It's the same story pretty much everywhere: Cities and states promised ridiculously
generous (by today's standards) pensions to teachers, cops and firefighters,
failed to sufficiently fund the plans and invested the money they did have
very badly. And now the weight of the resulting unfunded obligations are crushing
not just plan recipients but entire communities. Here's a representative case:
Oregon
PERS unfunded liability swells to $21 billion
(KTVZ) - This week, Oregon's Public Employee Retirement System Board received
an earnings report on the status of the PERS fund investment. The report
said Oregon's PERS fund fell by 4 percent in 2015, a loss of nearly $3 billion
-- and a Central Oregon lawmaker said that means major reforms are more urgent
than ever.
"The blow to PERS from the Moro court case left Oregon with an additional
$5 billion in unfunded liability," Sen. Tim Knopp, R-Bend, said Tuesday. "Now
PERS is an additional $8 billion short of its target."
In that ruling nearly a year ago, the state Supreme Court overturned the
vast majority of the PERS reform cost-saving provisions enacted by the 2013
Legislature.
The current unfunded PERS liability now exceeds $21 billion, up from $18
billion last year, he noted.
PERS Communications Director David Crossley said while the PERS fund earned
just over 2 percent last year, it did not achieve the "assumed savings rate" of
7.75 percent, so the liability increased by about $3 billion.
He noted that PERS had positive earnings, but lost value because it pays
out about $3.5 billion in benefits a year.
PERS rates for school districts and local governments will rise in July
2017, Knopp said, forcing school districts to lay off teachers, reduce school
days, increase class sizes, and cut programs like art and PE. Local governments
will also have to make cuts to public safety and other critical services.
This combination of worse-than-expected investment returns and legal barriers
to cost savings is playing out across the country. See Fitch
downgrades Chicago after "worst possible outcome" in state supreme court pension
reform bid.
What follows -- "...forcing school districts to lay off teachers, reduce
school days, increase class sizes, and cut programs like art and PE. Local
governments will also have to make cuts to public safety and other critical
services" -- is also playing out in most states and cities.
And this, remember, is at the tail end of an epic bull market in financial
assets. If pension plans aren't fully funded now, they'll fall into an abyss
in the coming correction.
The result: everyone gets poorer. Or more accurately, everyone discovers that
they were never as rich as they thought they were, and that the down escalator
they're on has a long way to go.
At the risk of belaboring the point, imploding pensions, like most other modern
problems, can be traced back to easy money. Put a monetary printing press in
the hands of government and the resulting corruption flows from Washington
outward to every state capital and mayor's office. With interest rates artificially
low and inflation artificially high, generating 8% returns as far as the eye
can see looks not just possible, but easy. So promising benefits based on high
rates of return seems reasonable to elected officials anxious to buy labor
peace. And once the Ponzi scheme is in place, there's no way to turn it off
without creating chaos.
The only solution (again at the risk of repetition) is to take the easy money
program to its logical extreme and devalue the dollar by an amount large enough
to make nominal pension benefits affordable. That's functionally the same as
honestly cutting benefits and will impoverish everyone who doesn't own lots
of real assets, but it will be easier to hide.
