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A Progressive Take on Public Pensions

While the public pension crisis has been an issue on the right for many years, left-wing thinkers show relatively little interest in the issue. When progressives do opine on pensions, they often reject the alarm expressed by conservatives, seeing it as a smokescreen for unneeded austerity or a way to attack the public sector. In a deep blue state like California, pension reform advocates will have to reframe our arguments to better engage the left. Any such reframing should focus on two themes: sustainability and fairness.

Progressives are deeply concerned about climate change largely because scientists predict that greenhouse gas emissions will cause long-term environmental consequences. These effects, such as rising sea levels and severe heatwaves, will cause deteriorating living conditions for future generations. In short, they believe that greenhouse gas emissions must be capped because they are unsustainable.

Pension reformers have plenty of evidence that public employee retirement benefits are also unsustainable. For example, over the last ten years CalPERS contributions have been growing at a slower rate than benefits and the system is less than 80% funded. Unless something changes, there will be a day of reckoning as we have seen in places like Detroit and Puerto Rico. Even in the City of Dallas, a run on the pension system forced the mayor to change promised benefits without notice.

So, if we don’t want to leave a mess for future citizens and government employees, it is essential that we place public pensions on a sustainable footing: one in which conditions do not continuously deteriorate and there is a high likelihood that all promised benefits can be paid without crowding out other spending priorities.

Progressives also have a strong belief in fairness, which is why concerns over income inequality have gained so much traction. To many on the left, it seems unfair that some should be able to live in great comfort while many others struggle to make ends meet. This is why we have a progressive income tax system –  a legacy of the first Progressive era a century ago.

While the largest fortunes are made in the private sector, many public sector managers and public safety workers are becoming rich from government work. At our $100k Pension club website, California Policy Center lists over 50,000 public sector employees who receive more than $100,000 in annual pension benefits. Many members of the $100k club receive cash benefits in excess of $200,000 and even $300,000 annually, plus retiree health insurance.

A public employee retiring in his fifties with a $300,000 annual pension, could easily live another thirty years. That translates into lifetime pension benefits of $9 million before factoring in cost of living increases. Public employees retiring at a young age with a comfortable income can further enrich themselves with consulting gigs or new jobs in either the public or private sector. Their pension benefits are not reduced when they receive employment income. This contrasts to social security beneficiaries who lose $1 of benefits for each $2 they earn above $16,920 between the ages of 62 and 66.

In fact, retirement income prospects are much better for career public servants in California than for those of us who must rely on social security. In a new study for California Policy Center, Ed Ring finds that California public employees who worked 30 years receive pension benefits averaging $68,673.  This is more than double the maximum social security benefit for workers who begin collecting benefits at the full retirement age of 66.

So, we see a great inequity between private and public workers generally, and especially the highest paid government employees who qualify for gold plated pensions. To level the playing field, perhaps some Progressives would agree that benefits for the richest pension beneficiaries should be capped or taxed. Savings realized by the state and by local governments could go to restoring public services lost due to increasing pension costs, or to bolstering the assets of public pension plans – making them more sustainable over the long term.

Marc Joffe is the director of policy research for the California Policy Center. This article originally appeared in Fox & Hounds Daily.

A Modest Proposal for California from a Public Servant

When I see someone attacking the benefits the Fire Department receives or the Police Department receives, my concern is: Why wouldn’t you expect the same for yourself? We should act as a beacon.”
—Mike Mohun, president of the San Ramon Firefighters Union, quoted in the New York Times, March 2, 2017

There are many compelling reasons to examine this statement by Mr. Mohun, since pension benefits for state and local government workers are consuming ever increasing percentages of tax revenue. For starters, using the term “attack” is unfair. More accurate might be “counter-attack,” since the costs for these pensions are what has become extreme, not our reaction. If these pensions were financially sustainable, California’s citizens would not be under attack by continuously escalating taxes, and continuously diminishing public services.

But why shouldn’t we expect the same for ourselves? This doesn’t seem like an unreasonable statement. Perhaps to evaluate the reasonableness of Mohan’s idea, let’s examine the benefits received by retirees in the San Ramon Valley Fire District.

According to Transparent California, there are 97 retirees who used to work for the San Ramon Valley Fire District for whom years of service were disclosed. As can be seen in the table below, 7% of these retirees are collecting a pension in excess of $200K per year, based on an average years of service of 28 years. Three more, 3%, collect a pension over $175K per year, based on average years working of 18 years. Without recapping the entire body of data, note that more than half the retirees collect pensions over $100K per year. The average pension for all retirees is $102,832 based on an average of 20 years of service.

Contra Costa County Pension System – San Ramon Valley Fire District
Retiree Pension Data, 2015

What’s not in these numbers is significant, if we really wish to understand what Mr. Mohun is suggesting we all should expect for our retirements. These averages are skewed lower than the reality because (1) some of the retirees appear to have been administrative or part-time employees, not full-time firefighters, (2) some of them probably bought “air-time” at bargain-basement (probably financed) rates which inaccurately distorts upwards their years of service, and (3) it is likely that all of them are collecting other supplemental retirement benefits such as retiree health care which usually adds at least $10K per year to the cost of their retirement benefit.

So Mr. Mohan is certainly not suggesting that we all retire after 20 years of work with a $100,000 pension, is he? Let’s further explore this.

