This appears in today’s online Wall Street Journal… (An entirely separate question, after reading this, is how Crane could be a major donor to the Gubernatorial campaign of Jerry Brown… But that is for another day…)
Dow 28,000,000: The Unbelievable Expectations of California’s Pension System
Because Calpers failed to disclose pension costs and liabilities 10 years ago, taxpayers will be on the hook for hundreds of billions.
By DAVID CRANE
In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries. The California Public Employees’ Retirement System sold the pension boost to the state legislature by promising that "no increase over current employer contributions is needed for these benefit improvements" and that Calpers would "remain fully funded." They also claimed that enhanced pensions would not cost taxpayers "a dime" because investment bets would cover the expense.
What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars, (4) Calpers’s own employees would benefit from the pension increases and (5) members of Calpers’s board had received contributions from the public employee unions who would benefit from the legislation. Had such a flagrant case of non-disclosure occurred in the private sector, even a sleepy SEC and US Attorney would have noticed.
Eleven years later, things haven’t turned out as Calpers promised. While state employees have been big winners from the bet, the state budget has been, and will continue to be, a huge loser. Far from being "fully funded" as promised, Calpers has already required $15 billion more from the state budget than projected in 1999 and $3.5 billion is budgeted for this year, a figure that is more than five times the expense projected by the state legislature in its SB 400 analysis. Pensions are crowding out important programs like higher education, parks and health care, and the state will continue to whack away at those programs because the legislature refuses Governor Schwarzenegger’s request to repeal SB 400 for new employees.
Of course, all of this might have been avoided had Calpers disclosed the risks and conflicts back in 1999. Indeed, legislators might have not passed the lavish pension pay-out had Calpers simply provided counter commentary from Warren Buffett and others who were saying its wagers were losing propositions.
The state’s pension funds are still trying to dupe taxpayers. In response to a recent Stanford University study that concluded California’s pension funds are understating liabilities by $400 billion, California’s pension funds set up "spin" websites and attacked the study as "shoddy" and "faulty."
Recently, a Northwestern University professor projected that California’s pensions will run out of cash in 2026, threatening even greater havoc to the state’s budget, yet our pension funds have adopted a "don’t worry, all is well" approach and refuse to provide the information necessary for the taxpayers– i.e., the people actually on the hook for these bets — to make an independent analysis.
As other states consider pension reforms, California’s current quagmire should serve as a reminder of the need to incorporate disclosure requirements.
Mr. Crane is the Special Advisor to California Governor Arnold Schwarzenegger for Jobs and Economic Growth.
