Monday, November 3, 2014

California's Unfunded Liabilities for Current & Future Pensions Exploded from $6.3 Billion in 2003 to $198.2 Billion in 2013

This morning on the Armstrong and Getty Show, Jack and Joe discussed a topic we touched upon here on Saturday.  California's public pension promises are totally out of control and will bankrupt the state quickly if municipalities are not able to renegotiate those fanciful promises in bankruptcy proceedings.  Joe also expounds on my theory that if we Californians are going to need a federal bailout (and we will) we had better hurry up and get to it because if Illinois beats us to the punch, I doubt the nation will have the stomach for a second state-handout. 

Here is the audio from today's Armstrong and Getty show at the top of the 7 AM hour.  Set forth below you can find nearly all of another excellent column from Dan Walters in the Sacramento Bee on the topic as well as an excerpt from Ed Mendel over at

This is from Dan Walters of the Sacramento Bee:
State Controller John Chiang dropped a political bomb the other day, although he was so quiet about it, one could say it was a stealth bomb. 
Chiang added public pension systems to his already large fiscal database. One chart reveals that their “unfunded liabilities” – the gap between assets and liabilities for current and future pensions – exploded from $6.3 billion in 2003 to $198.2 billion in 2013. 
Moreover, that startling number assumes that pension systems will see asset earnings of about 7.5 percent a year – a number that some are beginning to see as unattainable. 
Los Angeles’ city pension system dropped its assumed earnings, called the “discount rate,” last week. The board of California’s second largest pension system, covering teachers, was told last month by a panel of experts that its 7.5 percent assumption is likely to be under 7 percent for the next decade. 
If a 7.5 percent discount rate, which is also used by the giant California Public Employees’ Retirement System and many local systems, is too high, the current $198.2 billion debt in Chiang’s report is, in reality, much higher. 
The debt rose as pension funds’ earnings plummeted during the recession and new benefits kicked in, despite dramatic increases in mandatory contributions.
State and local governments’ contributions nearly tripled between 2003 and 2013, from $6.43 billion a year to $17.5 billion, while those of employees nearly doubled, from $5.2 billion to $9.1 billion. 
The unfunded liability problem hits cities the hardest because of their high payrolls. Many have seen their retirement tabs quadruple, such as the 2003-13 increase from $98 million a year to $375 million for Los Angeles’ city police and fire pensions. 
Three California cities have declared bankruptcy in recent years, in large measure due to pension debts, and the judge in Stockton’s case declared those debts may be reduced in bankruptcy, although he didn’t compel Stockton to do so.  [More on this below from Ed Mendel.] ... 
Chiang’s new numbers should not be surprising. 
Fifteen years ago, in a spasm of abject irresponsibility, then-Gov. Gray Davis and the Legislature pumped up pension benefits for state employees on blithe, unsupported assurances from a union-friendly CalPERS board that high investment earnings, not taxpayers, would cover the cost. And many local governments blindly followed suit. 
Davis was rewarding unions that helped him get elected in 1998. Now the piper must be paid, and the cost is very steep.  
And regarding just how difficult it is for bankrupt cities to actually cut pension promises, this is from Ed Mendel at
... To cut pensions, said the judge, the city would have to reject its contract with CalPERS and “more importantly” its contract with employees. Pensions are part of total pay, and while in bankruptcy Stockton negotiated contracts with unions. 
Klein said employees agreed to pay cuts during the negotiations with the understanding that pensions would not be cut. He said all of the concessions were “made on the direct income side not the pension side.” 
So to cut pensions, the city would have to reject a collective bargaining agreement. A U.S. Supreme Court decision (Bildisco 1984) set a higher standard for rejecting a collective bargaining agreement. 
The judge said Congress responded by setting a higher standard than Bildisco for rejecting a collective bargaining agreement in business bankruptcies (Chapter 11), which so far is not applicable to municipal bankruptcies. 
He said rejecting a “garden variety” contract is a low-level hurdle, rejecting a collective bargaining agreement under Bildisco is a higher hurdle, and rejecting a bargaining agreement in a business bankruptcy is an even higher hurdle. 
“So it would be no simple task to go back and redo the pensions,” said Klein. In the case of Stockton, the package of pay concessions would have to be reopened, which “as a practical matter would be difficult to do.”...