Pensions are the new mortgages.

At least, that’s the way it appears when cities begin walking away from the obligations to their employees the way some underwater homeowners sought indemnification during the residential market crash. Both scenarios are borne of some bad math and a misunderstanding of what it means to be insolvent.

In the case of a mortgage, owing $300,000 on a home worth only $200,000 in the current market doesn’t make the purchaser bankrupt if he or she is still earning enough to reliably afford the monthly mortgage payments for 30 years. Similarly, owing the state’s teachers, public safety workers and other public employees benefit payments over the coming decades but not yet having 100 percent of the needed payments in hand does not make the state’s retirement systems insolvent, as long as they are able to make the payments.

 For CalPERS (the California Public Employees Retirement System) and CalSTRS (the California State Teachers’ Retirement System) that’s exactly the case. Despite the downturn in the economy, each is able to meet its obligations.

CalPERS, which governs not just state employees but those in the majority of California’s cities and counties, is often accused of setting “unrealistic expectations” for its investment returns. Those expectations are currently at 7.5 percent, and last month the system reported earnings of 13.3 percent in 2012.

However, it’s much wiser to look at investment systems like these over the long term, and even still, CalPERS earned an average of 8 percent annually over the past two decades. The system consistently outperforms its own expectations, showing that pension critics’ core argument is simply false.

 CalSTRS covers the state’s teachers, the bulk of whom neither pay into nor receive payments from Social Security. Without a doubt, this system took a hit during the recession and has continued to be underfunded since its alarm bells were rung midway through the Schwarzenegger administration. However, even now, it is more than 70 percent funded. If it were the owner of that $300,000 home, that would mean it was sitting on more than $210,000 in equity only needing to fund the remaining $90,000 over the course of 30 years. Under current conditions, CalSTRS has sufficient assets to pay its obligations until 2044.

Likewise, California cities ought to be able to meet their obligations for paying into their retirement systems. For every Stockton or San Bernardino — cities declaring bankruptcy or claiming hardship over pension payments — there are dozens of cities that managed their budgets more responsibly and are showing surpluses now.

Cities must realize that walking away from pension obligations would only hurt California’s economy the way abandoned homes hurt our communities following the housing crash. First, a constant attack on workers’ pensions causes quality employees to go elsewhere. Just ask Stockton, which is having difficulty recruiting and retaining police officers because of the low pay and retirement plan uncertainty. When cops leave, crime goes up.

Second, California’s public employees contribute a tremendous amount toward our state’s economic activity. According to one study, CalPERS pension payments generated $26 billion in economic activity in 2010 alone. A California State University study pegged the number of jobs created by that spending at 93,000.

Governor Jerry Brown’s pension reforms may be considered a “tweak” by some, but consider the working families who will see their benefits reduced by $60 billion to $100 billion over the coming three decades. If those lower-wage workers are forced into more drastic “reforms” — pushed into 401(k)-style retirement plans and subjected to the whims and fluctuations of Wall Street — the effect on our economy will be worse than that of the housing crash.

Article By: Dave Low