There is a growing awareness among informed citizens that America is poised on a fiscal abyss. Government in general, and its spending in particular, is out of control at every level. It is not just the federal or state governments that are out of control. The cities and counties are also fiscal disasters. You will often hear state governors, particularly presidential candidates, criticize the federal government by pointing out that states cannot print money and therefore must balance their budgets. They present this presumed fiscal prudence as a qualification for higher office. They are lying. In city after city and state after state, the unfunded pension debt threatens to sink the state. While they claim to have passed a balanced budget, they are actually using accounting gimmicks to get there. Their favorite gimmick is to underestimate, i.e., lie, about whether they have set aside enough money to pay for the pension promises made to public employees by politicians eager to curry their favor or reward them for their support.
California Pension Debt: $1 Trillion and Growing!
Joe Nation, Ph.D., Project Director at the Stanford Institute for Economic Policy Research, is the leading authority on California pension liabilities. Under his able direction, the Stanford Institute has developed a web site that tracks the pension debt and liabilities for the State of California and each city and county within it. [www.pensiontracker.org
] As you can see for yourself, the cumulative pension debt in California for all state, county and local entities in Fiscal Year 2015 is $992 billion, which comes to just under $77,000 per household. We talk about this in more detail below. A Case in Point: The City of San Marino By the way, if you don’t live in San Marino, just plug in your city’s name in place of “San Marino” and all of this will apply. Here’s a quick reality check for all of us.
A number of residents in San Marino have become alarmed at the fiscal disaster that awaits them. After digging into the City’s books, they realized just how badly the city was being mismanaged and how quickly they had gotten into trouble. We at the California Tax Limitation Committee have worked with like-minded activists in San Marino to raise awareness of this problem among San Marino residents. The next election in San Marino will take place in November when they will elect three city councilmembers. At least three out of the seven candidates (Ken Ude
, Gretchen Shepherd Romey
and Susan Jakubowski
) are trying to make San Marino’s fiscal crisis a major issue in the campaign. We thought that this would be a good opportunity to talk about the statewide pension crisis using San Marino as an example that we can all relate to. The City of San Marino is a Fiscal Illusion
Just like the state and federal government, the City of San Marino is a fiscal illusion. The budget and pronouncements of the city and public employee unions conceal the fact that it is already bankrupt and ready to explode at any moment. San Marino is under water anywhere from $62 million to $132 million in pension debt and deferred maintenance. Let’s start with the three top fiscal realities in San Marino: 1. The obscene cost of salary and benefits for public employees (median pay and benefits for full-time employees $120,946
); 2. The unmet, unrecognized pension debt (at least $22.4 million, but probably closer to $92.8 million); and 3. The very high cost of deferred maintenance/replacement of municipal infrastructure (at least $40 million but nobody really knows). This describes the fiscal and, therefore, the political reality of San Marino and, with rare exception, each and every other city in California. What is also common to these cities is the lack of an effective plan to deal with these problems. Obscene Cost of Salary and Benefits for Public Employees
Encouraged by their own employees and special interests, cities spend with wild abandon money that they don’t have. On the rare occasion when citizens organize to oppose such fiscal debauchery, they are either ignored or excoriated for their ignorant threat to the “quality of life” of their fair cities. The only quality of life threatened, of course, is theirs. The salary and benefits of a median full time government employee in Southern California is over $100,000 per year. Combined with union “work rules” we end up with some firemen who live in Idaho, “work” four days a week and collect over $250,000 a year. These people can retire after thirty years and enjoy a lifetime pension of up to 90% of their salary for the rest of their lives. As these elite retirees – the REAL 1%
– rest from their exertions in the city library or reading meters, we citizens pay for their gold-plated health care plans in retirement to make sure that they live even longer! “Obscene” does not begin to describe what is going on. The high cost of salaries and compensation for public employees is not only the largest single expense in any city budget, it is the root cause of the biggest black hole on the city balance sheet: pension debt. Unmet, “Unrecognized” Pension Debt
Like almost every other city in California, San Marino is a member of CalPERS, the state-run California Pension and Retirement System. CalPERS has lied about its projected investment returns for years. During the great market correction that began in 2008, CalPERS insisted that it could still use an annual investment return assumption of 7.75%. Even now, CalPERS continues to assume that its investments will return 7.5% a year for the next 30 years! As a result, it has fraudulently understated how severely “underfunded” the whole system is and, therefore, each city within it. (Don’t you just love the Orwellian accounting expressions we use to describe a nuclear hole in the ground?). CalPERS will admit that San Marino’s pension debt is at least $22.4 million. The reality is much worse. Experts like Joe Nation at Stanford caution that these deficits must be calculated using an investment return assumption of no more than 3.2% which is more or less the risk-free rate of return. Using this more prudent assumption, the San Marino’s pension deficit is estimated to be closer to $92.8 million. The CalPERS deficit, of course, is just an aggregation of the obligations of its members, including San Marino. Thus when CalPERS understates its pension obligation it also understates the obligations of its members. For their part, the union dominated cities are more than happy to cooperate in this fraud by passing on this phony number to the public and carrying it on their balance sheet. (If they were running a public company, the whole lot of them would be in jail.) San Marino, therefore, makes no independent calculation of its pension obligations. It merely takes the number off the year-end CalPERS statement and pastes it into its balance sheet. Each year CalPERS also sends San Marino a bill for the coming year’s contributions. By understating both the amount of the pension debt and the annual contribution needed to fully fund the city’s portion, CalPERS and the California Crime Family that runs this state sustain the fiscal illusion of balanced budgets and ensure that no undue attention will be drawn to the obscene pay, benefits and retirement benefits of public employees. In this sense, therefore, the pension deficit is not “recognized” in an accounting sense; nor is it “recognized” politically. Deferred Maintenance and Replacement of Infrastructure
