One Small Step By Palo Alto

One giant leap for the next generation.

Earlier this year the City of Palo Alto’s Finance Committee hired an independent actuary to produce a budget scenario reflecting a more realistic return on pension assets than the unrealistically-high return assumed by CalPERS, the city’s pension fund manager. As explained here, unrealistically-high assumed rates of return allow governments to artificially suppress upfront (“Normal”) pension costs for current services at the expense of larger costs for citizens down the road who didn’t receive the benefit of those services. The independent actuary reported that a realistic assessment of Palo Alto’s Normal Cost is $8 million higher than CalPERS’s assessment.

Last week the City Council took its first operational action based on that analysis, voting to include half that amount in the General Fund budget. It’s not a full victory for truthful budgeting but it sets a powerful precedent. The $4 million adjustment will impose on current citizens a share of the cost for services for which they are receiving the benefit and, by avoiding compound interest on that adjustment, save ~3x as much for future Palo Alto residents.

Intergenerational thefts facilitated by unrealistically-high pension fund investment return assumptions are nothing short of massive. Last year the theft at California’s state government alone amounted to $4.5 billion, which because of compound interest will load the next generation with an extra ~$15 billion of pension debt. Unreasonably-high return assumptions by CalPERS have already created pension deficits that will crowd out hundreds of billions of dollars of government services over the next 30 years. The same is true in schools because of unreasonably-high returns assumed by CalSTRS, the pension fund manager for school districts.

Every government should take a page from Palo Alto’s book. Citizens should pay for the true cost of services rather than pass bills to future generations.


Originally appeared on Medium, 6/25/18.