Pension Bomb Fuse Just Got Shorter
Homeowners have enough to worry about in the current coronavirus crisis.
They face an April 10 deadline for the second installment of their annual property tax bill and there is no relief — yet — coming from either the governor’s office or the majority of county treasurer/tax collectors.
Many taxpayers have been furloughed or laid off and the chances are high that property values throughout America will take a hit — even in California.
How could things possibly get worse?
Here’s how. The coronavirus crisis and the damage it inflicts on the state’s economy has exposed the Potemkin village of the state’s actual financial condition.
For the last several years, we’ve been told that the “California Miracle” has left the state flush with a surplus of tens of billions of dollars. But that surplus will be quickly depleted because of the unexpected demands that the crisis brings.
Even more troubling is the impact on California’s debt balance, which is a mountain compared to the molehill of surplus revenue. And the bulk of that debt is in the form of unfunded pension obligations.
Fiscal watchdogs have been warning about this for more than 40 years only to be ignored by our elected leadership, whose cozy relationship with public-sector unions makes even modest pension reform nearly impossible.
For example, this column back in 2018 warned, “California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. Therein lies the problem. California has been horribly wrong in its application of assumed rates of return, leading to hundreds of billions in unfunded liabilities. This shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this short-sighted thinking.”
Similarly, other organizations such as the Reason Foundation and the California Policy Center have raised the alarm for decades about the unsustainability of our pensions systems.
David Crane, a research scholar at Stanford and president of Govern for California, makes the excellent point that, even without a stock market crash, California would still be in trouble: “Too many people incorrectly believe that pension costs increase only when stock markets decline, but pension costs would rise even if the stock market never declined. That’s because pension liabilities grow at the discount rate employed by pension funds for reporting obligations. Because California’s pension funds discount pension liabilities at the same high rate at which they hope pension assets will earn, the state’s pension liabilities grow very fast.”
Crane’s point is that even if the stock market rebounds, the problem won’t go away “because pension spending in California crowds out services at all times. E.g., the stock market quadrupled from 2009 to 2019 but state pension spending more than doubled over the same period, and that doesn’t count billions of supplemental payments authorized by elected officials.”
California would be on a much more solid financial footing if our elected leadership paid more attention to the advocates, academicians, think tanks and journalists sounding the alarm on the inevitable pension disaster. Only a handful of electeds, such as Sen. John Moorlach, R-Costa Mesa, are demanding action.
But perhaps politicians are already fully aware of the problem. It’s just that they willfully ignore it because they don’t wish to anger the labor interests that support their political careers.
In some action movies there is a ticking time bomb about to go off. When the clock runs out, there is usually a second of silence before the explosion. Will the current crisis spur legislators to start taking the pension crisis as seriously as the COVID-19 crisis? We doubt it. But either way, the bomb is ticking.