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Pension Wars
Unions Ask Court to Rule Against Math

Pension hawks celebrated in August when a California appeals court upheld a state law limiting the ability of public employees to spike their pensions late in their careers. But with the case possibly headed to the state’s Supreme Court, the battle isn’t over yet. The Marin Independent Journal reports:

Four Marin labor groups have appealed a state appeals court decision that some say could radically alter the ability to reduce the retirement benefits of public employees who are still on the job.

The plaintiffs — the Marin Association of Public Employees, known as MAPE; the Marin County Management Employees Association; Service Employees International Union 1021; and the Marin County Fire Department Firefighters’ Association — have requested that the state Supreme Court review a decision issued in August by the 1st District Court of Appeal in San Francisco. […]

The Marin County Employees’ Retirement Association has an unfunded pension liability of $402.8 million; the county of Marin’s share amounts to $243.6 million. The appellate court noted in its decision that in May 2011 the Congressional Budget Office estimated California’s unfunded liabilities at between $2 trillion and $3 trillion.

The so-called “California rule” has historically prohibited the state from reducing pension benefits over time. So when union-dominated public pension funds would purposefully conceal the costs of their liabilities and eventually run up a huge shortfall, the state would be unable to do anything except increase its own contributions even further. The California appeals court ruling from this summer modified this precedent by holding that, “while 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 the pension.” It’s no surprise that the unions are looking to get the ruling tossed.

Hopefully the California Supreme Court won’t give more cover for more can-kicking and phony accounting. Municipalities in the Golden State and across the country are facing deep fiscal holes that they will not emerge from without either adjustments to pension guarantees or draconian cuts to vital public services like education or public safety. As more and more cities start to feel the tremors of the coming avalanche of defaults and credit downgrades, judges need to give local governments more fiscal flexibility than they have had in the past. Without that flexibility, more municipalities are headed for bankruptcy. And once they file for Chapter 9, all bets are off, and pensioners could face an even worse haircut than anything being discussed today.

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  • Wayne Lusvardi

    I commend whoever wrote the above piece which brings to our attention the most politically incorrect term in California: MATH.

    In an article posted at his webpage – The Math That We Should All Be Worried About – Amit Sinha points out what happens in a pension fund with just one bad year of sub par returns (defined as under 7.5% per year). For those not following investment markets, the risk free interest rate has been hovering around 3% and as most people who have money in a bank know it is only earning a measly 0.25% per year. The California Public Employee Retirement System (Cal-PERS) had a near zero return this past year when inflation is taken into account.

    Sinha says inflation won’t help either:

    “Arguments in favor of using higher discount rates tend to revolve around the “artificially low” level of interest rates fueled by Central Bank actions, and a belief that discount rates would return to a more “normal” level in the future. However, a return to “normal” is likely to be accompanied by an increase in inflation. For public plans, higher inflation could actually be a problem, as benefits tend to be linked to inflation, and therefore liabilities would likely get larger, not smaller, with inflation. Therefore, by not putting in the money today, we are effectively making a leveraged bet on the stock market, and hoping it pays off, and praying that inflation stays low”.

    In 2010, Stanford University estimated that if state pension funds earned an unrealistic 8% on their assets, then states would run out of money by 2028; if 6% by 2024. That is only eight years from now. And this cataclysmic event could happen before 2024 given that the Federal Reserve is in a pickle and can’t raise bank interest rates without causing deep pain in global financial markets and the global economy.

    California is eventually going into the drink but they are so deluded that the state legislature has just passed a private pension fund for non-government employees to join the upside down public pension system. There is likely to be a political sea change when this cataclysmic event occurs and Cal-PERS has to reduce pension benefits by, say, 40%, and cities have to start going bankrupt.

    • Jim__L

      Yes, the longer we put it off, the more chance we have to face the worst of all possible worlds.

  • vepxistqaosani

    The problem isn’t math — it’s selfish rich people. If the state simply confiscates all their ill-gotten wealth, the pension system will be able to run for days and days.

    • JR

      Hey, that’s my line!!!

    • CaliforniaStark

      The problem with your proposal is that pension beneficiaries are increasingly populating the “selfish rich people” category in California. Six-figure public pensions are common.

      • LarryD

        Maybe California should institute a “severance tax” on pensions. I.e., a tax on pension payouts to pensioners who move out of California, to less expensive states. Similar rationale to severance taxes on resources extracted from the ground.

        I’ll note the tie to inflation in the pension contracts was put there because we’ve been through the inflation wringer before, anyone else remember “stagflation”?

        • M Snow

          They tried that. The Supreme Court threw it out, insisting that states can only tax their own residents. We moved to Nevada.

  • JR

    I have an idea. It may sound crazy at first but give it a chance. Have they tried confiscatory levels of taxation above a certain level determined at random? There’s nothing that a little progressive taxation won’t fix, am I right or am I right, FG?

    • AZ Cracker

      Perhaps 100% above 100k? Heh.

  • seattleoutcast

    It’s not bad math if your goal is to bilk future pensioners while you grab the goodies before the whole system implodes. I guarantee this is their rationale.

  • champ

    Well, you can thank current governor Jerry Brown for this, he was the governor who gave public employees the right to form unions and to strike, and he contributed greatly to the unprecedented increases in public employee pension promises.

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