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

For Immediate Release
March 13, 2017
California Policy Center
Ed Ring, ed@calpolicycenter.org
(916) 524-7534

California’s retired government workers earn 26% more in retirement than private-sector workers earn while still on the job.

That’s the finding of an in-depth analysis released this week by the California Policy Center.

“This is an absolutely upside-down system,” said California Policy Center CEO Mark Bucher. “In the Golden State, it truly pays not to work.”

The new study found that the average pension for a retired public employee in California was $68,673 in 2015, before benefits. By contrast, active private-sector workers earned on average just $54,326.

That same year, the maximum Social Security benefit for a high-wage earner retiring at age 66 was just $32,244 – less than half the benefit of a retired government worker.

Study author Ed Ring analyzed 23 of the largest pension systems in California, representing 95 percent of all state and local government retirees – over 1 million retirees.

State officials at CalPERS claim that benefits to retirees average about $31,500 per year.

But that’s misleading, says Ring, who is vice president of research at CPC.

“They’re not taking into account the average retiree’s length of service. Someone who works half of a normal career should not expect a pension equal to someone who has worked a full career,” Ring says.

Read the full study here: What is the Average Pension for a Retired Government Worker in California?

Other key findings of the study:

  • For all systems evaluated, representing over 1.0 million records of California’s retired state and local government workers, in 2015 the average pension for a post-2000 retiree with between 29.5 and 30.5 years of work was $68,673. This does not include benefits.
  • Using the same criteria – the average full-career pension for a CalPERS retiree was $71,402, for a CalSTRS retiree it was $57,715, and for a University of California retiree it was $61,752.
  • There was a great deal of variation in the major independent county pension systems, with the highest full-career average in 2015 going Contra Costa County, at $85,091, and the lowest going to Tulare County, at $51,932.
  • To compare public safety pensions to pensions for all other employees, we evaluated data from three cities where each city has two independent pension systems, one for public safety, and another for all other employees. The 2015 results summarize as follows:
    Los Angeles – public safety $89,183, all other retirees $54,782,
    San Jose – public safety $130,439, all other retirees $74,649,
    Fresno – public safety $54,860, all other retirees $40,927
  • Another way to compare public safety pensions to pensions for all other employees was to evaluate data from pension systems that reported, for each record, the former employing agency. Los Angeles County provided data that included this information. Los Angeles County was also the only major pension system to provide benefits data, yielding the following summary:
    Sheriffs – pension $88,144, benefits $18,395, total $106,539
    Firefighters – pension $104,905, benefits $20,350, total $125,256
    All other retirees – pension $50,484, benefits $10,581, total $61,065
  • Data on disability pensions was available from two major pensions systems: In Los Angeles County in 2015, disability pensions were reported for 6.5% of former miscellaneous employees, for 40.5% of all retired former sheriffs, and 65.7% of all retired former firefighters; in San Jose’s retirement system exclusively for former public safety employees, 50.0% of the retirees were receiving disability pensions.

“California’s state and local governments face serious financial challenges, including $1.3 trillion in debt and underfunded pensions, plus neglected infrastructure,” says Ring. “State and local elected officials ought to be coming up with policies designed to lower the cost of living for everyone, instead of paying pensions to their government workforce that actually exceed the average of what active private sector citizens earn while still working.”

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center produces policy solutions to unleash California’s legendary talent and entrepreneurial spirit. Learn more at CaliforniaPolicyCenter.org.

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

For Immediate Release
January 26, 2017
California Policy Center
Ed Ring, ed@calpolicycenter.org
(916) 524-7534

A in-depth analysis released this week by the California Policy Center finds that the average pay and benefits for California’s full-time state and local public employees in 2015 was $121,843. This is nearly twice what the average full-time private sector worker made in pay and benefits during 2015, $62,475.

Read full study: California’s Public Sector Compensation Trends

The California State Controller provides public pay averages but these are weighed down by part time and part year workers as well as interns and temporary employees. Relying instead on raw data downloaded from the State Controller’s website, CPC researchers combed through 881,021 individual 2015 pay records for California’s city, county and state agency employees to isolate the full-time employees in order to calculate accurate averages. Using data from the U.S. Census Bureau and the California Employment Development Department, the researchers were also able to estimate the average pay and benefits for private sector workers in California.