There are 7.0 million Californian’s over the age of 60, but after all, if we only work for 20 years, that means we’ll be retiring well before we turn 60. To accurately predict how we might quantify the macroeconomic impact of Mr. Mohun’s expectations for us all, we’ll need to consider how many Californians are over the age of 45. That retirement age would be based on the assumption that once we’ve completed an extended period of education and life experience, we begin full-time work at the age of 25, and retire when we’re 45 with a $100K pension for the rest of our life. There are 20 million Californians over the age of 45 in California.

Implementing the Mohan plan, therefore, would cost $2.0 trillion per year. Perfect! That’s still a bit less than California’s entire GDP of 2.5 trillion!

There’s a snag in all of this, however, because if you allocate 80% of California’s GDP to pay retirees, it only leaves a half-trillion to pay the workforce – those Californians between the ages of 25 and 45. There’s 10 million of them (actually 11.3 million but we’re rounding), so they would only be able to make $50,000 per year. And of course, no money would be left over for anyone under the age of 25 who might be trying to work their way through college.

Snags abound. What might it take to finance a pension of this magnitude? Wouldn’t this money have to be set aside? To get an idea, let’s see just how much is being set aside each year for Mr. Mohan and his cohorts in the San Ramon Fire Protection District.

For this we have to refer first to the webpage of the San Ramon Valley Firefighters Local 3516 that reveals their board members. Cross referencing these names with data from Transparent California yields the following information:

San Ramon Firefighters Local 3515 Board Members

As can be seen in the second to last column on the right, “benefits,” taxpayers are setting aside, on average, $151,905 per year to pre-fund retirement benefits for Mohan and his fellow union board members. The payments being made to their pension system are roughly equal to their entire annual pay, including overtime and “other pay.”

In a recent California Policy Center study entitled “California’s Public Sector Compensation Trends,” the average pay and benefits for a private sector worker in California in 2015 was estimated at $54,326. Unlike public safety averages, this $54,326 estimate undoubtedly exceeds the median, and, overall, was arrived at using generous assumptions. The reality is lower, not higher.

It is accurate to say that a San Ramon Valley Firefighter can expect to work half as many years as the average Californian in exchange for twice as much in pay – then retire 20 years earlier and collect a pension roughly four times (or more) than the average retirement income of the average Californian. Granted, firefighters should make more than the average worker. But over a lifetime, six times as much?

One final note: “Attacking” levels of compensation that are financially unsustainable and unfair to taxpayers does NOT translate into an attack on the profession of firefighting or firefighters as individuals. No reasonable person fails to respect firefighters for the work they do and the risks they take. But if and when the market takes another dive, and even before that, Mr. Mohan and his colleagues are invited to think about proposals that are not merely inspirational for everyone, but practical.

They might begin by recognizing how California’s legislature has enacted policies which make this the highest cost-of-living state in the U.S. They might use their considerable political clout do help us do something about that – for everyone’s sake.

Ed Ring is the vice president of the California Policy Center.

Problems With California’s “Secure Choice” Pension Plan

Editor’s Note: In this article, author Jon Coupal describes most of the problems with California’s “Secure Choice” pension plan for private sector workers, but he omits a big one: The plan is designed using realistic financial assumptions, i.e., relatively high contribution rates and relatively low rate-of-return assumptions, and a very modest retirement benefit formula. Put another way, “Secure Choice” is everything that government employee pensions are not. Unlike public sector pension funds, the Secure Choice fund will generate perennial surpluses. And where will those surpluses go? Perhaps to bail out the government worker pension funds? Here’s the difference in benefits: (1) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary. (2) Public sector: Public Safety, 30 years work – pension is 90% of final salary. (3) Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary (learn more). Isn’t that special?

California’s “Secure Choice” program sounds harmless enough: A voluntary program — at least for now — that would enroll private sector employees who currently don’t have a retirement plan into a state-run retirement savings account.

When the initial program was announced in 2012 with authorizing legislation, taxpayers were skeptical. Now that the program is even closer to fruition, there is greater reason to be concerned. The good news, however, is that the U.S. Congress is now threatening to pull the plug on this foolish endeavor.

The first question is why is this program even needed? While many public employees don’t pay into Social Security (most receive generous public retirement benefits instead) workers in the private sector do receive Social Security. One might complain that Social Security benefits are inadequate but, because the program is backed by the federal government (which has the power to print money) the benefits promised are almost certain to be forthcoming. Not only that, under federal law, there are many programs to assist private-sector workers whose employers don’t offer 401(k) or other employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how much can be saved tax deferred.

Given all the existing retirement programs authorized under federal law and managed by the private investment firms, why on earth would California want to adopt a massive new government program? The short answer is that progressives desperately desire to control every aspect of the economy, leaving no room for the private sector. Never mind that investment firms — of which there are thousands to choose from — offer competitive returns and efficient management of retirement accounts. Progressives truly believe that government can do it better.

But better than what? The California Public Employees’ Retirement System, which is carrying an unfunded liability of close to a trillion dollars, has a history of corruption and gross mismanagement.

Progressives also see Secure Choice as a means to crowd out private firms which attempt to maximize returns for their investors while public-sector retirement funds engage in “social engineering,” investing in speculative industries and firms, many of which require government subsidies to survive. At the same time, these public funds eschew well-performing investments such as in the oil industry. This might explain, in part, why the investment returns of California’s public employee retirement funds badly underperform.

