State’s Retired Public Workers Earn 26% More than Private-Sector Workers Still on the Job

California’s State and Local Workers Average Pay and Benefits Twice the Average for Private Sector Workers

Friedrichs v. 2.0? U.S. Supreme Court May Get a Second Chance to Free Teachers from Forced Unionism

California debt now running closer to Italy and Portugal, new study finds

New California Policy Center Study Offers Next Generation Infrastructure Solutions

Contra Costa needs more road capacity, but we don’t need new sales taxes to build it

Along with the grandeur of Yosemite and the beauty of the California coast, there’s our state’s epic rush hours. But sales taxes on the Nov. 8 ballot, like Contra Costa’s Measure X, aren’t the way to solve them.

Measure X would add 0.5% to local sales tax rates to fund a variety of transportation projects around the county. But it would raise something other than revenue — like concerns about equity and efficiency.

Measure X would hike the overall tax rate in El Cerrito to 10.50% and in Richmond to 10.00%. Working class people in these neighborhoods – many of whom do not have cars – will be expected to pay more for clothing and school supplies to subsidize the commutes of affluent Tesla drivers living in Blackhawk and other wealthy communities.

Because Tesla’s and other Battery Electric Vehicles (BEVs) don’t use gas, their owners don’t pay the gasoline taxes that traditionally fund road construction and maintenance. The increased popularity of BEVs has contributed to the sharp decline in gas tax revenues collected by the state and distributed to counties. This reduction in gas tax funding is one reason county officials are asking voters to double the transportation sales tax from its current 0.5% level.

But by funding transportation improvements from general tax revenue, we are subsidizing drivers who most often travel the highways in single-occupancy vehicles. A better option is to fund highway improvements through toll revenues. Although we are starting to see toll lanes in Contra Costa County, much more can be done.

In Orange County, public agencies operate four toll roads as well as four express lanes in the median of SR-91. Agencies maintain these arteries with toll revenues; no taxpayer funding is required. The SR-91 express lanes, opened 20 years ago, have been a model for express lane projects elsewhere around the nation. The nearest example to us is a stretch of I-680 in Alameda County that includes a High Occupancy Toll (HOT) lane – one that can be used by carpools for free and by solo drivers for a fee that varies with the level of congestion. In California, express lane tolls are paid with FasTrak, just like bridge tolls.

The Metropolitan Transportation Commission is converting a carpool lane on I-680 between Walnut Creek and San Ramon to an HOT lane. But beyond conversions, drivers also need new lanes on portions of I-80, I-680, SR-24 and SR-4. Under Assembly Bill 194, these new lanes can be financed by bonds backed by toll revenues – reducing or eliminating the need for tax subsidies.

Budgeted costs and the risks of cost overruns (like the one experienced by the Bay Bridge replacement project) can be limited by contracting with private firms to design and build new express lanes. This is the approach the Orange County Transportation Authority is taking for new toll lanes it is adding to I-405, a project now out for bid.

Other states are leveraging the private sector even more. In the Miami suburbs, the Florida Department of Transportation has recently added three tolled, reversible express lanes to I-595. The successful project was not only designed and built privately, but the concessionaire is also operating and maintaining the new lanes.

In the Washington, D.C. suburbs, an Australian company owns and operates express lanes in the Capital Beltway, I-495. The same company also owns 13 tollways in Australia.

By correctly pricing our highways, we can attract private capital and the toll revenues needed to maintain and expand them. By asking drivers to fund the highways they use, we can relieve the burden on the county’s often disadvantaged sales taxpayers.

Top 10: Vernon Leads California Cities with More Public Employees Than Residents

For Immediate Release
October 11, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

Vernon, California is so famous for its history of corruption that it was the municipal star of season 2 of HBO’s “True Detective” series. Now the diminutive L.A. County town can claim another achievement: Vernon is the only California city with more public employees than residents.

Vernon’s 210 residents are served by 271 city employees, according to data on the California state controller’s website. 

