Several news articles this week puts a human face on the true price of escalating pension costs and what happens when important services are streamlined or even eliminated in order to pay for retirement systems that have run amok. What’s called ‘Crowd Out’ is all too common when governments are unable to meet soaring pension costs and have to divert tax dollars from community services to help make up the shortfall.
RSI board member Dan Liljenquist has spoken about his time as a Utah state senator, when the state’s pension crisis came to a head and the legislature had to dedicate the equivalent of 10 percent of the state’s general fund for decades to pay for one year’s worth of pension market losses. “We had the largest class sizes in the nation, partly because of pension costs,” he told Forbes. “When governments are dedicating hundreds of millions of additional dollars to pay for market losses, they can’t afford things like teachers.”
And now it’s happening in California. An article published this week in the San Francisco Chronicle details how school districts will have to redirect billions of dollars from classrooms into pension accounts to help pay for the California Public Employees’ Retirement System’s (CalPERS) more than $100 billion shortfall.
“School district officials say that unless the situation changes, they will have to make cuts elsewhere, possibly leading to larger class sizes, stagnant worker pay, fewer counselors and librarians, and less art and music in schools,” says the Chronicle. “Insolvency and state takeover are not out of the question for some districts.”
Another report this week from the Sacramento Bee takes a close look at public safety services that have fallen by the wayside. Forced to cut safety services during the recession to instead pay mandatory pension fees, many local California firehouses never reopened, many fire and police jobs were never reinstated. And now that CalPERS will require a bigger contribution, these programs will likely never be restored.
CalPERS 7.5 percent assumed rate of return has continued to fall short over the years (last year’s returns were just 0.6 percent), leaving state taxpayers to try to fill the void. But it’s not just California that continues to make high rate of return assumptions. Pension administrators throughout the country rely on high market returns to fund their plans. The higher the earnings assumption, the less money gets paid into the fund each year by employees and employers. If the earnings fall short, the pension debt goes up. Trusting in this approach is an act of faith, depending on smooth sailing and no hiccups in the market. It’s not realistic nor responsive to the market.
And while some plans have voted to lower their assumed rates of return to 7 percent, such as CalPERS, or even lower, it will take years to dig out of the mess left in the wake of poor decision making. And unless serious pension reform is implemented, taxpayers will continue to live with substandard public services for years to come.