Then there is the cost to taxpayers. While the program is ostensibly voluntary, the startup costs of the program exceed $100 million. Taxpayers didn’t have much of a choice in seeing their dollars spent on this questionable program. We suspect that most Californians would prefer that money to go to projects that are truly public in nature such as highway maintenance and fixing dams. Finally, there is the risk to taxpayers in the event Secure Choice goes bankrupt. Defenders claim that this can’t happen but we recall officials in Stockton, Vallejo and San Bernardino saying the same thing.

The good news is that the days of Secure Choice may be numbered because of the political sea change in Washington. It is important to understand that the program would not even be legal were it not for regulations issued by the Obama administration. State programs such as Secure Choice were never authorized by Congress. Rep. Tim Walberg, R-Mich., chairman of the subcommittee on Health, Employment, Labor and Pensions, sponsored a resolution that most believe nullifies the Obama administration’s regulations. Just last week, that resolution passed on a party line vote meaning that Secure Choice and other similar state programs are now on life support.

California has enough problems to deal with. There is no need for it to get into the private retirement plan business.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

California’s Debt Bubble: How Does It End?

In a January 2017 study we estimated that California state and local governments owe $1.3 trillion as of June 30, 2015. Our analysis was based on a review of federal, state and local financial disclosures. This debt equals about 52% of California’s Gross State Product of $2.5 trillion and does not include the substantial cost of deferred maintenance and needed upgrades to the state’s infrastructure.

This analysis begs the questions:

  • How much debt is too much debt?
  • How and when does it end?

How much debt is too much?  It’s hard to answer with the information available to us. It could take a long time to reach a crisis, perhaps many years or even a decade or more.  Who knows? There isn’t any hard stop or red line limiting California’s indebtedness.

If the economy is growing, debt can increase indefinitely if debt service costs aren’t growing faster than the economy. Government debt need not be paid off.  It is rolled over into new debt when it comes due. Governments don’t retire or go out of business so their debt doesn’t have to be retired.  The main costs are interest on the debt, required pension contributions, and increasing retiree healthcare costs.

On the way up, adding to debt is painless and allows politicians to spend more than current tax revenues can support, knowing that the cost of the debt is someone else’s problem in the future.  It can make sense to borrow to finance cost-effective infrastructure with a long useful public purpose.  But, borrowing can also be used to pay for current expenses or to fund white elephants such as the bullet train.

What is fairly certain:

  1. Some other states such as Illinois could be an early warning sign for California in that they will get into trouble sooner. We can see what happens there and perhaps learn something. The Commonwealth of Puerto Rico which defaulted last year and which is now controlled by a federally appointed oversight board provides an even starker warning of the risks we face.
  1. We are unlikely to have a state-wide crisis. We are more likely to have increasing problems in individual cities, counties, school districts and special districts. The financially weakest agencies will run out of options and get in trouble first. During the last five years, we have seen bankruptcy filings by the cites of San Bernardino and Stockton and by healthcare districts in Contra Costa and Sonoma Counties. Several school districts are operating under state oversight due to poor finances.
  1. Underfunded pension funds will not be bailed out.  The state can’t afford to bail out individual cities, counties, and school districts that can’t pay interest on their debt or make required pension and OPEB payments.  The federal government will not bail out the state.  It would cost too much and would set a precedent that would have to be applied to other states that got into trouble.  Moody’s estimates that total state pension unfunded liabilities are $1.75 trillion at the end of fiscal year 2016. In fiscal year 2016 these pension funds earned a median return of 0.52 percent on investment compared to an average assumed rate of return of 7.5 percent.
  1. It’s unlikely that the governor and legislature will take meaningful action until there is a crisis of some sort that gives the state no choice but to deal with the problem. Short of a crisis, politicians are likely to nibble around the edges to say that the problem is being addressed while avoiding any hard decisions.

How can pensions become a problem?  Aren’t pensions guaranteed by the California constitution?  Yes.  But, what does the constitution say to do if there isn’t enough money?  If a city or county goes bankrupt, federal bankruptcy law overrides the state constitution and allows but does not require pension benefits to be renegotiated in a bankruptcy.

California Pension Fund Summary
2014 2015
Payments to pension funds:
Employee payments 8.9 9.5
Employer payments 21.2 24.7
Total payments 30.1 34.2
Payments by pension funds:
Pension benefits 43.7 44.9
Other payments 2.3 3.6
Total payments 46 48.5
Pension fund members
Employed 1.7 1.8
Beneficiaries 1.2 1.2
Source: U.S. Census Bureau data, https://www.census.gov/govs/retire/

So, how could it end?  Some possibilities are:

