It is reported in today’s paper that were Stockton to cut pension payments to CalPERS, the state public employee retirement system, it would actually cost the city more, at least in the short run.
How exactly can cutting payments increase costs?
If Stockton skips payments to CalPERS, the retirement giant terminates the city’s plan. It places Stockton’s portfolio in a special account. The city still has to pay the pensions. But whereas before CalPERS billed the city using notoriously rosy investment return projections, when CalPERS terminates the city’s plan, it severs the city’s payment schedule from its actuarial projections.
The true bill comes due. The city, by paying less, ends up paying more. This is a relatively short-term phenomenon. But an insolvent city needs higher pension payments like it needs a hole in the head: a previously unappreciated reason the city is ducking a fight with CalPERS.