Sacramento’s Gamble

This story should ring in the ears of all municipal leaders everywhere. Only in the public pension world can you not only benefit from earnings off stock market investments but you absolutely rely on them to make your future obligations.

The story is about, in part, David Crane, one of Gov. Arnold Schwarzenegger’s appointments to the board of trustees of the California State Teachers’ Retirement System, CalSTRS. Lawmakers rejected his reappointment even though he’s been on the board for a year.

Why?

Because he thought the board was assuming that CalSTRS would make too much off its investments. CalSTRS assumes its investments will make 8 percent, on average, every year into the future. Sure, some years will be better than others, but smoothed out, it’ll be 8 percent. Everything depends on that.

Democratic legislators, who receive millions in campaign donations from teachers unions and other government labor groups, said it wasn’t Crane’s job to meddle in investment forecasts.

And then this from State Senate leader Don “San Diegans Are Crackers” Perata. I didn’t much care about the “cracker” comment, but this is enraging:

State Senate leader Don Perata (D-Oakland) said the job of trustees is “only to protect members’ benefits” – not to worry about the long-term effects of the benefits on the state budget.

There are two things wrong with this: One, protecting members’ benefits necessarily requires a trustee to maintain the soundness of the pension fund – meaning the trustee should ensure that he or she is demanding enough money from the state each year to ensure the fund can make the payments to retirees in the future.

Secondly, being conservative about how much investments might pay off in the future is a good thing. It should go rewarded. It ensures that there will be enough money available for when it’s needed. Investment earnings are not guaranteed. I know, it’s crazy to imagine, but investments may not come back with such high earnings. People like Warren Buffett and others have strong doubts about the ability of even the largest investors to make such high profits each.

How do retirement officials react to this sort of rational worry?

Many labor leaders and pension officials characterize as bogus the alerts being raised about the funds’ soundness.

“This is another way that folks who would like to see these benefits go away can undermine the plans,” said Pat Macht, spokeswoman for the California Public Employee Retirement System.

This is not productive. A trustee to such an important fund should be able to bring up concerns about its soundness without being attacked. There are reasonable concerns about lack of funding for public pension systems that don’t have anything to do with a conspiracy to strip workers of benefits.

We, in San Diego, are witnessing the consequences of such stubborn head-in-the-sand type of avoidance. A true advocate for workers rights would push for a fully funded, competently managed and structurally balanced retirement fund that invests its earnings wisely, yet doesn’t make irrational assumptions about how much its investments can fund future payouts.

– SCOTT LEWIS