Commentary: Unfunded liabilities will likely require federal bailout

To even try to get a handle on this unfunded pension liability problem, you have to first recognize that this liability is not at all like a mortgage on your house, where you can easily ascertain the principal amount still owing, to the penny. The only thing that the pension liability has in common with a mortgage obligation is that both have underlying legal contracts.

But where they part ways is that the pension liability is calculated using estimates of how long people will live and what the stock market will do in coming years. For example, the oft-quoted unfunded liability (as of June 30, 2015) of $246 million assumes a projected rate of return on investments of 7.5% per year. If, over time, it actually earns only 2.5% per year, that $246 million could approach $750 million. (As a point of reference, CalPers earned only 0% last year and 2.4% the prior year.)

Costa Mesa should have little trouble paying the required annual pension contribution in the next few years, in my opinion, thanks to a robust local economy. But to make payments above what is required to significantly eat into that huge number is like trying to put out a forest fire with a garden hose.

To put it another way, Costa Mesa is incapable of generating the level of tax revenues needed to sustain a pension system where employees retire after 20 or 25 years of service and then live another 40 years receiving a guaranteed pension providing very close to what they were earning in their last year of service.

One of the biggest problems is that the unsustainable contracts that created this problem in the first place are still very much in force, adding more layers to this mountain faster than you can begin to eat into the base.

And if one were to painstakingly go through the convoluted mathematical calculations allowing politicians and bureaucrats to aver that a given additional contribution today (over and above what is billed by CalPers) can result in a fantastic savings over the long run (such as $1 million today produces savings of $2.9 million over 30 years), it can’t help but bring to mind the old saying: “Statistics never lie but liars use statistics.”

Long before Costa Mesa can get into serious trouble here, there will be countless weaker cities in our county and throughout the state that will be forced to either lay off large numbers of costly public safety workers or go into default. I believe they will choose the latter.

So what to do?

Simply wait for the weaker cities to default, resulting in some kind of federal bailout.(It would be both morally and politically unacceptable to allow hundreds of thousands of pensioners to get wiped out in bankruptcy court.)

But given the humongous size of the bailout that would be needed, it would not be unreasonable to expect pensioners to have to suffer some sort of “haircut.” Working with the aforementioned estimated unfunded liability of $246 million, if that haircut were say 10%, or $24.6 million, that might be a number that Costa Mesa can handle.

Rather than throw money at a mountain that is growing faster than it can be paid down, a more rational (if not politically correct) solution would be to set aside monies in a reserve account separate from the rainy day reserves, with built in safeguards to prevent future councils from even thinking of touching it. The thinking here is along the lines of letting the federal government handle the lion’s share (in the coming bailout,) and the city work on mitigating the “co-pay,” so to speak.

In the meantime, why pay for something you may get for free within the next 10 years or so? (Assuming a bailout.)

AL MELONE is a member of the Costa Mesa Pension Oversight Committee and a former candidate for City Council.