No. 2 Irwindale is a distant second – though just a 30-minute drive (could be hours – depends on traffic in L.A.’s tortuous downtown) from Vernon. In that East Los Angeles County city, there’s one government employee for every one of Irwindale’s 1,415 residents. San Francisco is the only major city on the Top 10, with one government employee for every 22.7 residents. 

Here’s the Top 10:

top10cities Most Public Employees

Public employees in Vernon earn an average of $107,848 (plus benefits of $37,571). That’s much higher than nearby hegemon, Los Angeles, where public employees average $83,356 (plus benefits of $12,620).

Several top Vernon officials earn salaries in excess of $300,000:

Mark Whitworth (City Administrator): $402,335
Daniel Calleros (Police Chief): $361,644
Michael Wilson (Fire Chief): $361,359
Carlos Fandino Jr. (Director of Gas and Electric): $324,354
Andrew Guth (Fire Battalion Chief): $304,243

While many of Vernon’s city employees continue earn six-figure salaries, the average city resident earns far less. Per capita income in 2010 was $19,973. Median household income in 2010 was $38,500 – down dramatically from 2000, when it was over $60,000. According to the 2010 U.S. Census, 5% of the population lived below the federal poverty line. In 2000, it was 0%.

How does the city fund that dramatic gap in income? By taxing utilities for industry in the city. But because Vernon’s utility rates are among the highest in California, many businesses are moving out. That’s going to put pressure on city officials to trim public services – or to capitulate to the logic of history and become part of a neighboring city. How about Bell?

Conor McGarry is a fall Journalism Fellow at California Policy Center. Andrew Heritage contributed data analysis. Source: California state Controller’s Office.

ABOUT THE CALIFORNIA POLICY
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Reporter's Notebook: CPC Offers Expert Help with Local School Bond Reporting

For Immediate Release
September 23, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

SACRAMENTO, Calif. — Well down the November ballot, obscured by the high-profile battle for the White House, Californians will find more than 100 local school bond measures representing hundreds of millions of dollars of new public debt.

“The bond process is like a rigged game of high-stakes poker,” says CPC president Ed Ring. “Taxpayers may have a seat at the table, but for years haven’t stood a chance against politicians, government union leaders, construction companies and investors colluding for political and financial gain.”

The California Policy Center’s government finance experts can help you show readers why these bond measures matter.

ED RING is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

MARC JOFFE is a California Policy Center financial analyst. His research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

KEVIN DAYTON authored the landmark study “For the Kids: California voters must become wary of borrowing billions from wealthy investors for educational construction.” That study tracked passage over 14 years of more than 900 California school bonds worth $146.1 billion, and inspired new law (AB 2116, signed this summer by Gov. Jerry Brown) that imposes limits and oversight of local bonds. He is a 1992 graduate of Yale University.

ABOUT THE CALIFORNIA POLICY
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

 

The Highest-Paid Public Employee in the Poorest County in California

Raymond J. Cordova, county executive officer of Imperial County, earns $282,093 with total pay and benefits. That’s 17 times the median per capita income of Imperial County residents, who earned just $16,409. By comparison, San Francisco’s highest paid public official, Chief Investment Officer William J. Coaker Jr., made $633,723 – about 13 times SF’s median income. San Francisco got the better deal: divide salary by population, and we find that San Francisco residents paid just 76 cents each for Coaker; Imperial County residents paid $1.60 each for Cordova.

Cordova is a low-profile guy in a low-profile community. With just 156,000 residents, Mexico-adjacent Imperial County is almost a postscript to the state. Cordova himself is nearly anonymous. The one photo of him on the internet – in which the sartorially splendid CEO is largely blocked from view by Supervisor Raymond Castillo – is the only one we could find; the county did not respond to requests for comment and a photo.

That made it hard for us to personally congratulate Ralph Cordova Jr., who, as Harry Bailey says of his brother George in the classic It’s a Wonderful Life, may be “the richest man in town.”

Imperial County runners-up: Director of Child Support Services Gustavo Roman ($241,717) and Public Defender Timothy J. Reilly ($224,138).

