By Steven Greenhut | Public-sector unions and their allies often turn back efforts at reforming their pension plans by simply denying that there’s any sort of problem. In California, the Legislature and governor claim that they have fixed the problem when they passed a modest pension-reform act applying to the state’s biggest retirement system (the California Public Employees’ Retirement System, or CalPERS). Yet even when everyone agrees that pension liabilities are at a crisis level, there are few ways of addressing it.

For instance, the governor and top legislators have pointed to massive, annual shortfalls at the California State Teachers’ Retirement System (CalSTRS). CalSTRS officials and the Legislative Analyst’s Office have called for annual infusions of as much as $4.5 billion to keep the system solvent. There’s no debate here about the size of the problem and what it will mean for teachers’ pensions. But there’s virtually nothing to be done.

Part of the problem is political. The powerful California Teachers’ Association has even fought a modest bill that would divert an extra couple billion dollars in surpluses this year only to the system. A common suspicion: Union supporters are more interested in having extra cash available to fund a brand-new universal preschool program pushed by the Senate president than in fixing the creaking teachers’ retirement system. That new program would create many union jobs.

CalPERS has been handling its underfunding problem in part by increasing the fees that local agencies must pay. That has been stressing city budgets in particular, as they must come up with more money to pay for their employees’ pensions.

CalSTRS is set up differently. It must go to the Legislature to get an OK to increase contribution rates. And the union-dominated Legislature isn’t about to approve such a thing. So, desperate to find ways to backfill its emptying coffers, CalSTRS’ leaders came up with a complex but clever plan to increase contributions.

Individual teachers would contribute an extra 2 percent to the CalSTRS system. In exchange, the Legislature would turn an annual salary adjustment (similar to a COLA, but without compounding) into a vested benefit, meaning that it could never be taken away. Teachers have been getting that benefit every year for many years and there’s no sign that the Legislature is going to stop giving it to them. But they could possibly stop if finances get too tight, so CalSTRS sees the guarantee as something of value. Here is my column on it for U-T San Diego.

Because of various California court decisions, agencies cannot take away vested pension benefits — even going forward — unless they give back something of equal value. So CalSTRS can’t simply ask employees to pay more each year, but the system desperately needs more cash.

The problem, though, is that this “California Rule” is at the heart of the state’s pension problems, and explains why some cities face bankruptcy. Reforming pensions for new hires only doesn’t solve the problem. In San Jose, for instance, pension costs have soared 350 percent in 10 years and have led to cutbacks in the police force. That city approved wide-ranging pension reform that would have given employees a choice of lower benefits or higher contributions going forward. The courts rebuked that part of the measure, even though San Jose officials argued that their charter-city status allowed them to do this.

So this definition of vesting leaves fewer options for officials. The CalSTRS plan brings in a little more cash in the short term, but it could create more of a problem in the long term by further expanding an area of benefits that are off limits from tinkering.

Localities are facing a declining number of options. The San Jose mayor’s plan for a statewide ballot measure to specifically allow changes to benefits for current employees was derailed by a union-friendly attorney general who gave the initiative a biased summary that would have made it nearly impossible to pass. And the courts have shown no willingness to chisel away at the vesting protection. And even after cities have gone bankrupt (Vallejo and Stockton, for instance) council members who are allied with or fearful of unions have chosen not to confront CalPERS and have cut programs and raised taxes while leaving pensions whole.

Even after bankruptcy, Vallejo is in trouble again and an analysis suggests that Stockton might have budget problems again in four years.

San Diego officials have been implementing a pension-reform plan that mainly tinkers with pensionable pay and isn’t dependent on new court interpretations — and Ventura County is attempting to follow that approach. Even that reform model is being challenged by a state agency that is behaving like an arm of the public-sector unions. (It has claimed that a ballot measure is in essence an unfair labor practice.)

Something has to give somewhere. But as of now, the only ones who will have to give more are taxpayers. It’s a sad story about how powerful interest groups can halt reasonable solutions for purely selfish reasons.

