Pension Mess Can't Go On; That's No Reason to Ignore It

You can deal with it now or deal with it later, but eventually you will have to deal with it.

By Steven Greenhut, writing for Reason.

"President Richard Nixon's economic adviser, the late Herbert Stein, still is knon for his dictum: "If something cannot go on forever, it won't." It should be the rallying cry for California's pension reformers. The numbers don't lie, they say. Services are being cut to pay for oversized pensions, they note. Something must be done because the debt cannot keep growing forever.

They're right. And it won't go on forever. It can't go on forever. At some point, even the most dogged public-pension defenders will realize the gravy train—six-figure guaranteed lifetime pensions inflated by myriad spiking gimmicks—will end because the math must catch up with the wishful thinking.

New York and Chicago already pay for more retired cops than for officers patrolling the streets. Some cities have gone belly up, with Stockton and Vallejo the most visible California examples of what happens without adult supervision. Even healthy cities are slashing services and raising taxes to meet escalating pension bills, to pay for those who often receive far more in retirement than most residents earn during their working years.

Even the rest of the media have come to the party, however late. At the Orange County Register, writers have been pointing to the disastrous fiscal effects of Senate Bill 400 for years. That's the 1999 legislation that started a wave of unsustainable, retroactive pension increases, not just in state government, but in cities and counties across California.

As reported in the Los Angeles Times last week, "With the stroke of a pen, California Gov. Gray Davis signed legislation that gave prison guards, park rangers, Cal State professors and other state employees the kind of retirement security normally reserved for the wealthy... California Highway Patrol officers could retire at 50 and receive as much as 90 percent of their peak pay for as long as they lived." The deal was promised to pay for itself, but instead has plunged California into an unsustainable fiscal mess. Surprise.

Indeed, Stein was right that unsustainable things ultimately will be, err, unsustainable. But there's no underestimating the ability of officials to delay the day of reckoning—at least until they are comfortably retired at their beachfront condos. One website covers the coming "pension tsunami." It's great imagery, but the problem is less "tsunami" and more "steadily rising floodwaters." The result is the same, but timing is everything.

Sometimes it takes decades for problems to wreak havoc. Those who make predictions sometimes have to wait until the audience becomes receptive to their message. Those pension reformers have been warning about the flood for years. They've attempted legislative fixes. They've taken local reform measures to the ballot. They've tried to qualify measures statewide. They've gone to court. Usually they are stymied by the more politically powerful public-employee unions.

In a fit of despair, I wrote that reformers ought to abandon ship. That's not because they are wrong actuarially, but because they are politically outmatched in our union-dominated state. But once again, pension reform is resurfacing.

Last month, a state appeals court rebuked a Marin County public-employee union that was challenging the state's modest effort to rein in some pension "enhancements," or spiking. In doing so, the court ruled that the so-called "California Rule" (forbidding the state from reducing pension benefits for current hires, even going forward) could be jettisoned.

As Judge James Richman ruled, "(W)hile a public employee does have a 'vested right' to a pension, that right is only to a 'reasonable' pension—not an immutable entitlement to the most optimal formula of calculating that pension." That's big news because the pension mess cannot be fixed merely by lowering benefits for new hires, most of whom won't retire for decades.

More impetus for reform came from The New York Times, which reported recently that the California Public Employees' Retirement System has two sets of books to evaluate the size of the state's pension debt. It has its "official," rosier estimates, which say the system can count on a rate of return on its investments of 7.5 percent annually (higher returns make the taxpayer-backed unfunded liabilities seem smaller).

Then there are the "market" estimates—the much lower (2.64 percent) expected rates of return CalPERS uses to calculate how much agencies must pay it if they want to leave the system. Most reformers say these numbers are closer to reality. The Times article said such "market" estimates result in a cost projection that is "alarmingly large."

This is nothing new. In a 2011 column, I argued the situation was unsustainable. It can't go on forever, but it would be nice if the state's leaders would muster some courage and fix it, rather than just waiting to see if Stein had a point.

Steven Greenhut was the Union-Tribune's California columnist. He is western region director for the R Street Institute. He is based in Sacramento."