So if you don’t live in Irwindale, rejoice: There, even when you look at it through rose-colored glasses, public pension liabilities equal $32,447 for each and every household in the city.
Slap on a skeptic’s glasses, and that load skyrockets to $134,907 per household.
Irwindale carries the heaviest pension load of more than 1,000 California public agencies whose data have been sliced and diced and posted for the world to see by the Stanford Institute for Economic Policy Research.
The heaviest loads in Orange County are in Newport Beach, Brea, Santa Ana, Anaheim and Costa Mesa, ranging from (rose glasses) $5,435 to $6,653 per household, or (skeptic’s) $15,976 to $19,062.
We’ll explain the glasses thing in a minute. But no surprise here: The older cities have had their own in-house police and fire departments for decades, and public safety workers get the most expensive pensions.
That comes clear in the incredible lightness of being a newer-fangled city, which contracts out for police and fire services (and thus doesn’t carry that pension load on its books): Aliso Viejo, $32 per household (rose) or $126 (skeptic’s); Laguna Woods, $32 or $121; Rancho Santa Margarita, $72 or $239.
Of course, that load winds up somewhere. In the County of Orange – which provides police services to contract cities via its Sheriff’s Department – each of its 1 million or so households has a load equal to $5,108 (rose) or $14,840 (skeptic’s). That’s on top of whatever each household’s city (and other agency) loads may be.
Stanford’s PensionTracker.org launched last fall, initially listing local agencies, and last week added data for every state. California ranked seventh highest nationwide for debt-per-household when viewed through rose-colored glasses ($15,618); and third-highest in the nation when viewed through skeptic’s glasses ($77,700).
“I was a little surprised that the unfunded amount per household is as high as it is,” said Joe Nation, public policy professor at Stanford and director of the data project.
All told, California’s public pension systems are $281.5 billion short, including pension bond debt. Through Nation’s lens, they’re nearly $1 trillion in the hole – or $946.4 billion.
Nation, a Democrat who served in the Legislature for six years, might be considered a card-carrying progressive. He represented Marin County, where Democrats and decline-to-states constitute nearly 80 percent of registered voters. He authored bills on greenhouse gas labeling for cars, fuel efficiency standards for tires and tax incentives for alternative energy.
Nonetheless, Nation has earned the wrath of public employee unions – a traditional Democratic power base – with his jarring analyses of public pension debt.
Stanford scholars have simply been calculating how deeply in debt pension systems will be if they earn less-rosy-than-anticipated returns on investments.
The rose-colored glasses refer to the shortfalls calculated by officials themselves – what they expect if California’s pension systems earn what officials say they’ll earn, which is currently 7.5 percent or so. Through this “actuarial” lens, they’re $241.4 billion short. That’s a staggering 38 times larger than in 2003, when the shortfall was $6.3 billion. Nation adds in bond debt issued to beef up pension funds, arriving at his $281.5 billion actuarial total.
Nation, and many others, don’t think it’s realistic to expect 7.5 percent returns on investments.
A sobering study by global management consultant McKinsey & Co., titled “Diminishing Returns: Why Investors May Need to Lower their Expectations,” explains why:
“Buoyed by exceptional economic and business conditions, returns on U.S. and Western European equities and bonds during the past 30 years were considerably higher than the long-run trend,” says the study, released this month. “Some of these conditions are weakening or even reversing.…
“Our analysis suggests that over the next 20 years, total returns including dividends and capital appreciation could be considerably lower than they were in the past three decades. If our analysis is correct, this will have significant repercussions for both institutional and individual investors, pension funds, and governments around the world.”
Total real returns for equities the past 30 years averaged 7.9 percent, McKinsey found. The next 20 years, that may well drop to 4 percent to 5 percent.
Nation, as it turns out, has been exploring that what-if-it’s-less? scenario for years. His Stanford scholars have calculated the “market” hole using returns of 6.2 percent and 4.5 percent, to howls of protest from the giant California Public Employees Retirement System and others who denounced it as alarmist.
