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Editorial: Pension tsunami ready to hit local governments

By   /   Friday, February 24th, 2012  /   Comments Off on Editorial: Pension tsunami ready to hit local governments

California’s ailing benefits system rests on three tottering pillars — the State Fund for worker’s compensation, unemployment insurance and public pensions.

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California’s  ailing benefits system rests on three tottering pillars — the State Fund for worker’s compensation, unemployment insurance and public pensions.

Each faces billion-dollar problems — California’s unemployment system cannot afford the interest it owes on billions borrowed from the federal government, the State Fund cannot cover the cost of claims and, in the latest dismal reckoning, the Stanford Institute of Economic Policy Research estimated on Feb. 21 that California’s local pension systems are more than $130 billion in debt.

The Stanford Institute report, called “More Pension Math” and issued in conjunction with Common Sense California, underscored the fact that the staggering shortfall in public pensions on a city and countywide level is a problem that needs to be addressed now.  As we’ll discuss below, the report places Ventura near the top of its rankings and Santa Barbara nearer the middle of the pack—but these are hardly things to brag about with voters. (San Luis Obispo County wasn’t included in the report).

What the report does demonstrate is that pensions are eating up local government costs faster than overall spending, and there’s no guarantee that other revenue will rise fast enough to cover the difference. Moreover, local governments, like virtually every institution in America, will struggle for years to recapture the investment losses they suffered in the 2008-2009 financial meltdown. The Stanford Institute’s report is comprehensive, taking the measure of large municipal and countywide systems that comprise 99 percent of local pension obligations.

In its analysis of Ventura and Santa Barbara counties, the Stanford-Institute report is insightful on many levels. First, it demonstrates clearly that Ventura County, with an unfunded pension load of $2.97 billion equal to slightly less than half of current assets, is one of the better funded plans in the state.

That’s partly because Ventura County has bitten the bullet and put money into its pension coffers. Indeed, pensions spiked to 16.9 percent of expenditures a year ago compared to less than 1 percent for many years. But by making a big contribution and cutting back on future benefit obligations, it may be able to make smaller but steadier contributions going forward and cover its pension nut—as long as the stock and bond markets cooperate. In order for Ventura County to retain its better-than-average ranking, Wall Street has to acquiesce. The Stanford-Common Sense report states that if you assume an investment return of 7.75 percent annually going forward, then the Ventura County plan, with about $3 billion in assets, just nudges to the point where it meets 80 percent of anticipated future obligations.

Depending on your perspective,  Ventura County’s plan is  either well funded or just the best house in a bad neighborhood. If you believe the markets will return 7.8 percent on average going forward, then  it’s well funded. If the return is more like 6.2 percent then pension costs could soar to well over 25 percent of all expenditures, the report concludes.

Santa Barbara County’s unfunded liability of $2.2 billion means that even under an assumed 7.8 percent investment return,  the county’s obligations are about 72 percent funded given total assets of about $2 billion. Eighty percent is the minimum to be considered well funded. The county has been overpromising on benefits and balancing its budget by underfunding its pension obligations. It was ill-prepared for the Great Recession and, while recent deep cuts in the ranks of county workers will help, it still has not found a path to sustainability when it comes to the future retirement obligations to its employees.

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