

California's $500-billion pension time bomb  - cwan
http://www.latimes.com/news/opinion/la-oe-crane6-2010apr06,0,6247734.story

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mark_l_watson
The article is good, but has one big error: the statement that existing
pensions are contractual obligations and must be paid.

Go back a few decades to the bankruptcy of Orange County California. Unions
negotiated away a large part of pension obligations to members.

When (not if) the state of California goes bankrupt, those obligations will
not go away entirely, but will be reduced through bankruptcy negotiations.

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nradov
The article is correct, in that the US bankruptcy code doesn't cover states.
There is literally no legal way for a state to go bankrupt, and thus no way to
force renegotiation of the pension contracts through bankruptcy court.

Of course the day may come when the state pension funds simply have no cash
left and stop paying benefits, and the pensioners will then sue to enforce
their contracts. It's hard to predict what might happen then. Unions might be
strong-armed into accepting a cram down. Courts could order the legislative
and executive branches to increase taxes or reallocate funds. Who knows?

~~~
mark_l_watson
Question: so counties are allowed to go bankrupt, but not states? States can
not print money, and many states including Arizona where I live are coming up
short paying for essential services.

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nradov
That's correct. Counties and municipalities can go bankrupt under Chapter 9.
[http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/ch...](http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter9.html)
There is no provision for states. It's an unprecedented situation so I don't
think anyone can predict what will actually happen when they inevitably run
out of cash.

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tshtf
The NYT article on the same subject -
<http://www.nytimes.com/2010/04/07/business/07pension.html> \- explains why:

"Currently, governments discount pension values by using the return they
expect their pension investments to earn over the long term. For most public
pension funds, that means about 8 percent. In California, the teachers’ fund
uses 8 percent, Calpers uses 7.75 percent, and the University fund uses 7.5
percent... After the researchers applied a risk-free rate of 4.14 percent,
equivalent to the yield on a 10-year Treasury note, the present value of the
promised benefits ballooned. The researchers came up with a $425 billion
shortfall for the three funds."

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btilly
Compounding the issue, in an attempt to achieve those investment rates the
pension funds have invested heavily in private equity funds. However during
the bubble private equity went on an unsustainable spending spree and those
funds are certain to lose large amounts of money when large numbers of bought
out companies can't make principal payments that come due in 2011 and 2012.

The last time that private equity ran up a bubble like that was in the late
80s. The institutions that invested in private equity funds then were the
S&Ls. That was a much smaller bubble than this, and we all know how well
_that_ turned out...

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roboneal
This is what happens when deferred "defined" benefits spanning decades are
controlled by political machines that operate under 2 or 4 year election
cycles.

Unfortunately, politicians get elected on the pork and candy they hand out
NOW, not for the fiscal health of state pension funds 30 years from now.

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stretchwithme
all the more reason for Californians to retire to Florida or some other state
where they won't have to help pay for everybody else's retirement.

Its really about time the taxpayers were put in charge of what is spent and
borrowed. The interests of legislators and taxpayers are clearly not aligned.

Switzerland has referendums on everything the legislature does and so can we.

Most of these ridiculously expensive commitments and the gymnastics undertaken
to hide them would be stomped in the polls.

If we copied Switzerland's system in general, a lot of things would begin to
improve. With more things under local control, there would be less shifting of
costs to the unsuspecting.

~~~
Lewisham
Part of California's problems (certainly not all!) are exactly _because_ the
taxpayers have too much control of what is spent and borrowed. The number of
social welfare things that appear on the ballot when voting time comes around
is crazy, but no-one will vote for the taxes required to support them. Only if
the state politicians had full control of the books could they say "there's no
money for this" and not have their hands forced by the voter to spend money
they don't have.

Californians want a welfare state, but won't pay for it, and you can't have it
both ways (personally, I prefer the welfare state and higher taxes, but that's
just me).

~~~
stretchwithme
which is why I think we should consider radical decentralization too.

The Swiss have another great thing too with their decentralized cantons. You
can actually LEAVE your canton and join another one. Or start a new one.

This is the ultimate in discipline for government. Competition!

