(Feb 2011) - Cities all over California are facing serious financial shortfalls, many brought on by unrealistic investments in programs designed to care for its employees into perpetuity. And judging by what we saw Tuesday evening it appears that Sierra Madre's city government is planning to join the pack.
The City Council Tuesday evening was considering investing funds with CalPERS. As presented by Karin Schnaider, the returns from CalPERS investments are coming in at approximately 7.9% a year. While it is an admiral goal to try and obtain the highest returns possible, was that figure actually based on financial reality?
Here are the actual numbers.
Per the CalPERS annual report for the fiscal year ended September 30, 2010, the fund has returned the following:
Quarter ... 7.9%
1 year ...... 10.4%
3 year ..... -4.8%
5 year ...... 2.5%
10 year .... 3.4%
As you can see, CalPERS by their own report has not reached their stated goal. Assuming they were able to reach their goal of 7.9%, interest rates would have to increase dramatically. For that to happen you would have to have massive inflation. Were that to occur, public employees would be demanding large increases in pay, which would then necessitate the projected return to be even greater than 7.9%. But the projected returns are only one part of the problem.
Pursuant to comments made by David Crane, who was in the Schwarzenegger administration, GASB, which stands for Governmental Accounting Standards Board, allows government agencies to make projections using Alice in Wonderland accounting that allows governmental agencies to hide and understate liabilities. The return projections are too high and the assumed rate of pay increases is too low, which leads governments to overpromise and underperform. This Alice in Wonderland accounting has led to state and local governments understating pension liabilities by $2.5 trillion dollars.
This failure by CalPERS to meet its goal and understate liabilities has had a draconian effect on state, county and city governments as they attempt to meet pension obligations promised to its workers. The amounts and numbers of employees continue to grow. For example, the number of retired public employees is projected to grow to nearly 2 million over the next twenty years, which is as many public sector employees as there is now. Current payments to retired employees exceed $5 billion dollars a year, more than California's funding for the entire University of California system.
To highlight the egregious nature of the system, the number of state workers who draw a pension of more than $100,000 per year increased from 6,133 to 9,111 from 2009 to 2010, a staggering 49% increase in one year. The top ten recipients all receive in excess of $200,000 per year, with the top recipient receiving $509,666 (Bruce Malkenhorst of Vernon). Assuming the average is $200,000, this represents total pension payments of $1.8 billion for these 9,000 people. An incredible amount of money for so small a group of retirees. By 2015 20,000 public retirees is projected to receive more than $3.0 billion per year. (Source: California Center for Public Salaries 2010)
The problem of pensions is not limited to government. According to an L.A. Times article dated January 28, 2011 ("Utilities have no incentive to scrap pension plans"), Southern California Edison recently requested a 7% rate hike just to cover the shortfall in its retirement plans. Telling in the rate hike request was that there was no sunset provision included for the rate hike if (or when) that shortfall is covered. As discussed in this article, similar situations exist and must be dealt with by all the major utilities.
(As an aside, our city government and the utility companies do have something important in common. When they need more money, they get it directly from us.)
To his credit Joe Mosca did recognize the City's dangerous overexposure once the absurdity of that 7.9% figure was pointed out to him by residents during public comment. Five years from now when the consequences would have started to hit, the effects could have been disastrous, with vital service layoffs in police, paramedic and fire a distinct possibility.
However, that 4.5% or so figure he did push for after having things explained to him could also be unrealistic as well. Financial planning is just not as easy as saying "that number is bad, therefore this number must be good." This was not about hurrying along the meeting so that all of the agenda topics could be covered. That number needs to be re-examined.
But here is something to consider as well. Had those residents not stood up and patiently explained financial reality to both the City Council and City Staff, would Joe have gotten it? There was no prior indication that he was anything but happy to commit us to that Alice in Wonderland 7.9% number. And certainly City Staff didn't have a problem with it. After all, they were writing their own ticket.
Has the level of protection we are receiving as tax payers from our city government come down to public comment? Is all that is keeping this city from making disastrous financial decisions the concern of a few financial professionals who come down to City Hall to express their horror?
If that is the case, then perhaps that 3 minute rule should be reexamined. Apparently the residents have some vital contributions to make to the City Council's deliberative processes. And as such Public Comment is the only way this city is going to stave off the kind of terrible financial planning that has put the State of California and so many of its cities into the dire financial condition they are today.
CalPERS poised to raise rates, but not on Brown’s timetable (Sacramento Bee - link)