Reality is finally intruding into the delusional world of public pensions. New actuarial rules will force public pension funds to assume a 5.5% rate of return, the same as private pensions, rather than the absurd 7.5% they’d been allowed to use. This means their projected rates of return will be much less which in turn means unfunded liabilities go much higher. The insolvency they’ve desperately been trying to hide will become much more obvious. Of course, 5.5% is still way too high in today’s low interest rate environment, but it’s a start towards financial responsibility since it stops public pensions ability to make numbers up. The new reality will be ugly for them.
California’s unfunded liabilities will nearly double to $328.6 billion. California already has the second lowest credit rating for a state, only Illinois is worse.
Meredith Whitney says California is papering over budget holes with gimmicks, like raising taxes retroactively, pushing state expenses onto local towns and cities that can’t afford them, and underfunding their pension funds. “It’s so much worse than the rosy picture that the headlines suggest.”
You read that headline right. In his weekly radio address on Saturday, Gov. Schwarzenegger said Republican legislators tried to block badly needed public pension reform. The reason for this seemed to be because they were getting large contributions from the prison guards union. He said he expected Democrats to oppose pension reform because “most Democrats are in bed with labor”, but what he did not expect was that the bill would initially fail because a few Republicans, from “the group who rails against government spending,” specifically opposed the bill.
At least 75 cities, counties, and public entities in California are considering cutting public pension benefits as well as raising the amount employees must contribute. Four localities, including San Francisco, will probably have pension-related ballot initiatives in November.
When San Francisco has such an initiative and it is supported by Matt Gonzalez, former chair of the Board of Supervisors and prominent Green and progressive, well, the times they are a ‘changing indeed’. American Leftist, a hard left blog, says Gonzalez has gone over to the dark side, and made a deal with business interests against the needs of workers. Could be, I suppose.
But, maybe Gonzalez realizes the painful truth. Municipalities are going broke due to the recession while simultaneously having to spend ever more on public pensions. It’s not sustainable. The money just isn’t there. Either municipalities, including San Francisco, do something about escalating pension costs or bankruptcy a few years down the line becomes a real possibility.