The financial implosion at CalPERS, the giant California public pension fund, is now directly impacting municipalities. The city of Costa Mesa recently voted to send pink slips to 203 out of 472 of its full-time employees, warning them that they could lose their jobs within six months. The city plans to outsource the jobs to private companies in a desperate attempt to avoid making sharply increased payments to CalPERS.

One big problem is that CalPERS, if faced with a funding shortfall, can legally force the state and municipalities to pay more. Gov. Schwarzenegger complained about this, as the amount CalPERS and the other public pensions demanded last year from the state was over $3 billion. Costa Mesa wants to lay off as many employees as possible to avoid making much higher payments to CalPERS, something they see happening for at least five years into the future.   They say they simply can't afford it and thus will privatize as much as possible. The impact of this upon their city services is obvious. Morale among city employees is already at rock bottom.

Can privatized employees provide the same service that public employees do? Will they even be in Costa Mesa and not just at a call center somewhere? Will buildings continue to be inspected and the roads repaired? Who knows, but Costa Mesa is about to find out. Also, they are assuming that privatizing will cut costs but have made no actual contracts yet, so whether there will be genuine long-term savings is as yet unknown.

CalPERS and the rest of the public pensions are supposedly part of the free enterprise system. Yet they have no incentive to improve their performance, and the hand of the marketplace has no influence upon them.  If they lose $500 million on a single real estate deal as they did with Stuyvesant Town, oh well, taxpayers will make up the difference. That this was a deeply risky investment to begin with and probably should have never been made in the first place, especially considering they are managing retirement money, seems to have not entered into their calculations.

If CalPERS was a private pension fund (or a hedge fund), given their lethargic performance, their top management would have been replaced long ago. Yet they seemingly exist on a planet of their own, free from any meaningful oversight and accountability. If they lose enormous sums, they simply force others to pay for their blunders. This is not fair to those whose money they manage nor is it fair to citizens of California who must pay up to fund pensions that are not theirs.

Costa Mesa clearly shares some of the blame. It has a deficit of $1.4 million this year, spends 80% of its budget to pay employees (the state average is 47%), and has $130 million in unfunded pension liabilities. That pension liability will be increasing sharply.

They are hardly alone. Many municipalities have been deferring responsibility for years, kicking pension funding down the road for someone else to worry about. The state has done the same. The predictable results from this are what we are seeing with Costa Mesa now.