How a pension deal went wrong and cost California

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Submitted by equalizer on September 19, 2016 - 10:10pm

LA Times decides to do a little work!
SB 400 passed in 1999 meant that California Highway Patrol officers could retire at 50 and receive as much as 90% of their peak pay for as long as they lived. Add up all state pensions and the deficit is $241 billion.

At least Grey Davis now feels a little guilt. "Hamm, recently retired chief executive of the California Assn. of Highway Patrolmen and the one who bankrupted the state said he now worries that “pension envy” could lead to a backlash against public employees.

“If I was in the private sector just struggling to get by, had no dream of retiring, would I be upset?” Hamm asked during a recent interview. “Yeah. And we have to understand that’s a reality.”

Gotta love this quote: "Board chairman William Crist, an economics professor at Cal State Stanislaus and former president of the faculty union, interrupted with sarcasm. We could go through a modeling exercise where we make all sorts of different assumptions and make predictions, but that’s really more than I think we can expect our staff to do.”

How is he not an Economic errorist? Should he not be on an island in the South Atlantic?

The current pension projections are around 7.5%, which is just absurd. It should be 4-5% at the most, right?
But that would require more work than any Professor would be expected to perform, let alone average state worker.

Is anyone worried?

Submitted by The-Shoveler on September 20, 2016 - 6:44am.

State will go BK unless major inflation beyond the 5-6% adjustment (15 dollars an hour minimum wage comes to mind).

Anyway I think it is all part of the plan.

FED bale out and Fed money printing to infinity and beyond LOL.

IMO there is no exit strategy for the FED.

I don't worry about China either, only the USA is stupid enough to let its housing market crash (in China the Gov is the Bank).

Submitted by harvey on September 20, 2016 - 7:09am.

It's not about effort or financial models.

It's about human nature and flawed incentives.

Defined benefit plans allow politicians to make promises they don't have to keep. The incentives reward those who make promises today in a quid pro quo arrangements. They receive votes today for promises of money decades from now. Of course they won't be in office decades from now...

It's exactly what happened in 1999 and there's nothing preventing it from happening over and over indefinitely.

It's easier to get away with in the public sector because the pension rules are so arcane. For the average taxpayer there is effectively no transparency. Politicians make deals with unions, the numbers are recorded somewhere in some ledger, buried in some legislation and nobody really knows what the actual cost will be until the bill comes due.

And the bill has come due.

Defined benefit pension plans are an economic experiment that failed. There is no way to do them "right" - the concept is fundamentally flawed at it's core.

As for the actual numbers, they are insane:

The average retirement age for CHP officers is 54. Someone that age without a pension who wanted to buy an annuity to generate the same income for life would have to pay more than $2.6 million, according to Fidelity Investments.

How many Piggs have $2.6 million in their 401Ks?

The only way to fix this in California is a ballot proposition/constitutional amendment outlawing public sector defined benefit programs.

Submitted by Escoguy on September 20, 2016 - 7:43am.

Few thoughts:

The level of pensions assumed they would stay in California, pay taxes in California and spend the money in California.

It may be necessary to impose certain requirements retroactively that pensioners verify that all of these things are done, otherwise reductions may be in order.

To the point, if they money stays in the system creating employment and is taxed, the impact doesn't have to be as dramatic.

Where things go wrong and very badly, is when the money goes elsewhere, and taxes are not paid. But am I naive to assume that retired state workers all pay their taxes correctly to the penny.

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