“If anything we have understated the public sector averages, and overstated the private sector averages,” said Ed Ring, CPC VP of policy research and author of the study. “For example, we calculated the public sector averages would have risen to $139,691 in 2015 if the pension systems had been more adequately funded. We also made, in the absence of better available data, very generous assumptions regarding private sector employer-paid benefits, which meant our $62,475 average total pay and benefits estimate for private sector workers, if anything, is overstated.”

Other key findings of the study:

  • Average 2015 total compensation for full-time state/local workers by category:
    – Cities: public safety $171,450, miscellaneous (all other employees) $121,431.
    – Counties: public safety $170,728, miscellaneous $108,857.
    – State Agencies: public safety $137,531, miscellaneous $104,867.
  • Between 2012 and 2015 there was a strong correlation between growth in employer costs for overtime and growth in employer costs for pension contributions. Overtime pay was up in 2015 compared to three years ago by 35% for cities, 60% for counties, and 32% for state agencies. Similarly, pension contributions were up in 2015 compared to three years ago by 14% for cities, 26% for counties, and 42% for state agencies.
  • In 2015, the pay (not including benefits) for California’s city and county employees exceeded pay for workers in cities and counties in the rest of the U.S. by 39%; California’s average public safety worker pay exceeded that of their counterparts across the U.S. by 78%; miscellaneous worker pay in California was 16% greater than in the rest of the U.S.
  • Between 2000 and 2015, average private sector pay for full-time workers in California (not including benefits) increased 47%, from $37,012 in 2000 to $54,326 in 2015. During that same period, average pay for public employees in California increased by 59%, from $51,271 in 2000 to $81,549 in 2015.
  • In 2015, the “benefits overhead” for the average private sector full-time worker in California is estimated at 15%; for state, city and county public employees, even when including overtime in the denominator, it is 40%.

“California’s state and local governments face serious financial challenges, including $1.3 trillion in debt and underfunded pensions, plus neglected infrastructure,” said Ring. “State and local elected officials ought to be coming up with policies designed to lower the cost of living for everyone, instead of paying their government workforce twice what ordinary citizens can earn.”

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 shaping more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

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

For Immediate Release
January 19, 2017
California Policy Center
Will Swaim, will@calpolicycenter.org
(949) 274-1911

In a case that will cheer education reformers, four Pennsylvania teachers today sued their unions, school districts and district officials for making union membership a condition of their employment.

The suit – and the likely appointment of a reform-friendly Supreme Court justice under the incoming Trump Administration – immediately raised expectations that Hartnett v. Pennsylvania State Education Association will do for public education what last year’s Friedrichs case could not.

Plaintiffs in Friedrichs persuaded district and circuit courts in California to move that case quickly to the Supreme Court.

“If the Hartnett plaintiffs can do the same, it’s possible Hartnett could become the vehicle for the Supreme Court finally to rule in favor of worker freedom,” said Robert W. Loewen, a retired attorney, court watcher and board chairman of the California Policy Center. “That would give the new court the opportunity to overturn its ill-advised decision in Abood, which has prevailed since the 1970s.”

The Hartnett plaintiffs “do not want the state deciding for them which private organizations they must support and specifically do not want to be compelled by state actors to support labor organizations they have not voluntarily chosen to support and that they may, in fact, oppose,” the teachers assert in their filing.

Hartnett comes just months after the U.S. Supreme Court deadlocked over Friedrichs v. California Teachers Association. Following a January 2016 Supreme Court hearing, Friedrichs appeared certain to unwind mandatory union membership for teachers on First Amendment grounds.

But Friedrichs was derailed by the death of Judge Antonin Scalia just weeks after that hearing. Scalia’s absence left the justices tied 4-4 on Friedrichs. That left standing a lower court’s ruling in favor of the California Teachers Association.

The failure of the Friedrichs case – and the apparently inevitable election of Hillary Clinton – seemed to kill hopes the Supreme Court would overturn Abood, and end union control of public education in the U.S.

Donald Trump’s November win, and the expectation that the new president will nominate a reform-minded Supreme Court appointment to replace Scalia, raised hopes for a new Friedrichs-style case.

