ring calls it “an apocalypse” – is not well understood by reporters or even public officials. Part of the problem is a lack of government transparency.
“One of the biggest reasons is the lack of good financial information about California’s government worker pension systems,” Ring writes. As an example, he cites the elimination of the California State Controller’s “Public Retirement Systems Annual Report.”
“That report used to consolidate all of California’s 80 independent state and local public employee pension systems into one set of financials, but they discontinued the practice in 2013,” Ring notes. “The most recent one issued, released in May 2013, was itself almost two years behind with financial data (using FYE 6-30-2011 financial statements), and it was almost three years behind with actuarial data used to report funding ratios (using FYE 6-30-2010 actuarial analysis). Now the state controller has created a By the Numbers website, but it’s hard to use and does not provide summaries.”
The report is not all gloomy. Ring offers several suggestions to mitigate the coming financial apocalypse. Reforms include adjusting pension formulas, strategies for economic growth and financial-industry reforms.
Analyst Ed Ring is available for media interviews. Direct press inquiries to:
President, California Policy Center
Vice President, California Policy Center