Fuse Getting Short on Pension Debt Time Bomb

Assemblyman Keith Richman is towering over a table cluttered with statistical charts and pointing at one. “Los Angeles County is having trouble paying for healthcare services, right?” he says. “So look at this.”

The Northridge Republican is pointing to a figure that shows the county is saddled with a $3.9-billion unfunded pension liability. That’s the money it is short of being able to pay for all the pensions it has promised present and future retirees.

The county already is paying $711 million this year into its pension system, out of a roughly $18-billion budget. That’s on top of $396 million it is spending to slowly pay off a $2-billion “pension obligation bond” it sold 10 years ago to make ends meet.

“It’s money that’s not going into healthcare, not going into education, not going into public safety, not going into infrastructure,” Richman asserts.

That said, L.A. County actually is one of the more responsible public pension entities in California.

It didn’t follow the other lemmings -- like Orange County -- and vote a hefty pension increase for “safety” officers. L.A. didn’t go the “3% at 50” route, allowing sheriff’s deputies and firefighters to retire at age 50 with 3% of their salary, times years of service -- i.e., work for 30 years and retire at 90% pay for life.

L.A. County has a “2% at 50” plan for safety employees; “2% at 60” for other workers, with annual inflation adjustments. That’s much more generous than most private plans, but the county workers don’t draw Social Security.

In Orange County, there’s a $1.3-billion unfunded pension liability. Nevertheless, county supervisors recently sweetened the system. To pay for $300 million in better benefits for future retirees -- including the supervisors who voted for it -- employee contributions were raised. But if that falls short, taxpayers will be on the hook.

The sups fattened future pensions and allowed employees to retire earlier -- age 55 at 2.7% times years on the job. The workers agreed to forgo pay raises for two years.

“Pay raises you can take back. You can’t take back pension plan enhancements,” notes Orange County Treasurer-Tax Collector John Moorlach, who foresees a deepening pension hole.

“What happens if you retire earlier? You live longer. So we have to provide [bigger pensions] plus cost of living increases for the remainder of their longer lives. Also, if you have a little higher retirement income, you’re not so fiscally stressed. So you live longer. Wealthy people live longer than poor people. Surprise, surprise.”

The city of San Diego seems the poster child for poor pension planning, with a $2-billion deficit. It actually jacked up benefits while lowering city contributions. As Times reporter Tony Perry wrote in September: “The city is now so deeply in the red, critics assert, that without drastic action, pension payments will virtually suck the treasury dry.”

And, of course, there’s the role model for fiscal foolishness in Sacramento.

Gov. Gray Davis and the Democratic-controlled Legislature opened up the vault to state employees in 1999.

Let’s be honest, that’s because public employee unions are the biggest bankrollers of Democratic politicians. They’re also major patrons of local pols. And among the most blatant are the cop unions that endorse candidates ostensibly because they stand up against crime, but really because they’re soft touches for higher pay and pensions.

But the rationale at the Capitol -- as in city halls everywhere -- was that the stock market was roaring, pension funds were getting fat off investments and the system was so flush the retiree benefit enrichments really wouldn’t cost taxpayers a cent.

Right. The market tanked and taxpayers are eating it.

Retirement-related payments are costing the state general fund $1.9 billion this year, according to nonpartisan Legislative Analyst Elizabeth G. Hill. That’s out of a total fund of $79.5 billion. She foresees annual pension payment increases of nearly 10%, about double the average state spending growth.

Making matters worse, Gov. Arnold Schwarzenegger and legislators agreed to sell a long-term $929-billion bond to help finance current pension payments. That prospective bond recently was pared to $800 million and sellers are awaiting legal clearance by a court.

“Irrespective of legal issues,” Hill declared when Schwarzenegger proposed the bond, “incurring two decades’ worth of debt to avoid an annual operating expense is poor fiscal policy.”

Pension debt is a ticking time bomb, many say.

Richman has a plan, even if it is DOA in the Legislature: He wants to scrub traditional “defined benefit” programs for all new hires in state and local governments, including teachers. Instead, he’d enroll newcomers in 401(k)-style “defined contribution” plans.

In a traditional DB plan, the employer -- the taxpayer -- bears the risk of poor investments. Under a self-investing DC plan, the burden’s on the employee. Benefits may not be as good, but they’re portable from job to job.

Anyway, that’s the direction private companies have been headed, whether their workers like it or not.

So look for the politics of resentment and envy to kick in as voters become increasingly aware that they’re providing a high level of retirement benefits for civil servants that they can’t possibly get themselves.

Look for perhaps a Schwarzenegger-backed ballot initiative.

Democrats and unions would be wise to ponder a possible hybrid system: a pared-back pension supplemented by a 401(k). It’s what many of us paying the government freight already have.