Rebecca Friedrichs, the third-grade teacher from Orange County, California, was among the first to celebrate the announcement of Hartnett.

“I’m thrilled to hear school employees and teachers throughout the country are standing united for freedom from forced unionism,” she told the California Policy Center hours after the suit was filed. “Every American worker deserves to innovate and thrive on the job unencumbered by the politics and policies imposed upon them by union domination of our workplaces.

“It’s time for liberation,” she said. “Three cheers for the brave men and women bringing the issues to light.”

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 shaping more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

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

For Immediate Release
January 11, 2017
California Policy Center
Marc Joffe, marc@calpolicycenter.org
(415) 578-0558

A landmark study of California’s finances reveals the state’s debt burden is approaching the levels of Italy and Portugal, where debt crises in 2011 and 2012 drove the Eurozone countries to the brink of collapse. The findings come a day after Governor Jerry Brown predicted that the state would end the year with a sizable deficit.

California Policy Center researchers Marc Joffe and Bill Fletcher determined that California state and local governments owed $1.3 trillion as of June 30, 2015. Pensions and health benefits paid to retired state workers make up more than half of that debt.

CPC’s analysis is based on a review of federal, state and local financial disclosures. The total includes bonds, loans and other debt instruments as well as unfunded pension and other post-employment benefits promised to public sector employees.

“Our estimate of California government debt represents about 52% of California’s Gross State Product of $2.48 trillion. When added to the state’s share of the national debt, we find that California taxpayers are shouldering debt burdens on a par with residents of peripheral Eurozone states,” they write.

Read CPC’s full study here.

Other key points in the California Policy Center study:

  • Not included in the debt calculation: billions of dollars in deferred maintenance and upgrades to California’s infrastructure. “To the extent California’s government has not maintained investment in infrastructure maintenance and upgrades to keep up with normal wear and to keep pace with an expanding population, it has passed this cost on to future generations who will have to issue additional debt to pay for this expense.”
  • More debt has been added since the June 30, 2015 analysis date. Governments at all levels issued $72 billion in new debt last year.

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 shaping more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

New California Policy Center Study Offers Next Generation Infrastructure Solutions

For Immediate Release
December 1, 2016
California Policy Center
Lee Schalk at 916-258-2396
lee@calpolicycenter.org

New California Policy Center Study Offers Next Generation Infrastructure Solutions

Study explores how private infrastructure investment can increase water supply, bolster energy, and modernize transportation systems.

LOS ANGELES — Today the California Policy Center released a new study investigating California’s infrastructure challenges and exploring how private infrastructure investment can increase California’s water supply and modernize its energy and transportation systems. The study explains how private investment, such as that funded through public employee pension systems, can bring the state’s infrastructure into the 21st century better than the current reliance on traditional municipal bond financing.

The six-part study, the product of a nearly a year of collaboration by the authors, can be viewed online here:

Part One: Introduction
Part Two: Water Reuse
Part Three: Water Storage
Part Four: Desalination
Part Five: Energy and Transportation
Part Six: Financing Models and Policy Recommendations

The complete study can be downloaded and viewed in printable PDF here.

The study suggests that private infrastructure investment could increase the development speed and quality of infrastructure projects, provide a steady source of yield for public investment funds like CalPERS, and transfer the risk of major infrastructure investments from the taxpayer to the private sector.

Private sector investment, says the study, would serve twin goals of rebuilding California’s water, energy, and transportation assets while providing safe and lucrative investment opportunities for pension funds — not to mention create thousands of new jobs and attract new residents and businesses.

The study explains how current policies have been unable to raise enough money to build and maintain infrastructure commensurate with the needs of a growing population. Instead, state policy has embraced conservation. While the study doesn’t oppose conservation per se, it argues that current and future Californians deserve abundant and affordable water, power and mobility. Current state policies that enforce scarcity are ultimately inconsistent with a prosperous and growing California.

California’s water, energy and transportation infrastructure has not been adequately maintained. The state’s water infrastructure has not been expanded since the 1970’s and is designed to accommodate 20 million residents when California now has nearly 40 million residents. Its transportation infrastructure is considered one of the worst maintained in the U.S. Its energy infrastructure is increasingly oriented towards renewables, without a clear plan to realize the distribution and storage upgrades necessary to realize this dramatic shift.