By Conor McGarry. Sources include State Controller’s Office.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Gov. Brown says yes to school finance reforms inspired by CPC study

For Immediate Release
August 18, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

SACRAMENTO — It’s rare that a think-tank study produces real reform, but it happened today when Gov. Jerry Brown signed into law a bill designed to stop school officials before they recklessly spend again.

Assembly Bill 2116 began one year ago with a July 2015 California Policy Center study.

For the Kids: California voters must become wary of borrowing billions from wealthy investors for educational construction,” by CPC researcher Kevin Dayton, tracked passage over 14 years of more than 900 California school bonds worth $146.1 billion.

Inspired by that CPC study, Rep. James Gallagher (R-Sacramento Valley) drafted a bill to limit the ability of school districts to take on debt through new bonds – even authorizing county auditors to stop spending if bond “funds are not being spent appropriately.”

“I am pleased that the governor saw the need to increase oversight of school bonds,” Gallagher said in a press release. “Borrowing for bonds has exploded in the last decade, and it is more important than ever that school construction bond funds be fiscally sound and their financing mechanisms transparent.”

In addition to waste and abuse in the management of those school bonds, Dayton found another problem: the surge in school bond debt has produced a massive “wealth shift” upward – from taxpayers of relatively modest means to “wealthy investors who buy state and local government bonds as a relatively safe investment that generates tax-exempt income through interest payments.”

Gallagher’s bill implements California Policy Center recommendations to kill one of the most pernicious municipal finance practices. The new law limits the ability of bond advisers to exaggerate property values when calculating the taxpayer burden.

“We dedicated tremendous resources to producing this study, and we were naturally pleased to see Rep. Gallagher act on it with such energy,” said Ed Ring, CPC’s president. “We’re especially delighted that the state’s school kids have been placed ahead of the interests of consultants, government unions, politicians and Wall Street banking interests.”

“It’s great to see intellectual research and analysis turn into practical improvements in law,” said Dayton.

ABOUT ANALYST KEVIN DAYTON
Kevin Dayton is a policy analyst for the California Policy Center, an influential writer, and the author of frequent postings about generally unreported California state and local policy issues on the California Policy Center’s Prosperity Forum and Union Watch, as well as on his own website LaborIssuesSolutions.com. Dayton is a 1992 graduate of Yale University. Follow him on Twitter at @DaytonPubPolicy.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

SUITABLE FOR QUOTING: Expert Responses to CalPERS' Monday, July 18 Earnings Report

For Immediate Release
July 18, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

California Policy Center Responses to Monday, July 18, 2016 Earnings Report

For reporters and commentary writers, the California Policy Center can make available two public finance experts. We also offer for publication these immediate responses to the CalPERS report:

 

ED RING: is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

“Current gains in the market are engineered by low interest rates and stock buy-backs. It is an unsustainable bubble.”

“CalPERS claims that infrastructure investments helped their portfolio returns, but they have less than 1% of their assets invested in infrastructure.

“CalPERS claims ‘fixed Income earned a 9.29 percent return’ in their most recent fiscal year. This is impossible to do without extremely high risk. Most fixed income investments today have returns of 3% or less.”

“If CalPERS is truly committed to transparency, they’ll stop investing in private equity, which by its very nature is not transparent.”

“If CalPERS truly believes they can earn 7.5%, or even 6.5%, then they should set a ceiling on the percent of payroll they demand from cities and counties, instead of perpetually increasing it.”

“If CalPERS truly believes they can earn 7.5%, then they’ll use that rate, instead of 3.8%, when calculating how much to charge a city or county that wants out of their system.”

“CalPERS depends on a Fed engineered asset bubble to remain solvent. As such, they are complicit with the Wall Street financial interests that control our national politicians and whom their union board members regularly decry.”

 

MARC JOFFE is a California Policy Center financial analyst and founder of Public Sector Credit Solutions in 2011. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

“This is the second year of returns well below 7.5%. In 2015, CalPERS returned only 2.4%. The cumulative impact will be greater stress on local budgets as cities, counties and special districts will have to increase their pension contributions to make up for the shortfall.”

