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Blue Model Blues
California Pension Fund Threatens to Renege on its Promises for the First Time

The tiny town of Loyalton, California, home to a modest public pension fund serving just four retirees, could be the scene of the first ever pension cutback in the Golden State. Mary Williams Walsh—a New York Times reporter who has taken the lead on bringing deep-rooted problems in America’s public pension systems into public view—explains what went wrong:

Loyalton … had been paying its required yearly contributions to Calpers, so officials thought its pension plan must be close to fully funded.

But Calpers calculates the cost of pensions differently when a local government wants to leave the system — a practice that has caught many by surprise. If a city stays, Calpers assumes that the pensions won’t cost very much, which keeps annual contributions low — but also passes hidden costs into the future, critics say. If a city wants to leave, Calpers calculates a cost that doesn’t rely on any new money and requires the city to pay the whole amount on its way out the door.

That is why Calpers sent Loyalton the bill for $1.6 million.

The problem for Loyalton, in other words, is just a more acute version of the problem besetting municipalities across the country: Namely, that state pension authorities have been assuming unrealistic discount rates and rates of return on their investments for decades. The purpose of this phony accounting is to conceal the massive shortfall in public pension funds that are often underfunded and consistently fail to meet overly optimistic investment targets. As long as the real numbers aren’t released, politicians, investors and public union bosses can look the other way. But the real value of obligations racked up over the years is finally becoming clear, and it stands to ruin fading municipalities that were roped into the system on false pretenses.

Walsh notes that “some see a test case taking shape for Loyalton and other cities with dwindling means.” There is simply no way for many small government entities in California to afford what the state pension fund says they owe. If Calpers follows through on its threat to cut off Loyalton’s retirees, then the fiction of “bulletproof” public pensions will be permanently undermined.

The crisis in Loyalton should come as an ear-grazing warning shot to states across the country that are concealing the true cost of their fiscal obligations. As the Ponzi scheme runs its course, the people who stand to lose most are retirees of modest means, not the union bosses in state capitals who demanded more and more benefits or the politicians who kicked the can down the road and pocketed the votes of citizens from whom they withheld the truth.

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  • seattleoutcast

    Somehow the republicans will be blamed for this…

    • ytzpzvgk

      It’s Trump’s fault.

  • Wild Bill Kinda

    People get what they vote for, deservedly so.

  • Dusty Thompson

    Socialism is the message, Marxism is the strategy and Fascism is the goal…

    Democrats lost America’s first Civil War because they enslaved Black people. Democrats are going to lose America’s second Civil War because they attempted to enslave everyone else…

    Not every Democrat was a KuKluxKlan member, but every KuKluxKlan member was a democrat.

    When peaceful recourse is denied, violent redress becomes justified, it becomes manifold.

  • dankleitman

    If a private corporation had kept two sets of books the way Calpers does, and done what Calpers has done to Loyalton, its officers would be in jail, and its name would be Mudd or Madoff.
    On the other hand, poor and tiny Loyalton will not be able to pay the million required by Calpers, and the pension reductions may well take place. The stink from this bullying, which is another casualty of Obama’s zero interest rate economics, may yet come back to bite Calpers.

    • Andrew Allison

      ERISA for public pension plans! NOW!!

  • mikekelley10

    I think most pension funds are invested about 40% to 50% in fixed income. The rest is in stocks. CALPERS relies on a return over 7% on average to stay solvent. Does anyone know how they will achieve that with ZIRP and a drastically over-priced stock market? Or even 4%?

    • Andrew Allison

      Nobody, including CALPERS, expects the 7%-plus rate of return. The number is intended solely to kick the can down the road by making the hole appear smaller than it is.

      • mikekelley10

        Of course. It’s all lies.

  • Jeffn

    from the article- the town was paying $30,000 a year into the plan for four employees. Their example was the bookkeeper who retired in 2004 with a $48,000/year pension.
    Divide $30,000 by four employees- $7,500/year each contribution. Times 30 years equals $225,000 in contributions. Retired in 2004 with $48k pension- so far has received $576,000 in pension payments. Even at 5% interest, she’s already collected more than the city contributed plus interest. At 6% interest, in two years she’ll have collected more than the city contributed.
    Fact is that everyone from Calpers to the town assumed money grows on trees. It doesn’t.

  • derfelcadarn

    Government is the manipulation of the many for the benefit of the few, government is the culprit here.

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