Now is the time to upgrade California’s infrastructure; private investment can alleviate the water shortages, traffic jams, and high energy prices plaguing the state.

“As Californians, we can create a better future for our state by pursuing exciting private investment alternatives to infrastructure improvements that embrace prosperity and abundance,” said Ed Ring, vice president of policy research at the California Policy Center and co-author of the report. “It’s time to take a new approach to solve our state’s water, energy, and transportation needs while at the same time providing investment opportunities for our public sector pension funds.”

For more information, visit CaliforniaPolicyCenter.org. To schedule an interview, contact Lee Schalk at 916-258-2396 or lee@calpolicycenter.org.

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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.

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.

 

Comparing Fresno City and County Pension Systems

As the Fresno Bee recently reported, the city of Fresno’s pension systems are in much better financial shape than the Fresno County Employees’ Retirement Association (FCERA). As of June 30, 2015, the city’s two systems reported a combined $349 million of assets (at market value) in excess of actuarially accrued liabilities. By contrast, FCERA’s assets were $1.043 billion below its liabilities. Actuarial surpluses are rare in California, and the discrepancy between the city and county is so great that we thought it would be worth diving into the finances of Fresno’s retirement system to explain the contrast.

The systems provide extensive financial reports on their websites. The two most useful are Comprehensive Annual Financial Report (which includes financial statements and 10-year histories for many data points) and the Actuarial Valuation Study (which provides in-depth data about system assets, contributions and benefit payments). FCERA posts its reports at http://www.fcera.org. The two city systems – one for Fire and Police, and one for non-public safety employees – publish their reports at http://www.cfrs-ca.org/.

Table 1 below compares some key metrics across the plans.

The Valuation Value of Assets (VVA) is used by system actuaries to determine future contributions. But for our purposes, VVA is less useful than the Market Value of Assets (MVA). While MVA is simply the total market value of all the bonds, stocks and other investments the system holds, VVA includes various smoothing adjustments – reporting practices, some of them legitimate, that can mask liabilities.

Benefits

Contributing to the difference in the financial health of Fresno’s city and county systems is the difference in benefit levels. For example, the City of Fresno limits public safety pensions to no more than 75% of final average salary (as per Section 3-333 of the municipal code). The county imposes no similar cap and also provides very generous benefit accrual rates, in some cases exceeding 3% per year of service. According to calculations we performed using the county system’s Benefit Calculator, a Tier 1 public safety employee retiring at age 60 with 30 years of service would get a pension equal to 97% of final salary. Tier 1 employees were hired before 2007; newer county employees receive less generous benefits.

The city does not cap miscellaneous employee benefits, but its employees earn substantially less credit for each year of service. According to the city’s Benefit Calculator, a miscellaneous employee retiring at age 65 with 30 years of service would receive 72% of final compensation, compared to 97% for a county employee retiring at the same age and the same number of service years.

 

Asset Returns

Another potential distinction between the city and county systems is investment performance. A pension plan can improve its actuarial balance by achieving higher asset returns. Over the five years ended June 30, 2015, the city’s investments outperformed the county’s. FCERA generated annualized investment returns net of fees of 9.8%. The two Fresno city systems, whose assets are jointly managed, achieved net returns of 10.9% over the same period. This 1.1% difference compounded over five years is fairly significant. One billion dollars growing at the county’s rate of 9.8% becomes $1.596 billion after five years, while the same amount growing at the city’s 10.9% annual rate becomes $1.677 billion – $81 million more.

However, when we look at the 10-year period that includes the Great Recession, the performance numbers reverse. Over the 10 years ended June 30, 2015, county assets grew at an annual rate of 6.8% versus 6.4% for the city. Both of these return rates are below the annual asset return rates assumed by each system (more on this below).

Further, it’s worth noting that funding levels for all systems declined over the 10-year period. Between June 30, 2005 and June 30, 2015, FCSERA’s funded ratio based on VVA declined from 91.5% to 80.7%. The Fresno Fire & Police plan saw a decline from 126.4% to 119.6%, while the city’s Employee Retirement System witnessed a funded ratio decline from 139.8% to 109.2%.