 

ABOUT THE CALIFORNIA POLICY
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

FOR PUBLICATION: Ed Ring Response to CalPERS' disastrous 2015-16 earnings report

For Immediate Publication
July 18, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

Latest earnings report is more evidence California retirement agency will reform or die

By Ed Ring | California Policy Center

The officials who run California’s public-employee retirement system should have released today’s earnings report with sound effects – a flugelhorn, maybe, or horror-movie screams.

Through the year ending June 30, the California Public Employee Retirement System earned just 0.61% on its investments – not even close to it 7.5% projection.

CalPERS is the nation’s largest public employee pension fund. Like all such funds, it relies on investment earnings to pay retired public employees far more in retirement benefits than those employees – along with their employers – deposited into those funds during their careers. The better the market, the less CalPERS has to lean on local government employers and employees for cash. But when the market goes south, as it has, CalPERs has to push its contributors for more cash.

Today’s report includes grim warnings about future earnings too. And that means everyday Californians should expect government service cuts, higher taxes, delayed maintenance of critical infrastructure, and a push to take on great government debt.

The earnings report directly contracts the system’s recent bullish assessments of fund performance. When the Orange County Register in January asked why CalPERS was still predicting a return of 7.5% when the stock market was producing more anemic results, fund officials offered a political rather than responsible financial response: even a modest downward estimate would force them to demand that local officials bail out the fund. That “would have caused financial strain on many of California’s local municipalities that are still recovering from the financial crisis,” CalPERS officials said in a press release.

In March, the agency was at it again, arguing that its projection of 7.5% returns was “not unrealistic” – is in fact historically reasonable because CalPERS has occasionally hit that number.

Then, reality began to set in. Last month, Ted Eliopoulos, the system’s Chief Investment Officer, warned the public that the next five years will be “a challenging market environment for us. It is going to test us.”

Our own recent analysis shows Eliopoulos is right.

Our analysis relies on three measures of stock-market health: ratios of price/earnings, price/sales, and price/GDP. They show the stock market is overvalued by about 50 percent, suggesting that pension funds are headed for a major correction.

At the moment, California’s state and local agencies contribute an average of about 33 percent of their payroll to CalPERS and other state/local pension funds. In the event of a market slide of 50 percent, followed by annual returns of 5 percent per year, with no changes to retirement benefits, we estimate the required annual contribution from local governments would rise to a crushing 80 percent of payroll. The total cost to California’s taxpayers of keeping CalPERS and the other state/local pension systems afloat: an additional $50 billion per year.

If market returns are just one point lower – 4 percent instead of 5 percent – we estimate local governments having to make annual payments equal to a staggering 113 percent of their payroll. That’s an additional $86 billion per year.

There are ways to preserve the retirement funds and protect taxpayers. But if investment performance falters, reducing the formulas used to calculate defined benefit pensions will have to be part of the solution. Lowering or even suspending cost-of-living increases for retirees and reducing the rate at which pension benefits are earned by new and existing employees would be a good start, as would capping pension benefits and raising the age of eligibility.

But implementing reforms is a political impossibility – unless the people running CalPERS and the other pension systems stop fighting to preserve the status quo. They need to work their client agencies and their union-dominated boards of directors to accept benefit reductions that will restore financial sustainability to these funds without crushing taxpayers. They might even exercise true creativity, and explore new portfolio strategies such as investing in California’s neglected infrastructure.

There’s little chance of that so long as denial characterizes the agency’s response. CalPERS officials accompanied today’s weak earnings report with cheery language. The near-zero return rate was a “positive net return” that the agency “achieved” “despite volatile financial markets and challenging global economic conditions.”

For his part, Eliopoulos, the fund’s top investment officer, expressed a kind of optimism about the future. So be it. But if he and his CalPERS colleagues truly want to prove their optimism – if they are so sure they can hit their numbers – they should freeze the amount they demand from cities and other agencies at a fixed percent of payroll.