  1. A slow death.  Required pension payments, retired public employee health care expenses, and interest on government debt grow faster than tax revenues.  Services are cut, head count is reduced, and maintenance is deferred to make interest, pension, and retiree health care payments. This is already happening.  An increasing number of cities, counties, and special districts would go bankrupt over time.  More school districts would be taken over by the state. A slow death could also involve CalPERS and other California pension funds continuing to earn less than their investment targets.  Pension funding ratios deteriorate and required pension contributions increase until the process spirals out of control.
  1. A precipitating event. A recession or major stock market correction could cause a sudden reduction in tax revenue or significant pension fund losses that sharply increase underfunding.  In 2009, the CalPERS investment portfolio lost about 24 percent of its value.  California pension fund assets are heavily invested in stocks and other volatile assets that would lose value in a recession or stock market correction.  The result could be a forced recognition that future pension payments can’t be met in full.
  1. Government employees get nervous.  California pension funds are paying out in benefits to retired government employees more than they are taking in in new contributions. In fiscal year 2015, they paid out $1.40 in benefits for every dollar they received in contributions.  Think about it!  If you are a working government employee, none of the pension payments made on your behalf go into an account with your name on it. Your pension is totally dependent upon pension fund investment performance and the willingness and ability of future taxpayers to cut expenses and raise taxes to cover any shortfall in fund performance. In the future, will taxpayers and the politicians who represent them be willing to do whatever it takes to pay unfunded pension and retiree health care expenses?  Will they be more interested in finding ways to reduce these expenses?  Will there be enough tax money to go around even if their intent is to honor these unfunded obligations and other debts?

So, how and when does it end?  We can’t be sure.  However, it could end badly.

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.

California’s Total State and Local Debt Totals $1.3 Trillion

We estimate that California state and local governments owe $1.3 trillion as of June 30, 2015. Our 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.

Not included are 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.

Components of California Government Debt

This is an update of a 2013 California Policy Center study entitled “Calculating California’s Total State and Local Government Debt.” That study reported total debt between $848 billion and $1.1 trillion. While we retain confidence in the findings of this earlier analysis, our new estimate incorporates a more comprehensive array of data sources and updated methodologies.

Our previous research relied primarily on official reports prepared by the State Controller and State Treasurer. Since 2013, some of this reporting has been altered or discontinued. Our current estimate supplements state provided data, with US Census data and information gathered from audited financial statements issued by state and local governments.

The latest U.S. Census Bureau estimate of California state and local government debt is $426 billion. Although this estimate is as of 2014, it is the most authoritative number available. Further, it appears to be reasonable based on our review of audited financial statements published by 300 of the state’s largest governmental entities. Although the state has over 4,000 government entities (and perhaps many more depending on one’s method of counting), most of these entities are relatively small and do not contribute significantly to state-wide totals.

We used the data collected from the audited financial statements to allocate the $426 billion total to the various categories of governments listed in the first section of the following table. State government is the largest borrower, but cities, counties, local educational authorities and special purpose governments also made large contributions to the total.


Special districts, authorities and agencies receive relatively limited attention, but some are large borrowers. For example, the Metropolitan Transportation Commission responsible for Bay Area Bridges, and to a lesser extent, area roads and public transit systems, has over $10 billion in liabilities, mostly in the form of bonds.

Table 1 also shows an estimated $148 billion of unfunded Other Post-Employment Benefits (primarily retiree health care). The state and county governments contribute the lion’s share of this total. Los Angeles County has the largest Unfunded Actuarially Accrued Liability (OPEB), at almost $27 billion. Our OPEB UAAL estimates are based on our review of the government audited financial statements for the 300 largest state government entities, which we believe account for 95% of statewide obligations.

The bond and OPEB obligations account for a total of $574 billion that we can attribute to governments by category. To this we add statewide unfunded pension obligations reported by 85 single and multi-employer pension plans, estimated at $258 billion. For most systems, we used a database posted by the State Controller, but for the largest systems, we obtained 2015 updated data from actuarial valuation reports.

Unfunded retirement obligations are considered long-term debt by any reasonable accounting standard. The principle behind this is clear: retirement benefits are earned during the years an employee works. To the extent the pension fund assets do not equal the present value of this future liability, a debt is created.

A large body of literature has arisen to question Unfunded Actuarially Accrued Liabilities (UAAL) reported by pension systems (see, for example, the work of Robert Novy-Marx and Joshua Rauh). The main concern is that most public pension systems discount the value of future benefit payments by unrealistically high rates of between 7% and 8% per year. Some authors contend that the discount rate employed should be a long-term risk free rate (of around 3%) because the benefits are almost certain to be paid. Others argue that a discount rate based on future asset returns may be used, but argue for adopting a more conservative rate given the fact that most systems have failed to achieve target returns in most recent years.

Moody’s, the credit rating agency, discounts pension liabilities with the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. When Moody’s first introduced its pension methodology a few years ago, we applied it to pension liabilities reported as of June 2011 when CPLI was 5.67%. More recently, CPLI has fallen: in June 2015, it was 4.44%. As a result, the increase in UAAL arising from the use of Moody’s methodology is much greater than it was when we first evaluated pension debts.

Using the CPLI discount rate, we estimate that the real UAAL is $713 billion, which is $455 billion more than the officially reported (the method for restating UAAL based on a different discount rate assumption is described here). An alternative approach used by the Stanford Institute for Economic Policy Research (SIEPR) is to discount the liabilities by a rate closer to the risk-free rate. In a recent report, Stanford researchers used a discount rate of 3.723%. Using Stanford’s methodology, we estimate a UAAL of $1.02 trillion.

It should be noted that this low rate is used by CalPERS to determine how much to charge a local government that chooses to leave the system. The logic in using this rate is probably that CalPERS would no longer be able to raise pension contribution levels after the agency has left the system and can’t depend upon local taxpayers to make up any shortfall in CalPERS’ future investment performance.

