Pensions once engendered feelings of promise and security, something for workers to aspire to.  Unfortunately those days have long since passed; pensions are now on the verge of extinction, except when it comes to public-worker pensions, where the word ‘pension’ now seems synonymous with bloated spending or worse, fraud.

In terms of bloated spending, take the case of New York State, where it’s recently been publicized that a number of lobbyists receive public pensions despite the fact that they don’t actually work in the public sector.  How could this be possible?  Among all the pork-barrel spending lobbyists typically whine fo,r they apparently found the time to slip in a demand for pensions.  Instead of laughing off such requests, wouldn’t you know it… they got their wishes granted.  “New York Conference of Mayors” (whatever purpose that organization is supposed to serve) Executive Director Peter Baynes, one of the beneficiaries of such pensions, lamely argued that lobbying groups such as his have been at the fore of reducing taxpayer costs, including the costs of the state pension system.  I don’t recall that he cited any example though… I was also too busy pondering the ridiculous idea that New York has to hand people pensions to lobby New York to lower spending on pensions.

New York is not alone in handing out pensions to private-sector individuals.  At least 20 states have similar policies, making the argument that certain lobbyists represent organizations which “serve the public.”  They must be using a very vague definition of “serving the public” then.  I picked up a piece of trash off a sidewalk yesterday, maybe I’ve now qualified for a pension too.  As with most bloated spending, this is what happens when other people’s money gets spent on other other people.  Thankfully some states are re-examining such spending; for example New Jersey Gov. Chris Christie issued an executive order to create a “Pension Fraud and Abuse Unit” in the hopes of re-tooling state pension policy.  But knowing how stubborn, greedy and determined lobbyists are, we‘ll see if anything comes of this.

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Locally, the Irvine City Council, despite its past record of spending like a trophy wife, made a financially smart move by voting to pay off its own unfunded pension liability (currently at $91.1 million) within ten to twelve years, rather than the previously scheduled twenty-plus years.  Of course, this wasn’t done simply because it was an intelligent move – it more than that for government bodies to do such things.  The root cause of this is that in 2015 the Governmental Accounting Standards Board will begin enforcing a policy requiring cities to include their unfunded pension liability as part of their audited financial report.  In short this will force cities to tell the truth about their budgets, so a larger pension liability would result in creating a budget deficit.  Rather than have to embarrassingly admit in a couple of years that the budget isn’t looking that good, the City Council took a step to lessen the blow when that hammer falls in a couple of years.

Despite that news, it’s time to temper the good feelings by reviewing the enormous, untamed monster known as the Orange County Public Employees Retirement system, also known as OCERS.  OCERS is responsible for funding the pensions of approximately 14,000 county and local government retirees, plus another potential 26,000 who haven’t yet retired.  According to the non-profit California Public Policy Center (CPPC), it has $9.5 billion in savings for those current-and-future retirees.  This is certainly a giant figure, even in terms of California dollars but here comes the bad news:  That figure means that OCERS is $5.7 billion short of its obligations.

How did such a canyon-like gap occur here?  Apparently, it’s been a combination of rosy (and I mean parading-through-Pasadena on New Year’s Day rosy) assumptions about investment returns, as well as aggressively lax liability repayment schedules.  OCERS has operated on the expectation of gaining 7.25 percent profits on interest annually… hey, I want to know what bank told them that!  If one drops that estimate nearer to a more reasonable five percent, that $5.7 billion liability resembles closer to $10 billion.  Unless the Bill Gates foundation decides to adopt OCERS, this calls for some quite drastic measures to be taken or else quite a few people will be left holding empty bags.

To fill that gargantuan money hole, the OC and its workers kicked in $218 million last year.  However, even if given 20 years to close the gap, that kick-in amount would have to reach $546 million per year, according to the CPPC’s estimates.  The CPPC’s Ed Ring called the amount of additional money needed to fix the problem “traumatic”… you know you’ve got a serious budget problem if the word “traumatic” applies.  Like any other government program that’s ballooning out of control, there are only two hard solutions to consider: yet higher spending or hope for a quick economic boom.

OCERS is currently toying with the idea of dropping its expected investment return rate below its current 7.25 percent (in fact it had already dropped it from 7.75 percent before)… dropping the rate would also require higher funding to go into the system immediately, so naturally unions are against the idea.  Said the OCEA’s (Orange County Employees Association) Jennifer Muir, the last drop was “extraordinarily aggressive” and those in favor of it were “lying to taxpayers”.  According to OCERS’ own estimates, they are currently 62.5 percent funded (meaning they can pay 62.5 percent of what they owe at the moment) and Girard Miller, their investment officer, argues that that amount is no sign for alarm, stating that 80 percent funding (which some consider as a preferable range) is unnecessary.

It seems this funding gap (whatever its size actually turns out to be) isn’t going away anytime soon, or even for decades, as the two sides remain at odds.  Hopefully in the near future states and cities will come up with more sensible plans when it comes to deciding who qualifies for pensions and how pensions are to be funded.  Lobbyists will continue to moan and officials lacking economic wisdom will propose dumb ideas.  Even without fraud involved, proper management of pension budgets seem to be even more vital to stave off monetary disasters.  Politically-affiliated accountants will alternately weave tales of doom or tales of boom… maybe more disciplined, impartial minds will rule the day, someday… one can only hope.