On December 23, Investor’s Business Daily posted an editorial about the problem with public employee pension funds. These future pensions are generally unfunded liabilities that municipalities take on when negotiating with public employee unions. What generally happens is that employees are promised great pension benefits instead of instant raises. That way the municipality does not have to raise its immediate budget–it looks as if it is being fiscally sane, and it quietly kicks the can down the road. In most cases (if not all) no provision is made to pay for these future benefits. Well, there always is a place where the can is no longer kicked down the road because the road ended. California is nearing that place.
The article reports:
Last week, the 85-year-old California Public Employees’ Retirement System, or CalPERS, slashed its official investment forecast going forward, meaning that state and local governments, police and sheriffs departments, and even school districts will have to spend billions of dollars more to CalPERS to support their future retirees. And, no doubt, it will mean higher taxes for all.
Sadly, this move won’t be enough. For years, the state has projected steady investment returns of 7.5% for CalPERS, the largest pension fund in the nation. But returns have been below that. So now CalPERS is trimming its return to 7% per year. But, given the pension fund’s mismanagement and poor performance, even that may be too high. Today the fund is a little over 60% fully funded, meaning it will have to raise billions of dollars more to be solvent. That means higher contributions for government workers, and higher taxes for average citizens.
It’s no accident. “CalPERS has … steered billions of dollars into politically connected firms,” wrote Steve Malanga in City Journal, back in 2013. “And it has ventured into ‘socially responsible’ investment strategies, making bad bets that have lost hundreds of millions of dollars. Such dubious practices have piled up a crushing amount of pension debt, which California residents — and their children — will somehow have to repay.”
That’s happening now. California’s famous Highway Patrol, for instance, has grossly underfunded its pensions. So it got the state to agree to a $10 hike in car registration fees to help make up the shortfall. No doubt, it will be asking for more soon.
It’s not just California. Across the country, pension funds have been underfunded, mismanaged and in some cases looted by managers. Today, according to the Fed, pension funds across the country are $2 trillion in the red — after being overfunded as recently as the year 2000. That means tax hikes are coming, like it or not.
This is a nationwide problem. This is also not a new problem. In 2010 I posted an article about the shortfall in union pension money. The close connection between many local politicians and local union leaders is a major contributor to this problem.
The Investor’s Business Daily article concludes:
In a scathing, just-released report, the American Legislative Exchange details how “rather than investing to earn the best return for workers, (politicians and fund officials) use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t and bully corporations into silence and behaving as they see fit.”
It’s quite an indictment. It’s time for a national commission to look into the misconduct and mismanagement — which pose a clear danger to the financial system — and answer the scariest question of all: Have public employee pension funds become too big to fail?
We have just elected a businessman to the Presidency. Hopefully he will have the skill and the knowledge to deal with this upcoming disaster. What is happening in California will eventually impact the rest of the country.