That would mean putting an end to the blank checks Californians have sent to Sacramento. And that news could be heralded by something like a trumpet blast of angels or a marching band.

 

ABOUT THE AUTHOR
Ed Ring is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Red Flags: New Study Offers Grim Warning for California Pension Funds

For Immediate Release
July 12, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

Stock market overvaluation will lead to ‘major correction,’ trigger benefits cuts and tax hikes

SACRAMENTO, Calif. – There are more red flags for public-sector pension funds that rely on stock investments for most of their income, a new California Policy Center study finds.

Read the entire study here.

“Three key market indicators show that publicly traded U.S. stocks are overvalued by about 50 percent, suggesting that pension funds are headed for a tough correction,” says CPC President Ed Ring, author of “How a Major Market Correction Will Affect Pension Systems, and How to Cope.”

Ring says the likely downturn will have grave implications for all Californians – not just those who depend upon the pension funds for retirement income. Lower returns on their investments will force pension funds to cut payments to government retirees or require California governments to act dramatically to cover the revenue shortfall.

Using a long-range cash flow model that simulates pension fund performance, Ring calculated the impact on California’s state and local government employee pension funds based on a market slide of 50% in 2017, followed by annual returns of 5% per year. In this case, with no changes to retirement benefits, the required annual contribution from governments would rise to 80% of payroll, costing an additional $50 billion per year. In another case, with post-crash returns projected at only 4% per year, the model estimated annual payments to rise to a staggering 113% of payroll, costing an additional $86 billion per year. Currently, California’s pension funds collect from state and local agencies an amount equivalent to about 33% of their payroll.

The study also provides several specific estimates of how much pension benefits would have to be cut (retirement age, annual multiplier, and COLA) after a severe market correction in order to keep the annual contributions from state and local agencies level at 33% of payroll.

The CPC study includes a link to download Ring’s spreadsheet so that anyone can test a variety of pension-fund assumptions.

You can download the spreadsheet here.

Ring’s prediction of an impending correction cites three key stock market ratios:

  • Price/earnings, now at one of the market’s historic highs
  • Price/sales, now at a 50-year high
  • Stocks/GDP, now near its 60-year high

Ring predicts he’ll have many critics.

“It is easy enough to step back and claim that the rules have changed, that these unusually high stock-market multiples can be sustained for additional decades, and that productivity improvements will enable the U.S. economy to support both massive debt and an aging population,” Ring writes. “Those who argue this position are betting that the U.S. economy will remain a stable refuge for wealth fleeing far more tumultuous economies elsewhere in the world. Staking the future of pension fund systems on this argument is a dangerous gamble.”

Ring’s study appears even as officials at California Public Employees Retirement System, the nation’s largest retirement system, prepare Californians for a poor earnings report next week.

Analyst Ed Ring is available for media interviews. Direct press inquiries to:

Ed Ring
President, California Policy Center
Ed@CalPolicyCenter.org
(916) 524-7534

Or

Will Swaim
Vice President, California Policy Center
Will@CalPolicyCenter.org
(714) 573-2231

ABOUT THE AUTHOR
Ed Ring is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

 

UC Berkeley's 'income inequality' critics earn in top 2%

For Immediate Release
June 23, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

 

Income inequality at UC Berkeley worse than world’s-worst Haiti

SACRAMENTO, Calif. – Scholars from the University of California at Berkeley have played a pivotal role in making income inequality a major issue in 2016 political campaigns. But while they decry the inequities of the American capitalist system, Berkeley professors are near the top of a very lopsided income distribution prevailing at the nation’s leading public university, according to a new study by the California Policy Center.

You can read the full study here.

Marc Joffe, the study’s author, examined state salary data to determine that inequality among the 35,000 UC Berkeley employees is worse than that of Haiti.

Ironically, income inequality at Cal shows up dramatically in its Center for Equitable Growth (CEG), the university’s home to critics of income inequality.