The following table shows liabilities by major pension system as reported, with the Moody’s adjustments and with the Stanford adjustments.


pensionunderfunding2015

Debt Continues to Increase

According to the State Treasurer’s Office Debt Watch website, $72 billion on new debt was issued in the year ending December 2016 as summarized below. This amounts to a debt increase of about $1,800 per citizen or about $4,600 per taxpayer in only one year (but this is partially offset by maturities and early repayments of exiting issues).

newissuance2016

California Debt in a National and International Context

The grand total of government borrowings, unfunded OPEB obligations and unfunded pension obligations is $1.28 trillion, or 52% of Gross State Product (GSP is a state’s share of the nation’s Gross Domestic Product and was $2.48 trillion in 2015). This represents a significant but not extraordinary debt burden by international standards.

But to more properly consider California debt in an international context, we should add federal debt for which California taxpayers may be responsible. In 2015, the ratio of publicly held federal debt to GDP was 73% (the national debt, which also includies debt securities held by the Social Security Administration and other federal agencies raises this proportion to 101% as of mid-2015).

Combining California’s debt with publicly held federal debt, we estimate a total debt-to-GDP ratio of 125% (or 153% using the broader definition of federal debt). This level places California distressingly close to peripheral Eurozone countries that faced financial crises in 2011 and 2012. Portugal’s 2015 debt-to-GDP ratio was 129% and Italy’s was 133%.

Implications at the Individual Level

The estimated California government debt of $1.3 trillion can be allocated back to all residents or just those that pay taxes. The state’s population is about 39 million. According to the IRS, about 17 million individual tax returns were filed in 2014. These levels imply California government debt burdens of $33,000 per resident and $74,000 per taxpayer – excluding their share of federal debt.

Further Research Needed

There are additional questions that remain to be addressed. The totals we report do not include the cost of addressing deferred maintenance of the state’s civil infrastructure. However, in 2015, California Forward estimated that the state faces a $358 billion infrastructure funding gap over the next ten years.

We have not looked at trends. How much faster has state and local debt grown compared to the state’s economy that supports the debt? We have not made any attempt to determine if the level of debt is beyond what the state can afford to service or what the impact of future interest rate increases may have on the ability of state and local government entities to service this level of debt in the future. Interest rates are at historic lows and are likely to rise in the future.

We have not estimated the impact of any possible increase in required pension payments on state and local government budgets. If CalPERS and other public employee pension systems reduce their discount rates to be consistent with recent investment performance and likely future investment returns, pension payments will increase substantially for state and local governments.

The State Treasurer’s office reports totals for debt issued on their Debt Watch website but does not estimate total debt outstanding. Some of the debt issued is retired or replaced by new debt. We understand that starting in 2018 the State Treasurer will start reporting debt outstanding as well as debt issued by various levels of government. This should improve the accuracy of future California Policy Center reports on total debt outstanding and eliminate the need to make estimates for some of the data.

About the Authors:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

Marc Joffe is the Director of Policy Research at the California Policy Center. In 2011, Joffe founded Public Sector Credit Solutions to educate policymakers, investors and citizens about government credit risk. His research has been published by the California State Treasurer’s Office, the Mercatus Center at George Mason University, the Reason Foundation, the Haas Institute for a Fair and Inclusive Society at UC Berkeley and the Macdonald-Laurier Institute among others. He is also a regular contributor to The Fiscal Times. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Invest California’s Pension Funds in Water and Energy Infrastructure

“We wanted flying cars, instead we got 140 characters.”
–  Peter Thiel, in his 2011 manifesto “What Happened to the Future.”

Anyone living in California who’s paying attention knows what venture capitalist Thiel meant. While a handful of Silicon Valley social media entrepreneurs have amassed almost indescribable wealth, and fundamentally transformed how humanity communicates, investment in boring things like roads, bridges, tunnels, ports, aqueducts, reservoirs and railroads – the list is endless – has stagnated. Especially in California. Flying cars? Forget about it. Go tweet.

20161114-cpc-flyingcar

Why? Why the neglect?

(1) For starters, why invest in moving atoms around, which is messy and might incur the wrath of powerful climate change activists, when you can move electrons around in new and exciting ways and make billions? Silicon Valley entrepreneurs are making a rational choice to prefer manipulating characters to manufacturing cars.

(2) And when it comes to innovations that do involve atoms, that is, actual manufactured goods, Silicon Valley entrepreneurs are lobbying for mandates that force people to purchase internet enabled home appliances, connected to smart meters, that punitively bill consumers who, for example, operate their clothes dryer or dishwasher at the “wrong” times.

(3) Public money that might be used to backstop private investment in infrastructure is being used instead to pay over-market compensation to California’s state and local workers, who now receive pay and benefits that on average are twice what California’s private sector workers earn.

To justify this neglect, California’s governor Brown has been the cheerleader for a culture of austerity. But there is an alternative that would lower the cost of living for all Californians, and even make it possible to lower public sector compensation without lowering their living standards. That is a culture of abundance.

The culture of abundance used to be synonymous with the Silicon Valley. “Better, faster, cheaper” used to be the mantra that informed innovation in the Silicon Valley. And throughout history, the human condition has marched fitfully but inexorably upwards because human creativity and innovation made everything we needed better, faster, cheaper. So how can we invest public and private funds to create cheap and abundant water, energy, transportation and housing?