Cross-posted from Public Sector Inc. with permission.

By Mike “Mish” Shedlock | Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%.

Bridgewater notes that public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades. It would take an investment return of roughly 9% a year to meet those obligations.

With the 30-Year long bond yielding a mere 3.5% and with stock valuation through the roof, I expect negative returns for 7-10 years.

Stretched out over 30 years, 4% seems about right. 9% is out of the question.

CNBC has further analysis in Report: 85% of pensions could fail in 30 years:

Influential and well-regarded hedge fund Bridgewater Associates Wednesday warns public pensions are likely to achieve 4% returns on their assets, or worse. If Bridgewater is right, that means 85% of public pension funds will be going bankrupt in three decades.

Bridgewater came to these conclusions by stress testing the nation’s public pension plans, much the way banks need to be evaluated on what could happen given a wide range out outcomes.

Many pension observers make the claim pensions will achieve 7% to 8% returns. But even if that assumption is correct, which is unlikely, public pensions are looking at a 20% shortfall, Bridgewater says. A 4% return is much more likely, the firm says.

Bridgewater set up a sophisticated model to simulate many of the possible market environments to see how they would affect public pension’s resources. In 20% of those scenarios, public pensions run out of money in 20 years. And in 80% of the scenarios, public pensions run out of money within 50 years, Bridgewater says.

Massive Number of Municipal Bankruptcies on Horizon

I wonder what Bridgewater’s model would predict starting with losses for the next seven to ten years, because that is what I think is highly likely.

Given the only way to shed pension obligations is bankruptcy, one hell of a lot of municipal bankruptcies are on the horizon unless some other legal maneuver is found.

Mike “Mish”Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

By Jack Dean | One of the largest and best organized pension reform groups in California is Citizens for Sustainable Pension Plans in Marin County.

Wednesday evening CSPP presented a debate in San Rafael featuring candidates for the Marin County Board of Supervisor in Districts One and Five — Toni Shroyer, Judy Arnold, Susan Adams and Damon Connelly. Moderator of the event was Dick Spotswood, columnist for the Marin Independent Journal. The video runs nearly two hours:

The debate was covered by Nels Johnson of the Independent Journal.

By Steven Greenhut | California’s governor and legislators have been almost giddy about the state’s balanced budget and they simply ignore the clear evidence that the state remains awash in debt. Its budget is balanced in the same way a person’s budget is balanced if they meet the bare minimum payments on a host of credit-card debts. Sacramento Bee columnist Dan Walters published a good piece debunking all the Capitol feel-goodism:

“To Brown, et al, the budget is balanced because it provides enough money to pay the obligations that he and the Legislature choose to pay. But when what they choose not to pay is included, the budget is billions, even tens of billions, of dollars out of balance. They choose, for instance, not to include a $70-plus billion shortfall in the trust fund that pays teachers’ pensions. … They also choose not to include a $60-plus billion unfunded liability for the health care of retired state employees and there’s really no way for that debt to be shared. It will be paid, sooner or later, from the state budget – and it, too, is growing by the day.”

And he ticks off many more billions in debt that is piling up. Meanwhile, state Democratic leaders are coming up with new spending programs (i.e., free preschool), which explains why they don’t want to worry too much about paying for the old programs. The Democratic approach has been to just ignore critics and keep saying how great things are. This is a great illustration about why it was so wrong for voters to approve Prop. 30, which increased taxes. The more money that comes in, the more quickly the state officials will spend it. They only address problems when there is a revenue crunch. More money just lets them avoid making hard choices.

This post originally appeared on Public Sector Inc. and is cross-posted here with permission.

By Jack Dean | Longtime pension reform activist Marc Garmin, editor of the Vallejo Independent Bulletin, shot and edited this excellent video. Introducing Chuck Reed is former Vallejo City Council Member Stephanie Gomes, who provides some background on the role pensions played in the bankruptcy of her city.