 

Discount Rates

In general, the market value of a plan’s assets is fairly easy to determine and is not subject to substantial estimation error. Most plan assets are invested in stocks and bonds that trade frequently and whose values are easy to establish independently.

By contrast, plan liabilities are based on numerous assumptions. How much a plan will have to pay in the future depends upon when employees retire and when they pass away. Expressing these future benefit payments in current dollars requires the choice of a discount rate – a choice subject to controversy.

Fresno city plans use a higher discount rate than FCERA. The city’s ERS and Fire & Police plans both assume annual returns of 7.50% and then use that rate to discount future benefit payments. FCERA uses a slightly more conservative rate of 7.25%. Both of these assumptions exceed the actual 10-year returns experienced by the city and county pension systems, and thus should arguably be reduced.

But to compare the systems, we don’t need to determine the ideal discount rate; we simply need to apply the same rate to each system. If we reduce the city’s discount rate from 7.5% to 7.25%, pension liabilities across the two city systems would increase about $61 billion and their funded ratio would fall by about 3.5%. (These estimates are discussed in an appendix at the end of this study). While significant, this fact only explains a small portion of the 38.3% gap in funded ratios between the city and county systems.

 

Mortality Assumptions

While the pension literature includes much discussion of discount rates, less has been written about mortality assumptions. But good death rate estimates are important: if beneficiaries live a lot longer than expected, pension payments will be much greater than forecast. This recently became clear in Detroit, where city officials faced a sudden spike in projected retirement payments after its pensions actuary switched to a new mortality table.

Mortality tables are produced by the Society of Actuaries. Most public pension plans use a table from the Society’s RP-2000 Mortality Tables Report produced in the year 2000. The large increase in Detroit’s projected pension costs occurred after actuarial firm Gabriel Roeder switched to the Society’s new RP-2014 Mortality Tables.

The RP-2000 report included a supplemental schedule that can be used to scale mortality rates to future years. The scaling procedure assumes a steady improvement in longevity, and thus a steady decrease in mortality rates over time. By applying the adjustment factor from the scaling schedule multiple times, an actuary can approximate what a future mortality table might look like. For example, by applying the scaling factors to the 2000 mortality rates 15 times an actuary can approximate 2015 mortality rates. In Detroit, Gabriel Roeder did not apply the scaling factor, thereby causing the big change when it transitioned to the newer mortality table.

Both the Fresno city plans and FCERA use the RP-2000 Combined Healthy Mortality Table and then scale the death rates from this table with factors in Mortality Projection Scale AA. However, there is an important difference. The city performs the scaling six extra times: it uses mortality rates scaled to 2021, while FCERA uses death rates scaled to 2015. This means that the city plans are projecting fewer deaths at any given retiree age – and therefore greater liability – than does FCERA.

The county’s mortality projections are thus more “optimistic” than those of the city plans, in the sense that its approach anticipates shorter-lived recipients – and that translates into lower expected benefit payments. The sooner an employee is assumed to pass away the less he or she is projected to receive from the system. If FCERA performed the same scaling as the city plans, its reported funding level would be worse. Without more data, we cannot say how much worse.

Finally, it ‘s worth noting that retirement rate assumptions differ between the city and county systems. The difference may be justified, and the impact is unclear. Since the plans have different benefit structures, they present different incentives to workers timing their retirements. When an employee retires early, he or she will receive benefits for more years but generally at a lower rate. So a change in retirement-age assumptions, may raise or lower projected system costs.

 

Conclusion

Overall, our conclusion is mixed. Fresno’s Employee Retirement System and Fire & Police Retirement System offer less generous benefits that the Fresno County Employees’ Retirement Association. This difference in benefit levels makes a substantial contribution to funding disparities between the systems.

FCERA uses a more conservative discount rate, while the city plans use more (financially) conservative mortality assumptions. These modeling differences affect the disparity between reported city and county funding levels, but they do not represent real differences and simply muddy our understanding of relative system performance. Ideally, all California pension systems would use the same actuarial assumptions (unless there are real demographic differences between workforces) so that we would be able to perform accurate comparisons.

 

Appendix: Recalculating AAL Using a Different Discount Rate

A pension system’s AAL is the discounted amount of future benefit payments. Unless one has a table of projected future benefit payments, it is impossible to precisely calculate AAL using another discount rate.