One untapped source of investment are California’s public employee pension funds, which collectively manage nearly $800 billion in assets. Investing just a fraction of these assets in revenue producing civil infrastructure could have a decisive positive impact. Using water as an example, along with a crumbling distribution infrastructure, there are well established water markets in California. Investing in sewage reuse, seawater desalination, and aquifer and reservoir storage for runoff could eliminate water scarcity in California.

There are several interlocking benefits to investing pension funds in California’s infrastructure. For the pension funds, these would be safe investments that over time would yield more than typical fixed income investments and in fact may exceed their target returns of 6.5% or more per year. For California’s workforce, building and operating these assets in water, energy, and transportation would create tens of thousands of high-paying jobs. For California residents, these assets would create abundance instead of scarcity, and lower the cost of living.

With respect to the environment, increasing the diversity and quantity of water and energy supplies would create climate resiliency, and in nearly all cases – since this factor is of great concern to many Californians – these operations would be either “carbon neutral” or very nearly so.

The challenge to rebuilding California’s infrastructure is not primarily financial. Attracting pension fund investment might be the centerpiece of finding the capital for these projects, but there are all the traditional sources of funds, namely bonds and private investment. The bigger challenge is cultural. Joel Kotkin, writing for the Orange County Register, vividly frames the cultural challenge we face:

“California is on the road to a bifurcated, almost feudal, society, divided by geography, race and class. As is clear from the most recent Internal Revenue Service data, it’s not just the poor and ill-educated, as Brown apologists suggest, but, rather, primarily young families and the middle-aged, who are leaving. What will be left is a state dominated by a growing, but relatively small, upper class, many of them boomers; young singles and a massive, growing, increasingly marginalized “precariat” of low wage, often occasional, workers.

This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Californians must be convinced that the “better, faster and cheaper” mantra that used to define the Silicon Valley, and the cost-cutting virtue of innovations that have uplifted humanity throughout history, can again be our cultural guiding principle. They must be convinced that good jobs and affordable abundance are possible without overly compromising our culture that cherishes the environment. They must be convinced that these “green” values have been taken too far; that they are a cover for condescending, statist oligarchs.

 *   *   *

Ed Ring is the vice president for policy research at the California Policy Center.

Will the BART Bond Fund Pensions?

This fall, voters in San Francisco, Alameda and Contra Costa counties will consider a $3.5 billion BART bond measure. Proponents argue that the measure is required to ensure the system’s safety and reliability. Critics are concerned that bond proceeds will be used to support excessive employee salaries and benefits.

BART management denies that claim. In an August 12 press release, BART management stated, “Not one penny, under any circumstance, can or will be used to pay for operating expenses, salaries, or benefits.” Indeed, using bond proceeds for such purposes would be illegal.

But there is an indirect way of using the bond to increase employee compensation. As Daniel Borenstein reports in The East Bay Times, BART currently devotes about 16% of its operating revenue to capital improvements. Once the bond measure passes, BART could reduce the amount of operating revenue it devotes to capital purposes, backfilling the shortfall with bond proceeds. BART management insists that it will not perform this sleight of hand, stating in its release:

To suggest we would use the money for salaries and benefits directly or “indirectly” is flat out wrong.  Cutting spending from the Capital Investment Plan in order to increase salaries would undo decades of financial projections and do immense damage to BART’s capacity to improve in the future.

Borenstein is unconvinced, noting that BART directors and staff have refused to make a commitment to continue the 16% annual operating revenue transfers. And the Times editorial board shares their columnist’s concern:  they have now advocated a no vote on the BART bond.

No one can be certain whether BART management or its critics will be correct, but it is useful to review the data on BART’s operating cost pressures. If BART management can’t restrain the growth in operating costs and are unwilling to offset these costs at the farebox, they will be obliged to skimp on capital investments.

As Chart 1 shows, BART labor expenses have risen sharply over the last five years. Budgeted labor costs have increased from $364.3 million to $499.6 million between FY 2012 and FY 2017, representing a constant annual growth rate of 6.52%. The amounts shown come from annual budget resolutions posted on BART’s web site.

Chart 1

Chart 1

Pension benefits are major sources of cost pressure. The system’s safety plan, administered by CalPERS, is only 63.3% funded. The employer contribution rate rose from 47.9% in Fiscal 2015 to 56.5% in the current fiscal year, and will rise again to 57.4% in Fiscal 2018. Most BART employees are in the system’s Miscellaneous employee plan. Contribution rates for this plan are lower but also escalating.

Chart 2 shows total BART employer pension contributions for the fiscal years ending June 30, 2014 through June 30, 2023 as projected in the most recent CalPERS actuarial reports. The projections beyond 2018 rely on optimist assumptions that CalPERS assets will return 7.5% and that BART’s covered payroll will rise by 3% annually. Still we see BART’s contributions rising from $35.7 million in Fiscal 2014 to $99 million in Fiscal 2023.

Chart 2

Chart 2

BART’s employer contributions are so high because benefits are generous and the retirement plan is carrying a lot of beneficiaries. BART police hired before December 30, 2014 are able to retire at age 50 with pensions of up to 90% of final salary. Newly hired PEPRA members must wait until age 57 and can only get up to 81% of final salary. PEPRA’s implementation for BART employees was delayed by the U.S. Department of Labor (DOL) because PEPRA interfered with collective bargaining. Citing Section 13c of the Urban Mass Transit Act, DOL refused to certify federal grants to BART if PEPRA was implemented. A Federal District Court overruled DOL, but the federal agency is continuing to challenge PEPRA on other grounds. (For more on this, see page 16 of BART’s 2017 Resource Manual).

