12 October 2016

California Dreaming -- About Pensions

Several years ago I wrote a lengthy article about the Chapter 9 municipal bankruptcy of Stockton, California. While not exactly a blockbuster, among other things Municipal Bankruptcy: When Doing Less Is Doing Best (download here) surveyed the perilous near-insolvency of the largest public employee pension plans in California. CalPERS, the plans' administrator, fought every attempt to modify the pensions of Stockton's retirees and current employees. While the bankruptcy court ultimately held that federal bankruptcy law trumped California pension law, Stockton chose to surrender rather than fight CalPERS all way to SCOTUS. (Check my posts here and here for further explanations.)

Much has happened since then, albeit little that has garnered much press. Among the tidbits of interest is the situation in which the tiny city of Loyalton finds itself in a world of hurt (details here). The population of Loyalton--3,240--is facing a bill from CalPERS for  whopping $1.66 million for dropping out of the state administered plan.

In one sense, the bill is appropriate; after all, CalPERS will be on the hook for the benefits due Loyalton's current retirees and employees who will subsequently retire. Of course, had Loyalton stayed in the CalPERS-administered system, it wouldn't have had to pay $1.66 million in one fell swoop (or perhaps even at all). CalPERS has and continues to systematically undercharge participating municipalities for their accruing pension obligations. That explains why experts believe CalPERS-administered plans are only about 70% funded. (In layman's terms, that's called kicking the can down the road.)

When a city like Loyalton drops out of its system, the kid gloves come off and CalPERS demands payment in up-front cash the full amount it believes will necessary to pay the pensions of all of a city's retirees and employees. Moreover, something that's not mentioned until the end of the news article linked above, CalPERS gets a statutory lien on Loyalton's city-owned property as collateral for the full amount due (plus interest).

In short, Loyalton is screwed. Much of the responsibility for this situation rests on previous elected officials in Loyalton who overspent, over-committed, and let embezzlement occur. Yet none of that moral responsibility helps the current residents who, along with paying taxes to keep the city running, are left to foot this bill

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