It was the best of times, it was the worst of times. For public employees and retirees, the promise of improved retirement benefits and health-care security had never been rosier. (Ah, such great expectations!) For public agency employers, however, the prospect of paying for those perks had never been dimmer. (Sorry, Oliver, there ain't no more.)
Welcome to 2009 and a tale of two woes: threatened municipal bankruptcies and the feared demise of defined benefit public pension funds, which could be triggered by diminished cash flows and inaccessible credit markets. (See, for example, Gov. Arnold Schwarzeneggers report to the California Legislature on June 2: (B)ecause of Californias outdated and volatile tax system, our revenues have dropped 27% from last year Our wallet is empty. Our bank is closed. Our credit is dried up If we dont act, the state will simply run out of money and go insolvent.)
If you are a public pension fund trustee, heres an exercise in transparency. Hold two sheets of paper up to the summer sky, one on top of the other. One sheet should show a graph of your actuarys current projection of employer contribution rates for the next dozen years. (Pick any projection you like even the one with the longest smoothed gains and losses, widest corridors and longest unfunded actuarial accrued liability amortizations.) On top of that, lay another sheet, showing your plan sponsors current projections of its expected revenue from taxes, user fees, state subsidies and all other sources for the same period of time. See anything scary? If your charts look anything like those of the most public funds, the trajectories on those two graphs race off in opposite directions from now into all foreseeable future years.
Over a century ago, Charles Dickens might have dubbed this outlook Bleak House. Today, he might just call it, more simply, Unsustainable. Either way, it is not a rosy picture for plan fiduciaries.
The federal government and the states have designs to divert billions of dollars of local governmental revenue to help narrow their own deficits. The federal government is cutting back on local grant subsidy programs that fund public safety, transportation and other services usually provided by local governments, while states are taking bigger chunks of property tax and license fee revenues for themselves, leaving less for the local municipalities. In California, parks, schools and hospital districts all face loss of state and federal revenues, plus lost fees from the falloff in new housing developments. In addition, California voters recently rejected multiple ballot initiatives premised on mortgaging the states future to feed the present. The recent ballot rout has left the state a wounded and hungry carnivore of cash that threatens to leave only the scraps behind for the states cities, counties and special districts.