Beware Teaser-Rate Pension Enhancements

Before the 2008 housing crash, some deceptive mortgage lenders lured borrowers into unaffordable mortgages by offering artificially low initial “teaser” interest rates without disclosing the consequences when the artificial caps were removed. Some California state legislators have taken a page from that deceptive book.

Assembly Bill 1383 proposes to enhance pensions for public employees without disclosing all the risks to taxpayers. The only risk that is disclosed is the additional upfront (“normal”) cost of the enhancements that taxpayers share with employees. The following risks are not disclosed:

• Taxpayers are on the hook for 100% of any backend (“unfunded liability”) costs if the normal cost plus investment earnings is not sufficient to pay the enhanced pensions.
• Under California law (Proposition 162), pension fund boards owe a fiduciary obligation to employees but not to taxpayers.
• Those same pension fund boards determine the normal cost that taxpayers and employees share.
• The lower the normal cost established by those pension fund boards, the higher the risk to taxpayers of unfunded liability costs.
• Associations representing employees who benefit from pension enhancements and artificially low normal costs have provided political support to many of the lawmakers sponsoring AB 1383.

Combined, those risks have led pension fund boards to artificially cap the normal costs shared with employees. That has led to the creation of unfunded liabilities paid for only by taxpayers. That’s why taxpayers are already contributing $36 billion per year to public employee pensions as opposed to only $11 billion from employees. An obligation that is meant to be shared equally by taxpayers and employees has turned into one in which taxpayers are already paying 3x more than employees.

The lawmakers sponsoring AB 1383 should disclose all the risks to taxpayers.