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Thursday, February 28, 2013

More debt than income -- and worse 

Previously we discussed the debts Costa Mesa faces from unfunded pensions. Money, mostly supplied by Costa Mesa with a much lesser amount from employee contributions is given to CalPers to invest.

The employees’ pensions are drawn from the invested funds. Pension amounts are guaranteed as a percentage of total pay during the final year of employment. This type of retirement system, pretty well limited to government pensions, is called a defined benefit plan.

For non-government employees 

Most non-government retirements are based on a defined contribution plan. These specify an amount that will be deposited for each employee. No specific payout is guaranteed.

For example, the employee may agree to deposit 10% of his pay while the employer agrees to deposit “matching” funds. Typically employers match about half of an employee’s contribution. The amount paid to the employee upon retirement depends upon how much has accumulated in his account, including gains and losses on the investments.

Expert studied our obligations

Dr. Joe Nation, an economist from Stanford, was hired to evaluate Costa Mesa’s unfunded liabilities. After Nation's presentation Tuesday night Mayor Righeimer stated “there is no way we can pay these (unfunded obligations) off in the foreseeable future.”

Compared to private sector retirement 

Nation said that an average Costa Mesa employee who earns $100k per year was getting retirement benefits similar to those earned by a private sector employee earning the same amount who put $70k per year into his own 401k. That is, one who lays aside 70% of his salary every month to save for his retirement! And CMPD and CMFD pension payouts are more remunerative than this.

Possible solutions

He mentioned that one way out for the city was bankruptcy.
Most of our cities are in this fix. If many cities declared bankruptcy California would face universal bankruptcy. Then all government pensions and medical benefits would stop. The payoff, at perhaps thirty cents on the dollar would be devastating to all government retirees.

Bankruptcy would force Costa Mesa into providing only minimal police and fire services and would eliminate infrastructure maintenance. Costa Mesa would soon resemble a third world village. It would be dangerous, dirty, and ugly.

Three other ways out

Nation suggested three other ways out of the mess, and a fourth arose during discussion. First, benefit reductions for current employees and retirees, which will be politically difficult. Benefit reductions require major legislative changes from the union-dominated legislature. These changes are unlikely until the state is insolvent or nearly insolvent.

Second, greater cost-sharing would help, but cost-sharing at a level that would be meaningful would require legislative action, as well.

Third, new revenues, aka increased taxes, could generate cash to pay for the pensions, but could also drive the big players to move to another state (or county, although extreme need for cash to cover unfunded pensions is rampant throughout California). And, as mentioned by a local blogger, the main sales tax generating area, South Coast Plaza, might decide to incorporate as a separate city to avoid a significant tax increase.

It will hurt

Regardless, private sector employment and business would be adversely affected – the predicted loss depends on the rate increase assumptions, and on educated guesses. The loss of revenue-generating entities would exacerbate the City’s indebtedness.

This might help 

During the post-presentation discussions Dr. Nation estimated that decreasing the Cost of Living Adjustment (COLA) incorporated in Costa Mesa pensions from 2% to 1% (arbitrary numbers) would decrease the unfunded liabilities by 20%.

Cobble together a solution

The eventual solution for prudent and responsible management will probably include some aspect of all four methods. It will be painful for all: government employees, private sector employees, business owners, and retirees.

Can Sacramento help

The chance that CalPers will be able to make the necessary changes for us is remote. Originally, their investment fund was managed conservatively to preserve wealth for the expected lifespan after retirement.

Over time the system has developed into investments in social engineering, such as green energy, regardless of the risk to funds. Furthermore, the funded benefits have increased and expected lifespans have increased. Also, funds have been withdrawn from good investments to meet current bills, making the program work like a Government-sponsored Ponzi scheme. But now there are fewer new hires to provide new revenue.

Who leads CalPers

CalPers controls more money than most third-world nations and more than many developed nations. Their current leader is a window glazier whose CalPers position makes him one of the most powerful men in the world. He’s certainly one of the most influential in the financial world.

The board that supervises CalPers investments is composed of people appointed by political officials and elected by employee unions. The folks who've been elected aren't likely to risk losing their position by favoring anything that reduces retiree benefits; in fact the opposite is true. And those appointed by officials elected with union money aren't likely to risk losing their appointments by pushing for fiscal responsibility.  CalPers is simply a political entity making financial decisions.

Whose money does CalPers invest

Most of the funds deposited in CalPers are from the employers. That means that the expenses accrue to the Costa Mesa taxpayers while the benefits accrue to the retirees. So it’s our money and our problem in Costa Mesa. It’s up to us to solve it.

Others have solved it

Nation gave an example of one of the Northeastern states that has resolved its pension problem by changing its system to a defined contribution system. From other sources we've learned that Utah has developed a hybrid defined contribution/benefit plan. And other states, such as Texas, have fully-funded pension plans. So, the problem has been solved elsewhere, and it can be solved in Costa Mesa.

We'd better solve it

We must find a way to reduce the liabilities. Financial stewardship requires it. Financial survival demands it.

Will they walk or talk 

Let’s see what the Council – and the employee associations -- have to say about resolving this issue.  Will they “walk the walk” or just talk the talk?”

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