There’s an old saying about attorneys. “If the facts are on your side, pound the facts into the table. If the law is on your side, pound the law into the table. If neither the facts nor the law are on your side, pound the table.” That can also apply to the California Public Employees’ Retirement System, as it pounds the table in response to a report about the way that CalPERS downplays its unfunded pension liabilities, which are obliterating local budgets.
On January 10, the California Policy Center’s Ed Ring made some points that don’t even seem controversial. Using CalPERS’ own data for every agency that is a client of the gargantuan pension fund, Ring paints a dismal picture of localities that are facing unsustainable pension fee increases – not just to pay for the growing “normal costs” that fund the pensions of current employees, but the “catch up” costs to make up for past liabilities.
The result: Pension costs are consuming local budgets. The California city with the highest pension burden, percentagewise, is Millbrae, in San Mateo County, which contributes a whopping 59 cents to CalPERS for every dollar in wages. Twenty California cities contribute at least 40 percent of those wages to CalPERS to handle pension costs.
Millbrae officials claim the numbers don’t matter because they’ve kept costs down through contracting out services. Millbrae’s response is problematic for two reasons: first, it outsources to the county and that doesn’t make pension problems go away. The county simply passes on to Millbrae the rising cost of its pension obligations. Second, that county is San Mateo, itself an epicenter of pension problems.
It’s clear why costs have grown dramatically over the past couple of decades. “In order to cajole local elected officials to agree to pension benefit enhancements, the same overly optimistic, misleading projections were provided, duping decision makers into thinking pension contributions would never become a significant burden on cities and counties, and by extension, taxpayers,” Ring explained.
In an interview with the Chief Investment Officer publication, CalPERS’ spokeswoman Amy Morgan blasted “Ring’s flippant claim of ‘tricky accounting gimmicks’” by noting that the agency complies with industry standards. Morgan touted CalPERS’ 11.2-percent rate of return from last year and 8.4-percent returns over the past 30 years. “We’re careful to balance our positive returns with the other risks to the system so the fund will be sustainable for generations,” she added.
Yes, the pension fund did quite well last year. Its long-term rate of return depends on chosen starting and ending dates – and CalPERS, of course, chooses dates that make its returns look sustainable and stellar, while critics point to long periods of much-lower returns.
But here’s the key point: CalPERS is only funded at 68 percent after these long periods of record-setting returns. Cities, counties and other participating agencies are facing repeated rate increases and service cuts after these long periods of record-setting returns. As Ring noted, “When stocks and real estate have been running up in value for eight years, pension plans should not be underfunded. But they are. CalPERS should be overfunded at a time like this, not underfunded.”
In essence, CalPERS says that Wall Street will fix all its funding shortfalls and make up for all those massive, retroactive benefit increases by continuing to go up. But what happens when it goes down, as markets inevitably do?
That brings us to the news this week. “Stocks went into free fall on Monday, and the Dow plunged almost 1,600 points – easily the biggest point decline in history during a trading day,” as CNN Money reported. Stocks rebounded a bit – and it’s unclear whether this is a temporary dip or a harbinger of things to come. But it does put the CalPERS approach in perspective, given that it is dependent on rollicking returns to stay afloat.
Furthermore, there’s no real question about how CalPERS downplays the system’s unfunded liabilities, or debt. Are they gimmicks or industry standards? Some would say they are both. The industry standard for government is radically different and far looser than the standard that applies to private industry. No one accuses CalPERS of not following proper procedures; it’s just that such procedures can fairly be termed gimmicks.
Some of these standards/gimmicks include the concept of asset smoothing, by which CalPERS sent agencies different values of their assets and let them choose which numbers to use, as Ring explained in a follow-up article. It let agencies choose the rosiest economic assumptions – and that enabled them to go ahead and retroactively increase pensions by 50 percent back in 2001.
Furthermore, Ring points to the way that CalPERS uses creative amortization of its debts, which “means calculating a stream of payments that will pay off that liability in 30 years, but varying the payments so that as projected payroll increases, the payment increases” thus allowing agencies to make artificially low payments in the early years of the term. CalPERS also overestimates its long-term rate-of-return assumptions. A prime example of this is when an agency wants to leave CalPERS, it assumes a real rate of return of a measly 2 percent – a far cry from the 7-to-7.5 percent rate of returns it assumes when taxpayers are backing it.
If everything is so rosy, then why does CalPERS even need the taxpayers to back its debt? If the rates of return are so reliable, then the agency should be fully responsible for all liabilities incurred on behalf of its agencies’ retirees and leave the taxpayer totally out of the picture.
As CalPERS was trying to discount Ring’s CPC study, it was hit by a nearly identical report from a different source. The League of California Cities release a report last month finding that “rising pension costs will require cities over the next seven years to nearly double the percentage of their general fund dollars they pay to CalPERS”? The report also found that “for many cities, pension costs will dramatically increase to unsustainable levels.”
As columnist Dan Walters summarized, “From one end of California to the other, hundreds of cities are facing a tsunami of pension costs that officials say is forcing them to reduce vital services and could drive some – perhaps many – into functional insolvency or even bankruptcy.” A report last year from the prestigious Stanford Institute for Economic Policy Research provided 173 pages of case studies and data showing that rising pension costs are crowding out public services and pushing cities to the brink.
The only flippancy comes from the union-controlled pension fund, which is committed to downplaying the problem in order to kick the can down the road for as long as possible. CalPERS cannot possibly pound the facts into the table, which is why its public-relations team pounds the table whenever anyone points out the truth.
Steven Greenhut is contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at firstname.lastname@example.org.