Newmark's Door: California Pension Crisis An Increasing Drag On Cities, Counties California Pension Crisis An Increasing Drag On Cities, Counties "Cities and counties across the U.S. are going broke trying to keep up with public pension debt. The pension crisis was the topic of a Stanford University media workshop that KPIX 5 attended this week." More below. “It’s the albatross around the necks of cities and counties,” Stanford Professor of Public Policy Joe Nation said about public employee pensions. “Unless we do something the system may not survive.”
The biggest system in the country is in California, the public employee retirement system known as CalPERS. The problem is the pension fund doesn’t have nearly enough money to cover the cost of current and future employee pensions. It’s short according to some estimates by a trillion dollars. “That’s equivalent to eight years of the entire state budget,” said Stanford Professor of Economics Jeremy Bulow. Critics say CalPERS has been hiding the enormity of the problem the same way a gambler hides their losses – by assuming that in the future, there will be huge and unlikely returns on their investment. Officially, CalPERS assumes a 7.2 percent annual rate of return on their investments -but most economists believe 3 to 4 percent is more realistic." If you've been hanging around the Lair for any length of time, you know this is one of my favorite issues because it will affect all of us, not just California, or Illinois, or Rhode Island, but pretty much every state, and in the end the federal government. The change it engenders will be cathartic but traumatic as well. "Bottom line: cities, counties, school districts and ultimately taxpayers are footing a much bigger and likely more realistic bill. CalPERS estimates about a third of local and state budgets go to pay for public pensions. Experts at this recent pension workshop estimate it’s closer to 60 percent and growing. “Retirement spending has doubled in the last five years, and you ain’t seen nothing yet,” said Stanford public policy lecturer David Crane. That could bankrupt some local governments. But San Jose’s former mayor Chuck Reed, who pushed hard for pension reform, says it’s a bitter pill that we all have to swallow. “You’ve got to put more money in,” said Reed. “All of these solutions … you’ve got to put more money in.'" I hear this often from people who believe that we need to fund these pensions. That is wishful thinking in the extreme. The money will have to come from somewhere, and there is nowhere right now with a pot of money this large. The federal government is in debt to the tune of $20 trillion thanks to Obama. California is a bankrupt state with the highest basket of taxes in the nation. There is no magic place to go to scrape trillions (this problem is a $7+ trillion problem) out of couches or pockets. We are not going to tax the wealthy to get this money; they will move, leave or stop earning substantial incomes. Every time a state is faced with a problem like this, it institutes a new special tax designed to bring in X dollars, but it never does because people respond to incentives and stop earning money which will be subject to these special taxes or like in Connecticut's wealth and income taxes. Connecticut Feels Effect of Drop in Super-Rich Tax Payments 25 Years, $13 Billion Lost: Connecticut Income Tax Continues To Fail Incentives matter. If there is no money to fund these pensions what are the alternatives? The states will default on them regardless of what the Constitution says about the matter. State Constitutions can be amended and, if necessary, will be amended. But it is not possible to squeeze blood out of a turnip. People, when forced, will vote with their feet, leaving only the poor who pay no taxes. This result in the Detroitization of entire states which are too intransigent to change. The sooner these problems are addressed, the better off for everyone involved, the later, the more damaging. I expect that the can will be kicked right to the gory end, and as many people will be damaged as possible. Our modern political class is the worst imaginable, yet each year appears to be replaced by politicians even worse.
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