Pension Wake up Call. Marinwood, are you listening?

From: The San Diego Union Tribune

Loyalton's pension default is a wake up call

Sick … a punch in the stomach. That’s how public retirees in Loyalton, California, are taking news that their town defaulted on its pension payments, resulting in the possibility of their retirement benefits being cut by as much as 60 percent, the majority of their hard-earned livelihood. 

Pension debt is not a new story — in fact, most of the country’s public pensions are significantly underfunded (state and local pensions across the U.S. have an estimated $5 trillion less than needed to cover promised benefits). But this time the largest pension plan in the nation, the California Public Employees’ Retirement System (CalPERS), has thrown public employees overboard. And that has government workers and retirees across the country asking, could this happen to me? The answer is yes! If your city runs out of money and your pension plan is not fully funded, you will lose. The only question is how much.

Loyalton withdrew from CalPERS in 2013, upon the retirement of its last guaranteed pensioner. For council members, it just made sense — after all, the town had been fully paying its required annual contributions all along. But what it didn’t count on was the $1.6 million termination fee demanded by CalPERS to cover unfunded liabilities which CalPERS has allowed to grow for the last 17 years. The fee amounts to a whopping $320,000 per each of Loyalton’s five retirees, an amount that is impossible for the town to pay. And now CalPERS has put the retirees on notice that their monthly checks will be cut.

This is what happens when cities run out of money and their pension plans are underfunded. Municipalities in fiscal distress with huge pension debt are spread throughout the country, and, sadly, California is leading the charge. Stockton, San Bernardino and Vallejo were just the beginning — all forced into bankruptcy with massive pension obligations, causing retirees to lose their health care benefits. In Detroit, Michigan; Central Falls, Rhode Island, and Pritchard, Alabama, retirees took hits to their health care and pension benefits.

State and local government retirement programs are trillions of dollars in debt, resulting in tremendous budget challenges for states and municipalities and it’s only getting worse. There is no doubt that spiraling pension debt is at crisis-level proportions and is the most significant financial issue facing state and local governments.

So how did we get here and what steps can policymakers take to clean up the mess? 

As retirement costs go up, and in most states they’ve doubled or tripled in the last decade, government leaders are simply not keeping up with the rising costs. Instead, they are creating enormous pension debt, which threatens not just taxpayers but also retirees. 

In California we’ve seen many years of systemic failure to properly fund the state’s public pension systems. CalPERS’ pension debt now totals around $170 billion. As a result, between 2003 and 2013, annual pension costs for California governments jumped from $6.4 billion to $17.5 billion, and are still rising. Because of the debt, Californians face a future of higher taxes and lower services, and retirees face insecurity and possible loss of their pension benefits.

The story is similar in many other states as well. Some local governments already face service delivery insolvency and bankruptcy. More will join them in the next recession, and public employees, retirees and residents will suffer unless there is significant and meaningful pension reform. 

Government leaders can start by fully funding their pensions. State and local governments have an obligation to ensure that their retirement plans are sustainable, fiscally sound and responsibly managed so that all retirees and employees get paid what they have earned. All workers deserve safe and secure futures and shouldn’t be held responsible for poor decision-making by policy leaders. 

Failure to fund pension obligations as they are incurred makes retirement security impossible. The widespread use of overly optimistic assumptions, like high rates of return on investments means that plans are systematically underfunding their obligations every year.

Let Loyalton be a wake-up call. Neither public employees nor taxpayers created the current pension crisis, and neither should be left holding the bag when the politicians who created the problem don’t make good on their promises.

Reed, former mayor of San Jose, is a board member of the Retirement Security Initiative, a national, bipartisan advocacy organization focused on protecting and ensuring the fairness and solvency of public sector retirement plans.