To read the accompanying article, visit the website of the Vallejo Independent Bulletin.

By Jack Dean | Sacramento-based Pacific Legal Foundation has filed a complaint and petition for writ of mandate in California Building Industry — Bay Area v. City of San Ramon.

According to PLF’s weekly president’s report, in this case the City of San Ramon is imposing a new special property tax district, which will levy a tax on landowners of undeveloped lots without providing any additional services. The Mello-Roos Act specifically forbids such a “pay something – get nothing” special property tax. And because the proceeds will be used for general government services, the tax also violates California’s Proposition 218, which requires voter approval for “general” taxes.

Says PLFs president Rob Rivett, “While we have sympathy for the fact that San Ramon is feeling a bit tight these days because it’s having trouble coming up with the money to pay for its generous pension promises to its employees, forcing landowners to cough up illegal taxes is not the way to pay off this debt.”

By Jack Dean | Adam Shapiro of Fox Business interviews Cate Long — one of the most respected voices writing about the public pension crisis. She warns that some public-sector employees will be lucky to receive pension payments of 70 cents on the dollar.

Cate Long is a regular contributor to Reuters and writes their MuniLand blog.

By Steven Greenhut | California’s Democratic leaders and their public-sector union allies have been staving off serious pension reforms thanks to their domination of the Legislature, their control of every state constitutional office and series of favorable court decisions. You really couldn’t blame the reform movement for giving up and moving on to other things — or moving out to other states. Voters, for instance, overwhelmingly approved San Jose’s 2012 pension reforms but the courts gutted the measure thanks to the so-called California Rule that doesn’t allow officials to cut benefits for public employees even on a go-forward basis. That city’s bold Democratic mayor, Chuck Reed, sought to take a measure to the statewide ballot that would allow such reductions, but the state attorney general killed that effort with an unfairly written ballot summary — and a Sacramento judge just concurred with the AG.

Who has time for this? Why not just let the cities continue to cut back on their services so they can pay for the six-figure pensions they handed out so generously? San Jose recently announced cutbacks of 100 more police officers, with Reed blaming the pension debt. The bankruptcy judge in the Stockton case last week said he has been reading media reports about once-bankrupt Vallejo now possibly heading back toward bankruptcy given that it never touched its pensions and is facing fiscal problems again. The judge wants to look closely at Stockton’s workout plan to see if it will, well, work out. I reported on a fiscal document in October that suggests otherwise. Stockton almost certainly will face a fiscal crisis again in four years even after bankruptcy and a tax hike — at least that’s the view of former Republican Assemblyman and fiscal watchdog Dean Andal.

Yet last week, pension reformers met in Sacramento to plot strategy again. In my U-T San Diego column, I compared it to the Monty Python scene from the Death of Mary Queen of Scots. Mary’s assailants think she’s dead, but she pipes up: “No, I’m not.” And she’s downright perky, too. Likewise, there was no doom and gloom in Sacramento. Former San Diego councilman Carl DeMaio, leader of San Diego’s pension-reform effort that led to overwhelming support for a cap on pensionable pay in June 2012, is pushing a statewide ballot initiative for November 2016. He wants to build county organizations to support the measure — and is championing some local measures, too. Ventura County, for instance, is following San Diego’s model — caps on pay, 401 (k) plans for new hires, protection of death benefits for public safety.

The San Diego model is being implemented and has so far withstood union challenges because DeMaio chose not to do as Reed did and challenge existing precedent. It doesn’t go as far, but it is still alive and kicking — despite continuing efforts by a union-dominated state agency to invalidate the law. Here we see state officials rigging the game at every stage, yet DeMaio and others remain remarkably upbeat and even perky. They know pension reform is the right thing and they keep moving forward hoping that eventually more public officials will decide to put California taxpayers and residents above union demands.