According to the most recent data:

  • Center Director Emmanuel Saez received total wages of $349,350.
  • Its three advisory board members are also highly compensated Cal professors: David Card (making $336,367 in 2014), Gerard Roland ($304,608) and Alan Auerbach ($291,782).
  • Aside from their high wages, all four professors are eligible for a defined-benefit pension equal to 2.5% times final average salary times number of years employed.

All four are in the top 2% of UC Berkeley’s salary distribution, and that Saez is in the top 1%.

Says Joffe: “It could be that an effective researcher has to know his or her subject: thus to the study the top 1%, we suppose one has to be in the top 1%.”

Among Berkeley’s most prominent critics of income inequality is former Clinton Labor Secretary Robert Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley. Reich receives somewhat lower compensation than the four CEG economists, collecting $263,592 in pay during 2014. But Reich’s salary was likely not his only source of income in 2014. Reich makes himself available to give paid speeches through a number of speaking bureaus, charging a fee estimated at $40,000 per talk.

“If UC Berkeley economists are really opposed to income inequality and are concerned about low-paid workers, they might consider sharing some of their compensation with the teaching assistants, graders, readers and administrative staff at the bottom of Cal’s income distribution,” Joffe concludes.

ABOUT THE AUTHOR
Study author Marc Joffe is the founder of Public Sector Credit Solutions and a policy analyst with the California Policy Center. Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Major-party presidential candidates offer no solutions on federal retirement crises

For Immediate Release

June 2, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

SACRAMENTO — Californians may be accustomed to living with the specter of a public pension crisis. But the federal government’s problem with its retirement systems – including Social Security – is far worse, and yet none of the three remaining major-party candidates for president has a plan to do anything about it.

The California Policy Center offers “Comparing Federal and California State Retirement Exposures,” a comparison of California and federal exposure to pension liability. You can read Marc Joffe’s full study here.

Key findings include:

On Social Security
DEBT VS. ASSETS: “Although discussion of Social Security often revolves around the trust fund, this emphasis is misplaced. Unlike CalPERS or CalSTRS, the Social Security trust fund does not contain real assets. Instead, it holds special-issue U.S. Treasury bonds. Total federal assets of $3.2 trillion are easily exceeded by $13.2 trillion of federal debt securities held by the public and $8.2 trillion of other liabilities. So the IOUs held by the Social Security trust fund compete with claims held by many external parties for a relatively small pool of federal assets.”

IMPACT ON FEDERAL DEFICIT: Using projections from the Social Security Actuaries, Joffe reports that the Social Security program is expected to add $371 billion to the annual federal budget deficit (in constant 2015 dollars) by 2040. The Social Security Actuaries say that projecting higher costs (for example, an increase in life expectancy), adds $640 billion (again, in constant dollars) to the annual deficit.

On Federal Employee Retirement Programs
UNFUNDED LIABILITIES: “The Civil Service Retirement and Disability Fund, paid $81 billion of retirement benefits in fiscal year 2015, or 2.49% of federal revenues. The system reported an Unfunded Actuarial Liability of $804.3 billion and Assets of $858.6 billion, implying a funded ratio of only 51.6%.” The Defense Department also offers pensions, and its system is worse than the Civil Service program with a funded ratio of just 35%.

Washington has Bigger Problems – and More Powerful Financial Tools
Joffe concludes that the federal government has tools to deal with a public pension crisis that the states do not:

Constitutional: “In an emergency, Congress and the president can cut or even terminate benefits to Social Security recipients, federal civilian retirees or veterans. This is not the case for the state of California.”

Currency control: “A central government controlling an international reserve currency does have more fiscal flexibility than a state which is legally obligated to balance its budget each year. So the federal government’s ability to absorb pension obligations is greater than California’s. This is fortunate, because the federal governments exposure is so much greater.”

The complete California Policy Center study is available here.

ABOUT THE AUTHOR
Study author Marc Joffe is the founder of Public Sector Credit Solutions and a policy analyst with the California Policy Center. Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

 

Taxes up, retirements slashed, governments in crisis: Ed Ring on California’s coming public pension apocalypse

For Immediate Release

May 18, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(949) 274-1911

SACRAMENTO – America’s already troubled public-employee pension funds will go broke in the next economic slowdown, creating the likelihood that millions of public employees will see their retirements slashed – even as state and local governments raise taxes dramatically and scramble to find new sources of cash.

