‘In 1999, most government pension plans were 100% funded. With a 50% increase in liabilities, they instantly became two-thirds funded. And, for the last 20 years they are still two-thirds funded!’ – Sen. John Moorlach
State Senator John Moorlach (R-Costa Mesa) knows a lot about municipal budgeting. While campaigning for Orange County Tax Collector-Treasurer in 1994, he accurately predicted the largest municipal bond loss and bankruptcy in history. Moorlach recently wrote in the Bond Buyer: “Put California Pensions on a Ventilator”, alluding to the use of mechanical ventilators to assist patients with life-threatening coronavirus to breathe.
Moorlach describes the current situation created by Gov. Newsom’s economic shutdown policies in response to the coronavirus outbreak:
“The coronavirus has massively impacted the necessary revenues our cities are relying on to meet their already stretched budgets. Anaheim is losing some $500,000 per day as their hotels and Disneyland are closed. Costa Mesa is likely to be losing massive sums in sales tax revenues as South Coast Plaza sits empty and car sales have dissipated.”
Moorlach is skeptical that budget reductions, issuing pension bonds that double the true pension costs to taxpayers, huge spikes in sales taxes, increased commercial property taxes by a split-roll property tax or more ballot initiatives will prevent eventual Chapter 9 municipal bankruptcies.
But Moorlach says the current self-created state and local government budget crisis only worsens the underfunded public pension system that goes back to 1999 when California government pensions were increased by 50 percent:
“In 1999, most government pension plans were 100% funded. With a 50% increase in liabilities, they instantly became two-thirds funded. And, for the last 20 years they are still two-thirds funded!”
State Pension System is a “Scam” – Moorlach
Moorlach believes that the state pension system is a Ponzi-like “scam” as it is currently structured and points to the state of Wisconsin, which has a 100 percent pension system, as a model.
A double check of Moorlach’s forecast of pension system and municipal bankruptcies by this writer indicates that Moorlach is right. Cal-PERS’ huge investment fund has only kept up with money inflation in the 20 years since SB 400 was signed by then Governor Gray Davis.
The online US Bureau of Labor Statistics Inflation Calculator indicates that a dollar has inflated to $1.57 (by 57 percent) over that same time period. Pension benefits went up by 50 percent but pension fund levels have only gone up 7 percent after adjusting for inflation. There has been little-to-no investment magic gained by Cal-PERS to grow state and local pension funding beyond the actual contributions by taxpayers.
In comparison, the Compound Annual Growth Rate in the Standard and Poors 500 stock index from 1999 to 2019 is $2.48 adjusted for inflation and including stock dividends (+148 percent). This means that stocks have outgained the Cal-PERS investment fund by 91 percent (148% – 57% = 91%).
State Budget Reserves May Cover Losses?
Likewise, Gov. Newsom announced a $54.3 billion budget deficit reportedly due to shutting the state down over the coronavirus public health crisis. The State Legislative Analyst’s Office, however, forecasts a more modest deficit of $18 to $31 billion through 2022. California has $16 billion in reserves. Thus, it is conceivable California could absorb its losses with reserves and modest budget reductions. But this will do nothing to alleviate the coming shock wave of underfunded pension systems. State and federal elected representatives are seeking a federal bailout for these self-caused budget reductions including its pension systems.
The cause of these enormous budget reductions is being mostly blamed on tax revenue losses from hotels, businesses and tourism as a result of ironically self-imposed coronavirus restrictions. Arguably, these budget reductions could have been avoided if Gov. Newsom had pursued a triage virus epidemic public health policy instead of martial law and business shutdowns. But the reality behind the coronavirus headlines is that gold-plated pension benefits have hit the wall. The coronavirus crisis only serves as a cover for bloated pension programs, which remain untouchable unless forced into bankruptcy.
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