Still, this is exhausting and fruitless work. In essence, the critics of an overly generous pension system are trying to save the system from itself by assuring that it remains properly funded. But even as the numbers look bleak — i.e., a state teacher retirement system that’s falling short in funding by around $4.5 billion a year, which is even acknowledged by Democratic leaders — there’s no rush by the Brown administration or the Legislature to address them. It’s great that the reform movement is still trying, though, even as the irresponsibility of the state’s political leadership becomes more maddening.

Steven Greenhut is the California columnist for U-T San Diego.

By Jack Dean | In this excellent Fox Business interview, Professor Walter Russell Mead explains to interviewer Adam Shapiro why liberals and conservatives both get it wrong when it comes to saving public pensions, and how ‘New Deal’ guarantees are obsolete. Lengthy but packed with good insights.

Walter Russell Mead is the James Clarke Chace Professor of Foreign Affairs and the Humanities at Bard College.

By Mike “Mish” Shedlock | On May 6, 2008, the Vallejo City Council voted 7-0 to file for Chapter 9 bankruptcy. At the time it was the largest city in California to do so.

In March of 2009 I noted Judge Rules Vallejo Can Void Union Contracts.

Vallejo foolishly refused to do so, and I predicted it would soon be back in bankruptcy over the same reason it went bankrupt in the first place: absurd union wages and even more absurd pension promises.

Sure enough, here we go again.

Vallejo Still Can’t Afford its Pricey Pensions

CNN Money reports Once Bankrupt, Vallejo Still Can’t Afford its Pricey Pensions:

The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills.

The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.

Amid threats of legal action from the state’s pension giant, CalPERS, Vallejo did little during its nearly three-year stint in bankruptcy to stem the growth in its pension bills.

As a result, Vallejo continues to dole out large sums of money for retirees. Except for new hires, Vallejo’s police and firefighters can retire at age 50 with as much as 90% of their salary — for life. Public safety workers who retired in the last five years have average annual pensions of more than $101,000.

And the pension costs are expected to continue to rise, with a projected increase of up to 42% over the next five years.

Moody’s recently warned that Vallejo’s pension obligations could force it to file for bankruptcy protection a second time. The credit rating agency said the city offers a cautionary tale for two other California cities teetering on the brink: San Bernardino and Stockton.

“If we don’t resolve those costs, then we’re going to see services continue to suffer,” said city manager Dan Keen, who has led the city since 2012. “We’re going to have to cut somewhere.”

A lot of cuts have already been made.

Vallejo’s roads are littered with potholes. Three of its nine fire stations remain closed. And its police force is down by almost 40% — though Keen says there are plans to hire more officers this year.

Crime has surged, with more than two dozen homicides last year, compared to only seven in 2006. Burglaries are also on the rise. Residents maintain neighborhood watch groups, but the crime is taking a toll.

“Some people in my neighborhood are voting with their feet and leaving Vallejo,” resident Russell Zellers wrote in a 2013 letter to City Hall. “If things continue along the present course, I may not be far behind them.”

I am not the only one who predicted another mess for Vallejo. Steve Greenhut did the same. For details, see Vallejo’s post-bankruptcy plight gets little notice in California’s state capitol.

Only One Way to Resolve Costs

There is one and only one way to resolve costs: pension haircuts. Since the state will not allow pension cuts any other way, countless California cities are doomed to bankruptcy.

Oakland, LA, San Diego and numerous other cities are completely zombified by pensions. Eventually all of them will be forced to declare bankruptcy unless a way is found to otherwise reduce pension costs.

The citizens of Vallejo and all the other walking dead cities should not have to suffer through round after round of tax hikes, so a privileged few can retire at age 50 with 90% of top salary pensions for life.

Sooner or later one of these cities is going to do the right thing: smash CalPERS arrogance straight down CalPERS’ throat via massive across the board pension cuts in bankruptcy.

A judge allowed Vallejo to do just that. Vallejo refused (most likely to protect the pension plans of corrupt city officials and friends of city officials).

Vallejo will get another chance soon enough to do what needs to be done.

Cross-posted from Mish’s Global Economic Trend Analysis with permission.