As of June 30, 2015, the BART Safety plan had 275 beneficiaries – almost half again the number of active members. Many of the beneficiaries are under age 50, having earned retirement benefits due to disability.

Many retired safety and management employees draw very generous pensions. According to Transparent California data, 112 BART beneficiaries received $100,000 or more in 2015. Like many public employees, BART staff members are not eligible for social security, but unlike most agencies, BART provides an offsetting benefit. Employees can contribute to a 401(a) Money Purchase Pension Plan and receive an employer match. BART employees thus have a plan similar to a 401(k) on top of their generous defined benefit pension.

In addition to pensions, BART offers Other Post-Employment Benefits (OPEBs) including medical benefits to retirees and surviving spouses, retiree life insurance and survivor dental and vision benefits.  According to its most recent audited financial statements, these benefits cost BART $26 million in Fiscal Year 2015. On the plus side, BART has pre-funded a large portion of its OPEB obligation. Further, BART’s actuary has found that an increasing proportion of eligible retirees and spouses are not participating in the OPEB plan, reducing the rate of cost growth. In fact, BART expects to pay less for OPEBs in Fiscal 2017 than it did in in Fiscal 2016. (For more on this, see page 19 of BART’s 2017 Resource Manual). But if medical cost inflation picks up in the years ahead and more beneficiaries take advantage of BART’s OPEB benefits, the system could experience rapid increases in its OPEB expenditures.

In summary, it is impossible to know whether BART will fulfill its stated intention of maintaining the current flow of operating revenues to capital needs, thereby avoiding a scenario under which bond proceeds are effectively diverted. We do know, however, that the system faces high and rising labor costs. Looking into the future, it is all but certain that pension costs will rise rapidly given current underfunding and the generosity of benefits. These escalating pension expenditures will be a source of pressure on the BART board to scale back much-needed maintenance expenditures.

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.

 

(Orange County Archives / Wikimedia Commons)

Stanton officials launch propaganda war on tax-repeal effort

(Orange County Archives / Wikimedia Commons)

Downtown Stanton, 1913: More innocent times.

STANTON, Calif. – It was a Wednesday afternoon in early March, a more innocent time in Stanton, California. Gathered in the community center of the Plaza Pine Estates, we were like Adam and Eve in the Garden of Eden before they ate the apple that gave them a second-grader’s sense of good and evil.

Plaza Pine Estates is a well-manicured mobile home park so close to Beach Boulevard – the 26-mile state highway that functions as an asphalt riverbed moving automobiles between the foothills of inland Southern California and sprawling Huntington Beach State Park – that you can hear the dopplering traffic inside the community center.

That’s where Councilman David Shawver led a parade of public officials, including a county firefighter and two sheriff’s deputies, in a celebration of Stanton’s voter-approved hike in the city’s sales tax – from 8 to 9 percent, the highest in Orange County.

The so-called Talk with the Block series – there’ve been three-dozen so far, an official said – are supposed to be about community concerns. But at this one, at least, the communication was mostly one-way – what your computer scientists might describe as less input than output.

Speaker after speaker depicted that increase in the sales tax as the penny-thin line between civilization and chaos. And, in the end, the tax isn’t an ordinary tax, they said, but a “shared tax” – by which they apparently mean that the tax will hit residents as well as humans they called “outsiders.”

“The penny sales tax is a shared tax, a tax from people who drive through our community,” said Shawver. “They drive up and down Beach Boulevard, stop to get gas, and we get one penny. One penny! And thanks to that one little penny, we’ve been able to restore critical public safety assets.”

It also hits anyone who shops in Stanton, of course, though not (the officials stayed carefully on message) grocery and pharmaceuticals shoppers.

But it’s all for a good cause, Shawver said: public safety.

Stanton has a well-earned reputation for violence – it’s among the toughest towns in a county more famous for cat-fights among wealthy housewives than gunfights, gangs and prostitution.

“I’m not going to fool you,” said Shawver, a council veteran. “Public safety is expensive, but I am concerned with maintaining the level of service that you demand.”

Public safety in Stanton is indeed expensive – and getting pricier. This year, the city will pay an additional $1.1 million for public-safety, most of that the escalating cost of pay and benefits for its $220,000-per-year cops and firefighters. Those pay packages were negotiated by the powerful sheriffs and firefighters unions – the same unions that backed Shawver’s 2014 sales tax hike.

If it weren’t for a few lousy public investments over the last several decades, the city might be able to pay its sheriffs and firefighters even at that stratospheric level. But Shawver was among those on the city council who approved Stanton’s play in Vegas-style redevelopment schemes until Gov. Jerry Brown killed them in 2011. Stanton, Orange County’s poorest city, now pays millions on bonds to hold property it purchased while betting on its steady appreciation. Interest payments this year alone: $2,323,887. Unless the city refinances that debt, it’ll pay $42 million in interest by 2040.

And there’s bad news just ahead for Shawver and other Stanton officials. Residents qualified a tax repeal for the November ballot; if successful, that’ll put a ding in the city’s income statement. So will the steady rise in the cost of cops and firefighters: Thanks to more rigorous accounting (and the reporting of the Orange County Register’s Teri Sforza), Orange Countians recently learned for the first time that the Fire Authority is actually running in the red, with deficits – especially for retirement pay and other health benefits – exceeding assets by $169 million for the fiscal year that ended in June.