That’s analyst Ed Ring’s conclusion in “The Coming Public Pension Apocalypse, and What to Do About It,” a path-breaking new study from the California Policy Center.

Read the study here.

“It’ll be the worst financial crisis in nearly a century, and California is destined to be among the hardest hit,” said Ring, president of the California Policy Center.

Ring cites as evidence three nearly unprecedented trends already visible in the U.S. economy:

  • HISTORIC DEBT: “Consumer debt, commercial debt, financial debt, state and federal debt (not including unfunded liabilities, by the way), is now estimated at 340% of U.S. GDP. The last time it was this high was 1929” – the year of the stock market crash that signaled the beginning of the Great Depression.
  • LIMITED LIQUIDITY: Because of that debt, few consumers and business can take advantage of historic low rates on borrowing. That eliminates interest rates as a key tool of economic stimulus. “Low interest rates – now at or near zero – no longer stimulate a net increase in total borrowing,” concludes Ring.
  • EXAGGERATED RETURNS ON PENSION INVESTMENTS: In determining their debt, pension funds estimate returns on investments of 7.5%. That’s already generally higher than actual investment returns. Any future stock market drop will lead to far lower returns on investments for all public-employee pension plans – and that will generate a crisis in payouts to retirees.

In his most important contribution, Ring calculates California governments’ total required pension contributions at various returns on investment and breaks out the normal versus the unfunded contributions. That has never been done.

“The implications of this are staggering,” Ring says. “A city that pays 10% of its total revenues into the pension funds – and there are plenty of them – at an ROI (return of investment) of 7.5% and an honest repayment plan for the unfunded liability, should in fact be paying 17% of their revenues into the pension systems.” If investment returns drop one percentage point, to 6.5%, “these cities would have to pay 24% of their revenue to pensions. At 5.5%, that number becomes 32%, and so on.

“It is impossible for these levels of payments to be sustained, but that’s exactly what will be necessary if the markets drop, and reforms are not implemented.”

The coming crisis – normally understated, Ring calls it “an apocalypse” – is not well understood by reporters or even public officials. Part of the problem is a lack of government transparency.

“One of the biggest reasons is the lack of good financial information about California’s government worker pension systems,” Ring writes. As an example, he cites the elimination of the California State Controller’s “Public Retirement Systems Annual Report.”

“That report used to consolidate all of California’s 80 independent state and local public employee pension systems into one set of financials, but they discontinued the practice in 2013,” Ring notes. “The most recent one issued, released in May 2013, was itself almost two years behind with financial data (using FYE 6-30-2011 financial statements), and it was almost three years behind with actuarial data used to report funding ratios (using FYE 6-30-2010 actuarial analysis). Now the state controller has created a By the Numbers website, but it’s hard to use and does not provide summaries.”

The report is not all gloomy. Ring offers several suggestions to mitigate the coming financial apocalypse. Reforms include adjusting pension formulas, strategies for economic growth and financial-industry reforms.

Analyst Ed Ring is available for media interviews. Direct press inquiries to:

Ed Ring
President, California Policy Center
Ed@CalPolicyCenter.org
(916) 524-7534

Or

Will Swaim
Vice President, California Policy Center
Will@CalPolicyCenter.org
(714) 573-2231

Citing CPC study, new Assembly bill seeks to stop runaway school bond debt

For Immediate Release
March 24, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(949) 274-1911

SACRAMENTO — A California Assemblyman hopes to stop school officials before they recklessly spend again.

AB 2116 author Rep. James Gallagher (R-Sacramento Valley) says his bill would limit the ability of school districts to take on debt through new bonds – even authorizing county auditors to stop spending if bond “funds are not being spent appropriately.”

“Borrowing for school construction has exploded in the last decade,” Gallagher said.“As borrowing hits record highs, it is more important than ever that school construction bond funds be fiscally sound, and their financing mechanisms transparent.

