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.