The skeptic’s glasses that Nation dons in this new exercise belong, actually, to CalPERS. PensionTracker’s “market” calculations assume a gut-punching 3 percent return – what CalPERS would use to calculate debt for agencies wanting to exit its system.
‘COOK THE BOOKS’
While Nation has calculated “per-household” debt loads, no one is proposing to bill each individual household for pension debt. It’s just a way to bring the problem down to scale for the average citizen – and one that enrages critics.
“This is another example of opponents of retirement security for teachers, firefighters, school employees and other public workers funded by special interests trying to cook the books under the guise of an academic study,” said Dave Low, chair of Californians for Retirement Security, a coalition of public employee unions.
He’s not necessarily buying the “past performance is no indicator of future results” warnings.
“As any financial expert will tell you, it’s critical to look at the long-term results of any investment, rather than cropping the picture to serve political goals,” Low said. “The fact of the matter is that CalPERS and CalSTRS have consistently met their rates of return over time. No amount of data manipulation can change that.”
CalPERS doesn’t think Nation’s approach is helpful.
“Showing pension liabilities on a termination- or market-value basis is unrealistic when investing for the long-term, as it only accounts for the current value of liabilities in the event of a plan termination,” spokeswoman Amy Morgan said in a statement.
But the pension giant is taking steps to stabilize in light of the economic conditions that the McKinsey study suggests, she said.
In November, it adopted a “funding risk mitigation policy” that will, in years of galloping investment returns, redirect money to help pay down unfunded liability.
“CalPERS remains committed to investing for the long-term and takes a measured and balanced approach to become a fully funded pension system,” she said. “Using our actuarial basis method allows for more rate stability for our employers and lessens the volatility so they can plan for the future. This method not only takes into account investment returns, but it also looks at employee life expectancy, projected retirement date and the projected compensation of the employee.”
ON THE HOOK
If the hole isn’t filled up with meatier investment earnings and heftier contributions from public workers and employers alike, taxpayers will have to fill it directly.
That’s because unfunded pension liabilities are simply what we’ve promised employees for work already performed. And in California, pension promises can never be broken – at least, not outside of federal bankruptcy court.
Despite modest reforms enacted in 2013 and greater contributions to pension funds by agencies and workers alike, pension debt keeps growing. A new accounting rule requires that they be factored into balance sheets for the first time this year. Billions of equity have vanished as a result – more than $3.5 billion from the County of Orangealone. The Orange County Fire Authority is officially in the red.
“For too long, the true cost of public employee pensions has been hidden from the public,” said Chuck Reed, a Democrat and former mayor of San Jose who has been trying to launch a pension reform initiative for years.
“Use of optimistic assumptions about rates of investment returns has obscured the cost and the risk to taxpayers. By using less-optimistic assumptions, PensionTracker shows the rest of the pension debt iceberg lurking beneath the water, waiting to sink the ship of state.”
Reed’s partner in the initiative push, Carl DeMaio, a Republican and former member of the San Diego City Council, said they’re aiming an initiative at the 2018 ballot. They want public agencies to have the freedom to negotiate smaller pension benefits for workers going forward; the benefits workers have already earned would remain untouched.
“At some point, obviously, we’ll have to deal with this,” Nation said. “We’ll either deal with it collectively, constructively and collaboratively, or when it blows up on us.”
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O.C. PUBLIC AGENCY PENSION DEBT, PER HOUSEHOLD
|Agency||Per-household unfunded liability, based on 7.5% return (actuarial)||Per-household unfunded liability, based on 3% return (market)|
|County of Orange||$5,108||$14,840|
|South Coast Water District||$698||$2,638|
|Serrano Water District||$354||$1,561|
|Laguna Beach County Water District||$290||$1,081|
|Yorba Linda Water District||$213||$791|
|Mesa Water District||$166||$669|
|Rancho Santa Margarita||$72||$239|
|Buena Park Library District||$52||$214|
SOURCE: PENSIONTRACKER.ORG, STANFOR INSTITUTE FOR ECONOMIC POLICY RESEARCH, PUBLIC AGENCIES