“Deferred maintenance” is another one of those delightful accounting euphemisms that we use to describe a collapsing infrastructure that renders the city insolvent all on its own. The City of San Marino is 103 years old with an infrastructure to match. We have seen current estimates to repair it hovering around $40 million, but nobody really knows what the real number is. No one knows how the cost estimates were calculated. Very likely this number does not include the impact of inflation, environmental compliance, cost overruns, mission creep, etc. Discussion
Each of these numbers is increasing as we speak. Salaries and benefits will rise. The city council has proven itself incapable of resisting the demands for increased wages and benefits. The pension debt will rise accordingly. The cost of infrastructure replacement will rise for the reasons stated. Even assuming we could lock in these numbers, the City of San Marino is fiscally insolvent and headed for a crash. San Marino, its future and its vaunted “quality of life” is an illusion. No less illusory are the failed political strategies normally used to cope with these problems. These are the major issues: 1. In our cities, our biggest single problem, pensions, is ultimately rooted in state law. Hence, it is not, strictly speaking, a local problem. Because pensions are not a local problem, it cannot be solved locally. 2. Any local political strategy must first contemplate and be fully aligned with a prior statewide political solution. 3. Paradoxically, the statewide solution begins with local awareness. The Pension Crisis is a Statewide Crisis That Cannot Be Solved Locally
Without going too deeply into the reasons, it is sufficient to say that even though the pension obligations may be incurred at the local level, they are calculated, regulated and paid at the state level. Aside from withdrawing from the CalPERS system entirely by paying the cost in full, in cash and right now, the city has no choice but to remain in the system. Although there may be other potential solutions, the city council, urged on by the wealthy, elite public employees who own and control it, will claim that their hands are tied and do nothing. Many cities in California have looked at this option and backed away. Thus, even when a city council is not in the pocket of the unions and public employees, their options are few and ineffective. For the reasons stated, it is essential that we understand that the biggest problem in San Marino, or any city, cannot be decisively addressed, much less solved, only at the local level. This is why efforts to elect “good people” to the city council, petitions, demonstrations, or even local initiatives are, by themselves, ultimately no more effective in California than they are in Venezuela. These efforts are essential, but not enough. Effective Local Political Strategies Must Be Part of a Statewide Political Pension Reform Strategy
We at the California Tax Limitation Committee recognize this reality. This is why we have long been convinced that the major problems we face in California can only be addressed by a series of strategic statewide initiatives beginning with Pension Reform. This initiative would: A. Abolish the current pension system (referred to as “defined benefit”), and replace it with 401(K) type plans (referred to as “defined contribution”); B. Prohibit the adoption of any defined benefit plan by any government entity; C. Cap employer contributions to retirement and benefits at 10% of salary; D. This initiative would apply to all new hires and every new dollar earned by any current employee; E. Pending rulings by the California Supreme Court, the current system would be reformed to cap pension benefits at 2% of salary for a maximum of 20 years of employment. In sum, the only truly effective local political strategy in the area of pension reform is a statewide Pension Reform initiative. Anything else is a waste of time, money and resources. Statewide Success Begins With Local Awareness
Just as the pension problem is an aggregation of local obligations, a successful statewide pension reform movement begins with, and depends upon, local awareness. Thus, we are not arguing against local political action. Far from it. We have always understood that successful statewide success begins locally. This is particularly true of fiscal issues, which can be very hard to explain to the average citizen. Someone once remarked that, “One death is a tragedy. A million deaths is a statistic.” And so it is with deficits. In the aggregate our statewide fiscal and pension crisis is remote and intangible. But locally it can be explained and made tangible. Thus, political action undertaken in any city must explain the current situation to voters in concrete local terms. We have done this successfully in other cities in our Utility User Tax Repeal initiative campaigns. Our single most effective campaign piece featured the scores, sometimes hundreds, of public employees receiving salaries above $100,000 a year and explaining how that related to the pension deficit in the city. This effort was never linked to the campaign of any candidate. Indeed, as we have explained, elected representatives cannot or will not do anything to deal with the pension problem. However, even in wealthy, laid back San Marino, many citizens became aroused when they realized what has actually been going on in their city. This effort just needs to be scaled up and continued for the next several years. More importantly, it needs to be linked to a statewide solution. Otherwise we just generate citizen discontent that will degenerate into frustration and bitter resentment when they realize that the really good person they elected cannot solve the problem or, worse, betrays their concern when he or she becomes co-opted by the prevailing political machine. That said, the candidates will not be able to be neutral. They will have to take either an opposing or supporting position on this initiative. The unions and public employees, who readily understand the fiscal and political implications of our proposal, will see to it that “their” candidates attack us and anyone who supports us. They will be forced to take a stand and explain to all of us why there is really nothing to worry about and how all of this comes to a good end. This is a very good thing indeed.