Financial Markets Won’t Fix Pensions

Public Sector Inc., 12/6/10.

By Steve Greenhut

When outgoing California Gov. Arnold Schwarzenegger’s pension adviser, David Crane, comments on a pension issue, it’s wise to listen to what he has to say. Crane has long been sounding the alarm about out-of-control public-sector pensions, and his testimony in the Senate regarding a failed pension reform effort captures the problem more succinctly than anything else I have read. Crane emailed me recently after my column pointing to Moody’s downgrading of San Francisco’s debt rating after voters there rejected a pension reform measure. I was encouraged that the financial markets were responding to the lack of pension reform, as was the city’s Public Defender Jeff Adachi, who sponsored Prop. B. But Crane does not believe that the markets can significantly rein in the problem. I sat down with him today at his Capitol office to discuss the issue.
As Crane explained, financial markets are a lagging indicator because debt is so senior that there’s virtually no chance the state will default on it. He makes that point most compellingly in the testimony linked above. Basically, the state first pays Prop. 98 dollars (mandating that 40 percent of the state’s general fund goes to k-14 education), then debt service and pension obligations. There’s plenty of money to cover the debt service, in other words. That means that all the cuts will have to come out of human services, parks and recreation and other budgets and that even a blip in the markets won’t mean too much since investors know they will be paid.

So while, as I argued, the financial markets might send some warning signs through downgrading, etc., Crane’s point is a broader one — the markets aren’t too worried about it, at least not enough to force the kind of substantive reforms needed to solve the problem. Significant cuts are coming down the pike unless pension and health care costs for public employees are controlled. “Services will be cut,” he told me, “because this debt will be paid off.”

Link to full article: http://www.publicsectorinc.com/forum/2010/12/financial-markets-wont-fix-pensions.html#more