How pension costs clobbered one California city "When Santa Cruz, a picturesque and funky coastal city, first started to feel the pinch of rising retirement costs for city workers, it took several steps to limit the fiscal pain. As recommended by the League of Cities and other authorities, Santa Cruz issued a bond to pay down its rising pension liabilities, set aside funds to cover increasing demands from the California Public Employees Retirement System (CalPERS), shifted some employees into lower-benefit pension plans and made sure that its workers paid significant portions of pension costs." Instead of requiring all of the employees take the same hit, the young take a very large hit, and the old take no hit at all. The problem is the old created the situation by failing to fund their pensions sufficiently, and now the young will pay to fund the oldsters' pensions and receive much lower pension payments themselves. The young take a double hit; the old get a plump retirement. How cool is that? More below. "Nevertheless, the impact on the small city’s budget continued to grow, leading City Manager Martin Bernal to tell the city council in his 2016 budget message that “our biggest challenge is the skyrocketing increases in health and retirement costs. These costs have gone from 28 percent of general fund salary in 2004 to 43 percent of salary in 2015, to an anticipated 58 percent of salary in 2020.”
And then there were none, none as in pension anyway. How long Santa Cruz until the younger employees will have no retirement at all? So, it's worse than stated above, the old will get a comfortable retirement, the young none at all. "Santa Cruz is not alone. Throughout California, city governments are facing budget shortfalls as CalPERS cranks up mandatory contributions in a somewhat desperate effort to make the gigantic trust fund healthy enough to cover pension promises to millions of state and local government workers. It has only about 70 percent of the money it says is needed to cover pension obligations – and that assumes that its investments will return profits that many experts believe are unrealistic. CalPERS lost about $100 billion during the Great Recession a decade ago and has not fully recovered, while payouts to retirees grow due to demographic factors. City officials have repeatedly appeared before the CalPERS board to seek relief, contending that some cities will be driven to insolvency. But for the most part, CalPERS officials have taken the attitude that making the fund actuarially healthy is their highest priority." This is what running out of other peoples money looks like. California is one of the first to the pain, but it will not be the least or the last. What makes this all so sad is that CalPERS does not seem to realize that once the municipalities go under, they will lose most of their employees which will make the pension even that much more precarious. I've discussed the ROI problem, CalPERS and other pensions want to be able to forecast ROI at about 7% because that will make the pension corpus larger, but the reality is the returns are much lower, perhaps 3%. It doesn't take many years of fake forecasts before the pension fund is in serious trouble. The game is similar to kiting checks. It creates only the appearance of solvency, not solvency. Adding taxes won't help. The system is insolvent, but not yet forced into bankruptcy. The cure is to severely cut employment, automate every possible city job while deeply cutting city services. This might work. Anything else is little more than rearranging the deck chairs on the Titanic. The ship is still sinking. Before this is done, California will be a burned out wasteland of bankrupt cities and town. Once the Millennials politically awaken, there will be a reckoning with the Boomers, an ugly reckoning.
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