That has other cities so enraged, they’re talking about leaving the authority and even privatizing firefighting.

But not Shawver. When it comes to the county’s sheriffs and firefighters, “There are no finer government agencies,” he asserted.

We might have believed that in a more innocent time, before the Talk With the Block. But later that night, we discovered that Shawver, a 28-year veteran of Stanton’s redevelopment fiascos, has served for 21 years as his city’s representative on the board of the Orange County Fire Authority.

Tax hike masks Stanton’s public-safety pay problem

Stanton has become the stage for a political brawl: in one corner, city officials and the public employee union leaders who backed the measure to give Stanton – Orange County’s smallest city and one of its poorest – the county’s highest sales tax; in the other, residents and business owners working to repeal Measure GG, the city’s 2014 voter-approved sales tax hike.

Late last year, the City Council grudgingly voted to put that citizen-backed tax repeal on the November ballot.

Until then, outsiders might have reasonably believed the people of Stanton were united in their generous desire to pay more for goods and services than anyone else in Orange County – a full percent more than neighboring Anaheim, Cypress and Garden Grove.

The pro-tax propaganda began during the 2014 campaign, when the city spent residents’ money to make the case for taking more of it. There was city money for polling and “informational brochures” targeting voters, city money to research effective messaging and city money for a direct-mail campaign with photos depicting families and firefighters along with information about Measure GG.

Outgunned retail business owners who had the temerity to post signs saying “No on Measure GG” were visited by off-duty code enforcement officers and off-duty sheriffs, who asked innocuous questions about their businesses and city services. In some cases, these off-duty city employees reportedly suggested the business owners take down their “No on GG” signs because they might dissuade city workers from shopping or eating there.

After Election Day, some in the media congratulated Stanton voters for their wisdom. In April 2015, the Orange County Register airdropped David Whiting into post-election Stanton, a place the columnist declared “Orange County’s scrappiest city.”

What makes O.C.’s tiniest town so scrappy? According to Whiting, it’s the willingness of Stanton’s residents to raise their own taxes.

Yes, Whiting paused to spotlight “a former gangbanger, paralyzed from a .32-caliber bullet to the spine,” tractor-mowing a 10-acre park by himself – for free. That’s truly scrappy.

But Whiting was really enthusiastic about Stanton’s self-inflicted economic wound. Raising sales taxes from 8 percent to 9 percent is evidence, he reported, that this is “the littlest city that can.”

Among the post-taxation signs of renewal Whiting found, one was literal: “The placard on the visitor’s counter at Stanton City Hall captures this comeback story,” Whiting reported. “It says that by boosting (the) sales tax from 8 percent to 9 percent, the city has restored personnel to handle 911 calls.”

Whiting’s post-election claim – that the tax hike had improved public safety – mirrored the claim city officials used to sell the tax hike and avoid a confrontation with the firefighters and sheriffs who work in Stanton.

Real reporting might have revealed other ways to manage Stanton’s budget without pick-pocketing residents and wounding businesses surrounded by competitors in cities with lower sales taxes.

For instance, my colleague Ed Ring has found that Stanton could eliminate what it calls its “structural deficit” of $1.8 million through a 14 percent decrease to the average total pay and benefits earned by its 33 sheriffs and 15 firefighters. Even after that reduction, firefighters would earn average pay and benefits of $187,285 per year, and sheriffs would earn $160,412 per year.

To put these public safety rates of pay into perspective, the median earnings for full-time, year-round employed residents of Stanton is $35,769.

There’s another reform that could alleviate the structural budget deficit: sell off about five dozen private properties the city purchased with redevelopment funds. As reported by the Register, the “Stanton Redevelopment Agency had two bond issues: One for $15.3 million, on which it will pay investors a whopping 9.496 percent interest; and another for $12.5 million, on which it will be paying 9.346 percent interest.”

Translation: Stanton is paying $2.6 million per year – $800,000 per year more than its “structural deficit” – to own property that the city should never have bought. The city should sell that property immediately – not as part of a dystopian scheme to sell off libraries and parks, but as an attempt to fix its budget and put commercial real estate back into private hands.

Instead, city officials have taken the path of least resistance, avoiding a fight with the powerful public employee unions that help keep them in office by raising taxes.

The council wanted civic peace; now it will have the political version of war – acrimony, intimidation and threats of panic in the streets. As soon as it bowed to state law last year and placed the citizen-backed repeal on the November ballot, the City Council kick-started a new propaganda campaign, predicting that repeal of the 2014 tax will unleash on their benighted city the Four Horsemen of the Apocalypse.

Local Protestors show up to question Council Member David Shawver's support of an increase in Sales Tax for Stanton

Local Protestors show up to question Council Member David Shawver’s support of an increase in Sales Tax for Stanton.

“That one of the poorest cities in Orange County has to pay the highest tax is totally unbelievable,” former Stanton Mayor Sal Sapien told the Register. “I am very hopeful the residents will prevail over the council.”

In their fight, residents will need more than hope. But hope is a start. Really, scrappiness would be better.

Will Swaim is vice president of communications for the California Policy Center. This article first appeared in the Orange County Register.