In a piece called "A Modest Proposal" (March 26, 2008), I suggested in an open letter to Mahmoud Ahmadinejad and Hugo Chavez—high on George Bush's list of imaginary enemies—that they could bring America down merely by bringing Wall Street down.
More than a few readers called me nuts. I was being hyperbolic, hysterical. But I was right.
Ready for another bomb? Our pension system is broken. It's next to blow up.
Pension assets are invested in the stock and bond markets, which, coincidentally, are down more than 30 percent from last year. Whoops. Make that close to 40 percent for some plans more heavily invested in stocks. According to the Center for Retirement Research at Boston College, that's about $4 trillion in losses.
Four trillion isn't just my estimate and, actually, the number is even bigger. The report I just cited estimates losses only up to October 2008. The market has been down more since that time. January 2009 was the worst January in the history of the New York Stock Exchange.
Furthermore, pension systems were seriously unfunded even before the current bear market; Los Angeles faces a $1 billion shortfall, half of it pension-related, for 2010. This is especially true for public pension systems, like CalPERS (state employees and some counties), CalSTRS (teachers) and SACRS (the counties that self-manage their pension assets and that don't belong to CalPERS).
State and local governments are not required to fund the pension costs for public employees for years. Public pension systems play by one set of rules called GASB (Government Accounting Standards Board); private pension plans play by a much stricter set of rules called FASB (Financial Accounting Standards Board). But state and local governments don't worry much. They have an ace in the hole. CalPERS and the other public systems could, in theory, grossly mismanage their investment assets all the way down to zero dollars, and their retirees would still get paid the lucrative benefits promised to them, because there is a state constitutional requirement to pay them. If the system goes broke, states and local governments just raise taxes.
To say there is a relative generosity of pension plans for public sector workers vis-à-vis private sector workers doesn't even begin to tell the whole story. According to the Center for Retirement Research at Boston College, public employees do three times better.
Take a recently retired deputy sheriff who worked 30 years and who made an average of $75,000 for the last five years of employment. This is an entirely realistic number, and probably doesn't even include overtime. Three percent of $75,000 is $2,250; multiply it by 30, and you get $67,500. That's what that retired deputy will get every year, with cost of living adjustments for the rest of his life. Not to mention subsidized health insurance for the rest of his life, which may or may not include the spouse.
How did public employees get such a sweet deal? Simple: unions.
Virtually everybody who works in the public sector is represented by a union or a collective bargaining unit, whereas hardly anybody who works in the private sector is represented by a union anymore.
States and local governments have the "miracle funding" option of higher taxes. States and local governments by law can't renegotiate or repudiate pension commitments, not even in U.S. Bankruptcy Court. So they issue what are called pension obligation bonds, which have the net effect of raising the tax burden. The bottom line is there is no equitable way to pass on the excessive cost of benefits to future generations that were bought through undue influence.
Our kids are really screwed.
Enter Paul McCauley, CPA, and his Proposed McCauley Initiative Measure, also officially known as "The McCauley Public-Employee Pension Reform Act," which has been approved for circulation for signatures to be put as a referendum on the California ballot in 2009.
If enacted into law, the initiative would amend the contracts clause of the California Constitution to allow the state and local governments to renegotiate public-employee pension contracts.
Citing "undue influence," the current economy, the infrastructure burden, California's sinking credit rating and even global warming, McCauley's proposition seeks to end the pension game as it's currently played in the public sector. McCauley's opponents are quick to point out that he works for the Sheet Metal Workers Union and hasn't proposed any legislation to end private sector union benefits.
I recently obtained a memo written by Contra Costa's district attorney's office written by L. Douglas Pipes and dated Jan. 23, 2009.
Mr. Pipes writes, "We cannot stop these (mostly ignorant) people, like Mr. McCauley, from rabble-rousing the electorate with these kinds of proposals. But we can stop such proposals from going into effect."
Pipes goes on to say that even if passed by the electorate, the unions will sue. He implies the electorate is often wrong.
Pipes concludes by writing, "You can sleep well at night without worrying about the McCauley initiative. Let us instead focus our concerns and actions on our fight to protect our vested health insurance benefits from the slash and burn actions of Contra Costa County."
And I thought the chief concern of the DA's office was law and order.
Ryan Morris contributed to this article