Advocates and opponents of pension reform in California are abuzz with the release of updated estimates of the Golden State's unfunded pension liabilities, from the Stanford Institute for Economic Policy Research. While data confirming the half-trillion-dollar hole in the state's three largest pension funds are certainly big news, the IEPR has also issued another report, this one on the public pensions in San Jose.
layoffs of dozens of police officers, broken budgets, and a desperate ploy to save the city by cutting into the pensions of current city employees — you probably won't be surprised to learn that the city's financial health isn't so good these days. The Stanford authors conclude that the Safety pension fund (which pays benefits to firefighters and police officers) is less than 55% funded, while the Federated fund (which pays all other city retirees) is less than 47% funded. If we use risk-free assumptions on the funds' returns (a fair assumption, if taxpayers are going to effectively guarantee them), Safety is only 47.4% funded, and Federated is only 42.6% funded. Using the more optimistic assumption of a 6.2% rate of return, the total unfunded liabilities of these pensions are estimated at about $3.6 billion (liabilities under risk-free assumptions, unfortunately, are not presented). As such, even if optimistic rates of return are assumed, San Jose has an 88% probability of falling short on its pension obligations in the next 16 years. In order to have an even chance of meeting its obligations, the two funds would need to see an average annual return of 11.4% over that period, and to reach 80% funding, the pensions would need to average 10% returns on investment. By 2016, the IEPR also concludes that San Jose taxpayers will be footing 36% of the cost of Federated pensions and 71% of the cost of Safety pensions; if risk-free discount rates are assumed, taxpayers will pay 53% of Federated pensions and 111% of Safety pensions; in other words, the costs of Safety pensions will exceed total payroll.
In other words, the report suggests that the dire fiscal scenario described by Mayor Chuck Reed is a pretty likely outcome. Even under fairly neutral assumptions, spending on pensions would crowd out spending on other public services to a significant degree; if California's economy slides back into recession (keeping in mind that AB 32 is around the corner), this spending will break the city's budget. San Jose's unions, unsurprisingly, dispute the study, pointing to its failure to account for a recent analysis that lowered next year's pension bill. This is technically true, but completely beside the point. Both Reed and the Stanford team argue that, without serious reform, San Jose's only option is to make deep cuts to services, salaries and personnel, which is what they spent the first half of 2011 doing. The recent estimates don't reflect a meaningful change in the city's financial prospects; they simply show that imposing a 10% pay cut and laying off hundreds of employees, including 66 cops, will indeed lower pension obligations. In other words, they don't support any argument the unions want to make.