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Put Public Employees on Secure Choice and Social Security

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.” – California State Senator Kevin De Leon, August 7, 2016, Sacramento Bee

This quote from Senator De Leon, one of the main proponents of California’s new “Secure Choice” retirement program for private sector workers, says it all. Because De Leon’s comment reveals the breathtaking hypocrisy and stupefying innumeracy of California’s legislature.

Let’s start with hypocrisy.

De Leon is careful to protect private sector taxpayers from having to bail out their new state administered “secure choice” retirement plan, but no such safeguard has ever been seriously contemplated for the state administered pension plans for state and local government workers. These plans, using official numbers, are underfunded by about $250 billion. If you don’t assume California’s 92 state and local government worker pension systems can earn 7.5% per year, they are underfunded by much more – at least a half trillion.

Underfunded government worker pensions are the real reason why Prop. 55 is offered to voters to extend the “temporary” “millionaires tax” till 2030. That will raise about $6 billion per year. Underfunded local government worker pensions are also the reason for 224 local tax increases proposed on this November’s ballot, which if passed will collect another $3.0 billion per year. And it isn’t nearly enough.

The following table, excerpted from a recent California Policy Center study, shows how much California’s state and local government pensions systems have to collect per year based on various rates of return. At the time of the study, the most recent consolidated data available was for 2014. As can be seen – at a rate of return of 7.5% per year, state and local agencies have to put $38.1 billion into the pension funds. And at a rate of return of 6.5% per year, which CalPERS has already announced as their new “risk free” target rate, they have to turn over $52.3 billion per year. How much was actually paid in 2014? Only $30.1 billion.

20160516-cpc-ring-pension-liabilities

To summarize, in 2014 the pension funds collected $8.0 billion less than they needed if they think they can earn 7.5% per year. But following CalPERS lead, they’re lowering their projected rate of earnings to 6.5%, which means they were $22.2 billion short. There are 12.8 million households in California. That equates to at least $1,734 in additional taxes per household per year just to keep state and local pensions solvent.

And it gets worse. Because in order to ensure this new “Secure Choice” program doesn’t get into the same financial predicament that California’s government pension systems confront, the “risk free” rate of return they intend to project is not 7.5%, or 6.5%, or even 5.5%. No, they intend to initially invest the funds in Treasury Bills, which currently pay at most 2.5%. In an analysis of Secure Choice’s proposed costs and benefits performed last April, we express what using a truly “risk free” rate of return portends for California’s private sector workers vs. public sector workers. These estimates are based on all participants, public and private, contributing 10% to the fund via withholding.

Public sector:  Teachers/Bureaucrats, 30 years work  –  pension is 75% of final salary.

Public sector:  Public Safety, 30 years work – pension is 90% of final salary.

Private sector:  “Secure Choice,” 30 years work – pension is 27.6% of final salary.

There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more, that is, a two-to-one up to a four-to-one employer matching contribution. Second, to justify the optimistic projections that make such generous pensions appear feasible, public pension funds have assumed a “risk free” rate of return of 7.5% per year.

Which brings us to innumeracy.

During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%. It doesn’t take a Ph.D economist to know that California’s pension funds are going to need to greatly increase their annual collections. It only takes horse sense. But even horse sense eludes California’s innumerate lawmakers.

So here’s a modest proposal. Why not freeze the employer contributions into California’s state and local employee pension funds at 20% of salary (that’s a two-to-one match on a 10% contribution via withholding), and then, constrained by those fixed percentages, lower all benefits, for all participants, on a pro-rata basis to restore solvency. Better yet, why not enroll every state and local government employee in the Secure Choice program? Either way, “the state shall not have any liability for the payment of the retirement savings benefit earned by program participants.”

Along with this modest step towards dismantling the excessive privileges of these unionized Nomenklatura who masquerade as California’s public “servants,” why not enroll all state and local government employees in Social Security? Because California’s public servants make far more, on average, than private sector workers, and because Social Security benefits are calibrated to pay relatively less to high income participants, this step will financially stabilize the program.

Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.

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Ed Ring is the president of the California Policy Center.

Sacramento's "Secure Choice" Pooled 401K – Too Frugal for Public Workers

In a move of breathtaking hypocrisy, California’s legislators have unveiled a financially sustainable retirement security program for private workers, while keeping financially unsustainable pensions for public workers.

What private sector employers and private sector workers need to ask, more than anything, is if this new retirement security scheme is so great, why aren’t public employees going to also adopt it?

That’s a really good question. And the answer is simple:  The pensions they’re already getting, paid for by taxpayers, are far. far better. Way better. Out of this world better. Crazy better. Goofy better.

