By Michael T. Alexander, President of the California Taxpayers Union
The City seems to disagree with everything being said in support of Measure N which would repeal the city’s 7.5% Utility Users Tax that currently generates about $3.5 million each year. This is curious, because the facts could not be simpler.
South Pasadena, like almost every city in California, owes far more to its current and future retirees than it can ever pay. Even the City admits that it owes at least $29 million. They get that phony number from the dreamers at CalPERS who fraudulently claim their investments are going to average 7.5% over the next 30 years. If CalPERS were a private investment firm or insurance company promising those kinds of returns, they would be in jail. And you know who would put them there? That’s right, the State of California. The same State of California that allows one of its own agencies to do what it would never allow anyone else to do.
In fact, we know that South Pasadena’s pension debt, i.e., what they owe over and above what they have already paid into the system, could easily exceed $100 million. That number is growing as we speak. CalPERS is sitting still. They are making the cities come up with more and more money each year to “catch up.” These “catch up” contributions are in the millions and will wipe out the taxes generated by the UUT and every other new tax they come up with. Cities all over California are complaining about and are rightly concerned that they are facing bankruptcy and/or radical reductions in municipal services. It is the number one topic when leaders from different cities get together.
In other words, the City of South Pasadena, like most California cities, is in deep financial difficulty but pretends otherwise. In sum, South Pasadena is a fiscal illusion.
“Keep moving! Nothing to see here!”
The City’s arguments, if you can call them that, boil down to a bunch of half-baked denials and union slogans. They admit that they have a “pension problem” but try to leave the impression that it’s either under control or no worse than any other city’s. They admit that taxes will have to go up, but never tell us by how much or for how long. When confronted with the reality that the pension debt, by definition, derives from their high cost of labor, they deny the obvious and merely assert that salaries are in line with those of other cities. (Yeah, guys, that’s the problem!) These cities have the same problem for the same reasons.
They are treating the pension disaster like any other multiple fatality car wreck. They just tell the public to “Keep moving. Nothing to see here!”
Our hands are tied!
The closest the City comes to the truth is when they point out that their hands are tied by state law. While this is true as far as it goes, it doesn’t relieve them of their fiduciary responsibilities to deal with the problem. The public employee unions long ago created a statewide pension system that would take the biggest pension issues off the negotiation table at the local level.
The City of South Pasadena is no stranger to statewide politics. Over the last 50 years, the City has spent untold millions opposing the 710 freeway. It now needs to put that same energy into pension reform. It probably won’t because the city council operates as a wholly owned subsidiary of the public employee unions.
So what’s really going on here?
The fact is that at the highest levels of local and state government the people who run this system know everything I know. They know the system is broken and the cities are broke right along with it. So, why won’t they publicly admit it? Good question.
Here are the reasons:
1.Taxpayers have been hoodwinked
The forces behind big government, especially the public employee unions, have been misleading taxpayers for years. It all started in 1998 when retirement benefits for public employees were increased a whopping 50% with no additional contributions from the public employees themselves. The expectation was that CalPERS’ investment earnings would cover the additional costs which never happened.
By pretending that they are the victims of circumstances beyond their control rather than of their own political and financial malpractice, they hope to continue convincing taxpayers that it’s their responsibility to make good on the promises that the political class made to themselves. The last thing they want is for taxpayers to wake up and realize what has been said and done in their name. Two decades of Government Greed have brought us to this unhappy juncture. Taxpayers should not have to pay the price for the problems that the political class created.
2.Admitting the city is underwater by as much as $100 million could trigger bankruptcy.
The success of public employee unions in increasing employee pensions coupled with the failure of CalPERS to produce promised earnings on invested assets has created a huge problem: the money to pay for future pensions simply isn’t there.
The shortfall is called the unfunded pension debt. The unfunded pension debt is not an absolute figure but is highly dependent on the future earnings of the funds set aside to pay for future pensions.
CalPERS claims it will earn 7% going forward. Using this rate of earnings, South Pasadena is reporting $29 million of unfunded pension debt. However, the Stanford Institute for Economic Policy Research (PensionTracker.org) is using a more realistic interest rate of under 4%. This translates into an unfunded pension debt of over $100 million.
If the City owes $100 million, but cannot make its payments, this could trigger bankruptcy. Once the city is in bankruptcy, the courts and creditors are in charge, not the public employee unions. CalPERS and the public employee unions want to conceal the possibility of this happening at all costs. It should also be noted that South Pasadena’s bankruptcy could lead to a wave of municipal bankruptcies throughout California.
3.Admitting even the possibility of insolvency would severely damage the City’s credit rating, lower the price of their bonds and make it impossible to borrow. It could even lead to a collapse of California bond prices.
South Pasadena and every other city in California issues bonds. Even the hint of insolvency will cause a reduction in their credit rating and drive down the price of the bond. This, in turn, will make it harder, perhaps impossible, to float any new bonds. But nothing happens in isolation. Financial markets are very sensitive. South Pasadena isn’t the only California city with this problem. Everyone else is in the same boat. Hence, an admission of actual or prospective insolvency could affect the entire California bond market. This reduced creditworthiness could drive down the price of all California municipal bonds. This could cost Wall Street billions.
To make matters worse, cities won’t be able to issue new bonds, which they are going to have to do in order to deal with all of the deferred maintenance in the city. Put another way, the city can’t pay gold plated pensions and pave the roads at the same time. Now you are starting to understand why the politicians don’t dare speak the truth about the pension debt bomb. They are scared to death of what might happen. So they just keep double-talking, stammering and whistling past the graveyard. Hot tip: It isn’t working. The entire edifice is about to come crashing down.
4. Admitting they are broke could lead to the destruction of the union’s political machine.
Much more devastating than the financial consequences would be the political consequences for the apostles of unlimited government. What we know as the “left” or “progressive” movement in modern politics is the result of government growing itself. Remember, the prime directive of government is to grow itself. Consider also that every public employee is, in effect, a paid, partisan, political activist whose first duty is to help grow government. It is a never-ending cycle in which government at every level taxes more, spends more, regulates more.
In California most of these public employees belong to a union. Together they contribute over $1.0 billion a year in dues. The public employee unions use this money to elect state, local and federal officials who will work with them to grow government. They are a political party unto themselves. Under the guise of providing public services, these union operatives pay themselves extravagant salaries and lifetime benefits. Any reduction in the size of government or the amount that they pay their political operatives will reduce their ability to keep growing government. This political cabal is the single most efficient and effective political force that has ever been assembled in America.