In 2013, Moody’s adjusted pension liabilities by using more conservative discount rate assumptions. The rating agency’s method of restating liabilities involves projecting forward the system’s reported liability for 13 years and then discounting the result back for 13 years using the more conservative rate. Moody’s refers to the 13-year re-discounting period as a “common duration” and recognizes that applying the same duration to all plans could be a source of estimation error.

Moody’s also noted at the time that more precise estimates would be possible once pension plans implemented enhanced reporting required under Government Accounting Standards Board Statements 67 and 68.

Under these new rules, pension systems must report the “Sensitivity of Net Pension Liability to Changes in the Discount Rate.” This new schedule shows the Net Pension Liability calculated using the current discount rate, a rate 1% higher and another rate 1% lower. For the Fresno city systems, we have Net Pension Liabilities based on rates of 6.5%, 7.5% and 8.5%.

We can estimate the impact on Net Pension Liability by linearly interpolating between the 6.5% and 7.5% values. For the two Fresno systems combined, the estimated impact of a change in discount rate from 7.5% to 7.25% is $69 billion.

Net Pension Liability as reported under GASB Statement 67 is higher than each system’s Actuarially Accrued Liability. In the case of the Fresno city systems, the difference is about 11.5%. If we reduce the Net Pension Liability difference of $68 billion by 11.5%, we arrive at the $61 billion estimate presented in the main text.

The author wishes to thank Lisa Schilling at the Society of Actuaries and Bill Bergman of Truth in Accounting for their assistance with some technical points in this study. Any errors are my responsibility.

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

Sonoma and Marin county officials voted to hike their own retirement pay

For Immediate Release

April 29, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

 

Retroactive pension bump likely violated multiple state transparency and accounting laws

Sacramento — County supervisors members and other senior county officials in Marin and Sonoma may have violated state law when voting for massive retroactive pension increases for themselves and other government employees, according to John Moore’s analysis published by the California Policy Center.

The retirement pay hikes were available to all county employees, and retroactive to the employee’s date of hire.

In both counties, officials paid outside attorneys to assert state laws were not mandatory.

The apparent violations were initially discovered by the county’s respective civil grand juries following citizen complaints. The Marin grand jury report documented 38 violations of the government code.

Section 7507 of the California Government Code is supposed to ensure that the public knows how tax dollars are spent and that spending increases do not violate constitutional debt limits. Under 7507, before increasing pension benefits, officials are required to:

  1. Secure the services of an enrolled actuary to determine the future annual cost of an increase in order to ensure they are aware of the cost and that the spending does not require voter approval; and
  2. Provide the public with the information at a noticed board meeting so taxpayers know how their money is being spent and can respond to the proposed increase.

In both counties, staff could identify no documents indicating that supervisors relied on actuarial calculations of future annual costs, and were therefore unable to meet the public-disclosure requirements.

Ken Churchill, who filed the grand jury complaint in Sonoma County, said, “Since 2000, our pension costs have grown about 500%, while our unfunded pension liabilities and pension bond debt have grown about 900%. Now we have no money to maintain our roads and basic infrastructure.”

Marin County resident David Brown filed a lawsuit in Marin. Brown said, “I believe that our county government should comply with the law and am simply asking that a judge determine if laws were violated – and if so, what the appropriate remedy should be.”

Find the complete report with links to the grand jury’s reports and the county’s responses here.

Read the story of David Brown’s lawsuit here.

Retroactive pension increases erupted in other California counties with their own pension systems, including: Alameda, Contra Costa, Fresno, Imperial, Kern, Los Angeles, Mendocino, Merced, Orange, Sacramento, San Bernardino, San Diego, San Joaquin, Santa Barbara, Stanislaus and Ventura.

Grand juries in those counties along with taxpayer groups can investigate how the increases were enacted in their county to ensure they complied with the law.

Contacts for additional information:

John Moore
(831) 655-4540
jmoore052@gmail.com

David Brown
Marin County Citizens for Sustainable Pensions
(415) 987-1619
ahb1027@yahoo.com

Ken Churchill
New Sonoma
(707) 578-3403
ken@churchill-cellars.com

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: Stress test reveals Fresno County ranks No. 3 among California’s worst 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.