“AB 2116 ensures that future school construction bonds are subject to stricter scrutiny and transparency.”

Gallagher said his Assembly bill is built on research and recommendations in a July 2015 California Policy Center study.

“For the Kids: California voters must become wary of borrowing billions from wealthy investors for educational construction,” by CPC researcher Kevin Dayton, tracked passage over 14 years of more than 900 California school bonds worth $146.1 billion.

In addition to waste and abuse in the management of those school bonds, Dayton found another problem: the surge in school bond debt has produced a massive wealth shift upward – from taxpayers of relatively modest means to “wealthy investors who buy state and local government bonds as a relatively safe investment that generates tax-exempt income through interest payments.”

Gallagher’s bill would implement three of the California Policy Center’s recommendations – requiring independent audits of a bond’s drain on local tax revenue; establishing annual reviews of bond issuing and repayment; and empowering auditors to halt spending that is inconsistent with the bond’s purpose.

The bill will be heard April 6 at 1:30 pm in the Assembly Education Committee of the California State Capitol, Room 2116.

ABOUT ANALYST KEVIN DAYTON
Kevin Dayton is a policy analyst for the California Policy Center, a prolific writer, and the author of frequent postings about generally unreported California state and local policy issues on the California Policy Center’s Prosperity Forum and Union Watch, as well as on his own website www.LaborIssuesSolutions.com. His other policy reports include Legacy Issues: The Citizens for California High-Speed Rail Accountability 2014 Business Plan for the California High-Speed Passenger Train System and four editions of Are Charter Cities Taking Advantage of State-Mandated Construction Wage Rate (“Prevailing Wage”) Exemptions? — a publication that sparked high-profile policy debates in cities throughout California and in the state legislature. His 2003 journal article “Labor History in Public Schools: Unions Get ’Em While They’re Young,” endures as the leading critical analysis of that movement. Dayton is a 1992 graduate of Yale University. Follow him on Twitter at @DaytonPubPolicy.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Study ranks San Mateo, Merced among CA's worst counties for pension burden

For Immediate Release
March 15, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(949) 274-1911

Annual ranking: California’s best and worst counties by pension burden

SACRAMENTO — Years after the Great Recession slammed their Wall Street investments, at least four California counties have broken through the 10 percent ceiling, spending one of out of every $10 to fund their government-employee retirement programs.

The resulting strain on local budgets, called the pension burden, is one of the revelations in California Policy Center’s latest analysis of county reports.

Study author Marc Joffe said county pension burdens may be worse than his analysis reveals.

“Because pension systems usually require their actuaries to assume high rates of return on their assets, it’s arguable that counties understate their actual pension burdens,” Joffe said. “The financial stress on local governments is likely more critical than even our numbers reveal.”

Four California counties reported their pension contributions now exceed 10 percent of total revenues: Santa Barbara County (13.1 percent), Kern County (11 percent), Fresno County (10.7 percent) and San Mateo County (10 percent).

A fifth county, Merced, is also expected to report that its required contributions topped 10 percent of 2015 revenue when it files its audit.

“For years, public employee union leaders denied the pension burden was even close to 10 percent,” California Policy Center president Ed Ring noted. “This study shows the burden in some places is now approaching 15 percent of total revenues.”

The surveyed counties, which account for more than 95 percent of California’s population, made over $5.4 billion in pension contributions during the fiscal year. These counties also made $660 million of debt service payments on pension obligation bonds, raising total pension costs to over $6 billion last year.

That figure accounts for about one sixth of all California state and local pension contributions (not including payments on pension obligation bonds), estimated at $30.1 billion in 2014.

As investment markets remain relatively flat, it seems likely that many California counties will bow to pressure to cut government services or to raise cash through debt instruments or taxes.

The complete California Policy Center study is available here.

ABOUT THE AUTHOR
Study author Marc Joffe is the founder of Public Sector Credit Solutions and a policy analyst with the California Policy Center. Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.