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Publishers preview pension problems; it's not petty politics

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Posted: Sunday, April 17, 2011 10:26 am

News reports are focused at the moment on California's $15 billion budget defict.

But that appears to be a drop in the bucket compared to the unfunded pension liabilities of California's state and local governments. Estimates of the problem start at $100 billion and range up to $700 billion.

At a newspaper trade association meeting Friday in Los Angeles, a panel of county politicians, a newspaper lawyer and a reporter gave an overview of this state's underfunded pensions and the more they explained, the higher the numbers went.

The California Public Employee Retirement System - CalPERS - admits it's $100 billion underfunded. But that doesn't count the CalSTRS fund for teachers, nor does it count the problems for university employees. And it doesn't count local governments that aren't in the state-run programs.

Worse, it doesn't count some accounting gimmicks that understate the problem.

The highest estimate of this problem - $700 billion - was put together by some Stanford economics students and their teacher Joe Nation, a lecturer at Stanford and a former legislator. He thinks most pension plans are understating the problem.

The panelists at CNPA's meeting disagreed on some points, but agreed on these:

  • Public employee unions want to deny the problem but the truth is dawning on them and their members.
  • Many politicians underestimate the problem either because they don't understand it or don't want to tell the voters they have to cut services and raise taxes to correct a problem they didn't see coming when they gave away the store.
  • Some politicans do get it. They are bargaining hard with unions and pushing reforms. They are having luck reducing the pensions of employees who will be hired in the future.

But it's current employees whose benefits are vastly underfunded.

The journalists and the lawyers who are interested in reform predict a big showdown in court on employees rights to benefits in certain pension plans.

In the private sector, most employees have a 401 (K) or other defined contribution plan - they and their employers put money into mutual funds and other investments and individual employees are entitled to the money plus interest earned in their individual accounts when they retire.

But almost all governments, and some older companies, have defined benefit plans. In these plans, money goes into funds run by boards chosen by unions and employers. These funds estimate how their investments will do and either set the benefit schedule or recommend benefits to the employer - often city councils and schools boards.

If the investments don't reach the estimates, the employers are on the hook for the shortfalls. In the case of a government, that means the taxpayers have to make up the difference.

The courts will have to decide whether employers overwhelmed by these costs have a right to reduce the benefits to employees in some way. Or they might rule those benefits are employee rights tightly protected by contracts and the California Constitution.

If the courts rule present employees' pension benefits are untouchable, the present budget battles - the fights over raising taxes, closing parks and laying off public safety workers - will seem trivial.

Cities and counties can declare bankruptcy. Orange County did it 1994.

But states can't declare bankrptucy. So ... keep reading.