Nevertheless, the marchers are onto something, although their concept should be applied instead to a different discipline. “I think we need to have a March for Math. How you gonna be over $19 trillion in debt and still spending?” wrote commentator Julie Borowski. Indeed. Our political leaders, in California especially, are enthralled by climate science, and have embraced myriad programs to deal with the issue of man-made global warming.
No, most legislators aren’t at war with science. They remain at war, however, with basic numbers. Congress continues to spend money even though the federal budget is trillions of dollars in debt. How does that work? We keep hearing – from members of both parties, by the way – that the key is cutting government waste. But there’s no appetite for cutting entitlements, or defense spending, and there’s no way to cut service on debt. After those items, the federal government already is running a deficit. That’s an obvious addition problem.
In California, legislators in 1999 passed a law that led to a tidal wave of retroactive 50-percent pension increases for government employees across the state. Its advocates claimed that such a huge giveaway won’t cost taxpayers a dime. And that one law, passed with bipartisan support and over the objections of fiscal watchdogs, has laid the groundwork for California’s continuing pension problems, which have unfunded liabilities estimated as high as $1 trillion.
That math deficiency ought to lead to angry protests in cities across the state, let alone marches.
Former Gov. Arnold Schwarzenegger’s pension adviser, David Crane, said in testimony before the state Senate in 2010, that the California Public Employees’ Retirement System (CalPERS) “has not been requiring adequate contributions when pension promises are made, virtually assuring deficiencies for which only the state is on the hook. … Initial contributions are determined by investment return assumptions. For example, in 1999 CalPERS based pension contributions on an 8.25 percent annual investment return, which implicitly forecast that the Dow Jones Industrial Average would reach roughly 25,000 by 2009 and 28,000,000 by 2099.”
We see the Legislature and then-Gov. Gray Davis not only were incapable of doing simple math problems, but they embraced fiscal models that had more to do with “magical thinking” than “mathematical reasoning,” especially when it comes to multiplication tables. Don’t they know that inadequate contributions and overly optimistic rate-of-return predictions multiply the size of the shortfall and have a cascading effect?
Similar math problems continue. In its last fiscal year, CalPERS’ investments earned a return of less than 1 percent. The agency responded by voting to reduce its expected return rate to a still-too-high 7 percent, which suggests legislators need to brush up on the concept of compound interest.
State leaders didn’t know – or were so eager to increase benefits for their union allies that they chose not to know – that retroactive increases would lead to an exploding membership in the $100,000 pension club, and resulting cost increases for local governments. Those governments would raise taxes and pare back budgets. That’s a subtraction problem that legislators and CalPERS overlooked, although subtracting personal income and reducing public services to make up for exponential growth in public-sector pensions have never been much of a concern to them.
California officials have trouble with percentages, too. For instance, CalPERS will soon have more people receiving benefits from the system than paying into it. The pension fund’s defenders will say that’s not a problem given the fund is supposed to be self-sustaining, which means that the amount of money paid into it plus interest earned from investments pays for all the retirement costs. Yes, it’s supposed to be, but it isn’t self-sustaining. The system’s “unfunded liability” refers to the amount that isn’t paying for itself, and is backed by the state’s taxpayers.
It’s hard to see thousands of people rallying to the cry, “no unsustainable pension systems,” but it might do more good than yelling about “science.”
The Jerry Brown administration and the Democratic Legislature have not put the pension issue – or the retiree medical issue, which may be an even bigger problem – on the agenda since the 2012 passage of the Public Employees’ Pension Reform Act. PEPRA, they say, has reformed the system. The act reduces benefits almost entirely for newly hired public employees. Here’s where math education comes in handy. Those employees won’t start retiring for 25 or 30 years, so slightly reducing their benefits will do little to deal with the current pension debt.
Some California cities (Stockton, Vallejo, San Bernardino) have gone bankrupt, but none of them have trimmed pension benefits for current employees, even though a federal judge in the Stockton bankruptcy case said that cities may “abrogate” pension promises in bankruptcy. Before the decision, CalPERS had argued that this wasn’t allowable. Essentially, cities would be forced to pay benefits they had promised even if they didn’t have the money to do so. Talk about the New Math.
Lo and behold, Vallejo and Stockton have continued to have fiscal problems even after exiting bankruptcy. Regarding San Bernardino’s exit plan, Moody’s reported last week that the city “will face operational challenges associated with deferred maintenance and potential service shortfalls, which, added to the pension difficulties, increase the probability of continued financial distress and possibly even a return to bankruptcy.” Officials in all those cities insisted their bankruptcy work-out plans would fix their cities’ problems.
These are definite math problems. The impact of ignoring math won’t mean that planet Earth dissolves in a giant fireball, as some global-warming activists claim, but it will mean that cities will continue to face “service insolvency” – when there’s enough money to pay the bills, but not to provide an adequate level of public services. Other cities will no doubt face actual insolvency. Some people may lose their pensions. Taxpayers will continue to face higher taxes. Businesses will continue to flee the state. Unlike global warming, this is something local officials can really change if pressed to do so.
There are lots of statistics to add and subtract here, even if there’s little understanding of them by those who make the decisions and spend our money. After the Governmental Accounting Standards Board (GASB) issued new rules that prodded governments into more accurately reporting their liabilities, the size of California’s stated debt has soared. That’s a good step in the direction of honest math, but it’s only the first step forward.
Maybe it is time for concerned citizens to march to Washington, D.C., and Sacramento – and to their local City Hall as well. They can carry signs, although it’s hard to come up with pithy comments that rhyme with “unfunded liabilities,” “service insolvency,” “3 percent at 50” and “assumed rates of return.” Still, it might be worth trying. Rhode Island Gov. Gina Raimondo, a Democratic advocate for pension reform, has said the pension problem is “about math, not politics.” She’s right – and it’s also a perfect slogan for a march.
Steven Greenhut is a contributing editor to California Policy Center. He is Western region director for the R Street Institute and writes a weekly column for the Orange County Register. Write to him at email@example.com.