Jason Gibbs | Beware of the State’s Pension Tsunami

Earlier this week, local leaders and community advocates journeyed to Sacramento to partake in discussions with policy advisors and elected officials on a wide range of state and local issues.

KHTS held their 14th annual Sacramento bus trip providing the opportunity to relay both our concerns and support with actions and legislation that significantly affects the way we live, the businesses we run, and how we raise our families here in Santa Clarita. Thank you to Sen. Scott Wilk, Assemblyman Tom Lackey, Assemblywoman Christy Smith, and to all the employees and staff who made this an incredible and successful experience!

While all of the topics and speakers were well presented and opined, it felt like kismet when the topic I had begun writing about for this column was discussed by Sen. John Moorlach: pension reform. 

While it seems to be a requirement in today’s political theater to approach topics and principles solely from a partisan standpoint, the need to evaluate the impacts of our political posturing on those who simply want to live and thrive in this state without engaging in the ceaseless drama, is at critical mass.  

It’s no secret that the California pension system is insolvent and is leaving a crushing debt that will inevitably consume our coffers without immediate and drastic action. Unfortunately, under the guise of unfettered democratic rule, the system is reaching all new levels of disaster. 

With ever-increasing benefit promises, overinflating return rates from investment portfolios, and the political tentativeness to share costs of these pensions onto employees, Sacramento can no longer play the role of ostrich and ignore this issue. 

State and local governments face more than $400 billion in unfunded liabilities (which is just political speak for debt) according to the State Controllers’ office report in 2016. However, these numbers are probably low!  CalPERS assumed their investments would have a set return rate over time (set to be 7 percent in 2020). If you assume a market rate return of closer to 3 percent, which is more conservative and practical, the debt is over a TRILLION dollars!

It’s not just non-conservative return rates that have caused this debacle! Gov. Gray Davis signed legislation just before the dot-com bubble burst allowing early retirement and additional pension benefits. This extended to local governments and school districts as well, including providing pension holidays. Suffice it to say, the dot-com crash and then the great recession (which wiped out nearly 30 percent in CalPERS assets) did nothing to help achieve the pie-in-the-sky promises.  

Additionally, the life expectancy of workers is more than what the program estimated, which, again means more cost that must be paid! Just like with Social Security, predicative models indicate there will not be enough workers to sustain the amount of retirees. 

Bottom line…it is unsustainable!

Pensions are funded from three sources: returns on investment, employee contributions and government employer contributions. Therefore, when we discuss how to get more money into the fund, the answers are charge the government more (i.e. taxes), charge the employer more for the care they are promised, or hope that CalPERS can get a better return on their investment.  

Historically, the state has been extremely hesitant on the first two options. Large labor unions do not advocate for making their members pay more for their benefits.  Cities will not advocate taxing the populace to pay more for employee pension and health-care promises.  

Therefore, the state has relied solely on the investment portfolios to meet their expectations. Thirty years ago, CalPERS projected 8.75 percent returns and CalSTRS assumed 8.5 percent, but those rates are dropping to 7 percent in 2020. Even at these lower rates, many advisors argue that these rates are entirely too optimistic.  

Joe Nation, the project director for Pension Tracker, suggests a market rate of closer to 3.3 percent is much more realistic. But, if the retirement plans assume such a low rate of return, that means the employer or employee will have to make up the $700 billion in losses. Good luck getting the unions or taxpayers to agree to that! 

In fact, Gov. Brown tried in 2012 to close the gap by forming a hybrid system with pensions and traditional 401(K) plans, but Democrats blocked this plan.

No matter how you look at it, debt is non-partisan. Republican or Democrat, liberal or conservative, we taxpayers are responsible for these obligations. What’s more of a travesty is we are passing this burden on to generations that had no say in its creation! While I was the only City Council candidate to discuss the real dangers of pension liabilities, I hope our elected officials will see the importance of actually doing something, and not just utter phrases like “we need more resources.”  

Because frankly, relying on portfolios to outperform reality, for retirees to not live as long, and for a non-stop economic boom to pay these promises, is not just unrealistic, it is immoral! 

Jason Gibbs is a Santa Clarita resident. “Right Here, Right Now” appears Saturdays and rotates among several local Republicans.

Advertisement