Pension Oblivion

NBFD FerrariMy friend Shawn Dewayne, a financial planner who often includes tax-free municipal bonds in his customers’ portfolios, is concerned about the impact of out-of-control city/state pension costs is having on munis. When he saw this car recently near his Newport Beach office, it pretty much summed up the whole pension mess for him, as it does for me.

The plate translates as “Ex Newport Beach Fire Department” and it’s affixed to a 2013 Ferrari California 30, a car that retails for $208,000 before all the VERY costly extras and options Ferrari offers.  Shawn tells me that a week earlier he saw another very expensive car – a Shelby Cobra 427 – with the license plate “I (heart) STERS,” as in CalSTERS, the California teachers’ retirement fund. And keeping up the car/pension theme, he told me of a retired water district general manager who recently spent $200,000 on a professional rebuild of his 60′s supercar, an Olds 442. (Oh, how I lusted after that car in my youth!)

Sure, these three well off ex-public servants could have had lucrative side businesses, but more likely they’ve just got great retirement benefits. A retired fire chief, for example, can relax and buy a Ferrari on the $200,000+ annual pension benefit that’s common for that job, along with Cadillac (or Ferrari) medical coverage.

The Death of CalPERS?

There’s one thing – and only one thing – I like about California’s out-of-control retirement pension and benefit programs:  I get to throw back on the Left the word they love to over-use so much: Unsustainable!

The programs are so unsustainable that CalPERS just announced its going to hike the amounts municipalities who are enrolled with them must pay by … get this … 50 percent. Sure, they’re going to phase it in, but a 50 percent hike is still a 50 percent hike – and when you multiply it by 1.6 million, the number of California government workers covered by it, you’re looking at some very serious bucks.

Canyon LakeTo see how this hits home, look at the small town of Canyon Lake, a party town of a place in Riverside County. CalPERS already has increased the town’s contribution rate from 12.8 percent of an employee’s salary to 17.9 percent over the last three years, and the City Council was looking it going to 26.8 percent this summer – before the 50 percent rate hike starts to kick in. So they did what any logical person would do.

They decided to quit CalPERS. According to news reports, it’s going to cost Canyon Lake $660,000 to say farewell. That’s the amount of unfunded liability CalPERS is carrying on Canyon Lake’s small employee base, and the city figures the cost of financing the payment will be less than the cost of putting up with CalPERS jacking up rates instead of paring down benefits. Cities with more employees, especially those who have been shorting CalPERS because of their own financial unsustainabilities, will be looking at much bigger divorce settlements.

But they’re looking, nonetheless. I know of one special district that is trying to figure out how to raise the money needed to divorce itself from the system and I’m sure the upcoming rate hike will swell the numbers. If American business ingenuity kicks in as I suspect it will, you’ll see new financing tools to fund CalPERS split-ups. When that happens, the move toward sustainable pensions could become a stampede, leaving the nation’s biggest and baddest pension plan crushed in the dust.

That’s just the sort of “rebuilding California one catastrophe at a time” I predicted in Crazifornia, so don’t be surprised if it happens.