Take a look at the official recommendations made on March 28, 2016 to the California Legislature. In this document, on page 53, there is a table showing “income replacement” based on years paying into the system at various contribution rates. At a contribution rate of 5%, after working 30 years, a participant can expect income replacement in retirement of 13.8%. That is, if they made $100,000 per year in their final year of work, they would get a “pension” of $13,800 per year.

Wow.

If you normalize “Secure Choice” plan’s proposed contribution rate to 10% of payroll, comparisons to public pensions are possible. Because 10% is a good rough number to use for public sector employee contributions via payroll withholding. Teachers and bureaucrats pay a bit less than 10%, members of public safety pay a bit more than 10%. Here are the comparisons:

Public sector:  Teachers/Bureaucrats, 30 years work  –  pension is 75% of final salary.

Public sector:  Public Safety, 30 years work – pension is 90% of final salary.

Private sector:  “Secure Choice,” 30 years work – pension is 27.6% of final salary.

There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more. Second, public pension funds assume a “risk free” rate of return of 7.0% per year. How much will the “Secure Choice” plan assume? Refer again to the official recommendations, this time page 16:

“Senate Bill 1234 will allow the Board to: Establish managed accounts that would be invested in U.S. Treasuries for the first three years of the program…. After three years, the Board should begin to develop investment options that address risk-sharing and smoothing of market losses and gains.”

The 30 year T-Bill is currently paying 2.69%.

Let’s recap:

Public sector:  The “risk free” annual return for their pension funds is ” 7.5% per year.

Private sector:  The “risk free” annual return for their “Secure Choice” is 2.69%. per year.

Ah, but wait! The attentive reader may wonder what may happen after three years. Because the recommendations specify that “investment options” shall be “developed” after three years of investing in T-Bills. Which brings us to the second monstrous hypocrisy – the “Secure Choice” pooled 401K funds will be managed by those same private sector investment firms that defenders of the pension funds routinely demonize.

How much money? If 50% of California’s 6.8 million eligible private sector workers participate, using the U.S. Census Bureau’s median income estimate for California’s private sector workers of $45,000 per year, at a contribution rate of 5%, you’re talking about $7.6 billion per year. Not much compared to the $30 billion that gets poured into California’s state/local government pension systems each year, or the $45 billion per year that those systems actually require to remain solvent, but nonetheless it is a huge chunk of change.

The sad irony amid all this hypocrisy is that the “Secure Choice” program has the virtue of being far more financially sustainable than public sector pensions. With lower risk investments, modest benefit formulas, and the built in capacity to adjust benefits to ensure solvency, this pooled 401K – which could also be termed an adjustable defined benefit – is a system that can be offered to all citizens without blowing up. There are many problems, the employer mandate and the “opt-out” provision are two obvious ones, but at least it is an attempt at creating the so-called three legged stool of retirement security: Social Security, supplemented the “Secure Choice” program, supplemented by individual retirement accounts.

Concerned citizens may argue endlessly about whether or not the state should offer any sort of retirement security – Social Security, “Secure Choice,” or whatever. But if the state is going to have these programs, they should be offered to every worker according to the same set of rules and offer the same set of benefits. Government workers should not be getting deals far better than private workers.

So here’s the deal, California legislature:  Mandate that every state and local government worker, effective immediately, begin participating in Social Security and the “Secure Choice” program, and encourage them to supplement that with individual 401K retirement accounts. Mandate that all retirement benefits they earn from now on are limited to those three programs. So work out the bugs. Then, and only then, sign us up.

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Ed Ring is the president of the California Policy Center.

The Hypocrisy of Public Sector Unions

During the industrial age, labor unions played a vital role in protecting the rights of workers. Skeptics may argue that enlightened management played an equally if not greater role, such as when Henry Ford famously raised the wages of his workers so they could afford to buy the cars they made, but few would argue that labor unions were of no benefit. Today, in the private sector, the labor movement still has a vital role to play. There may be vigorous debate regarding how private sector unions should be regulated and what restrictions should be placed on their activity, but again, few people would argue they should not exist.

Public sector unions are a completely different story.

The differences between public and private sector unions are well documented. They operate in monopolistic environments, in organizations that are funded through compulsory taxes. They elect their bosses. They operate the machinery of government and can use that power to intimidate their political opponents.

Despite these fundamental differences in how they operate, public unions benefit from the still common perception that they are indistinguishable from private unions, that they make common cause with all workers, that they are looking out for us. This is hypocrisy on an epic scale.

Hypocrites regarding the welfare of our children

The most obvious example of public sector union hypocrisy is in education, where the teachers unions almost invariably put the interests of the union ahead of the interests of teachers, and put the interests of students last. This was brought to light during the Vergara case, which the California Teachers Association (CTA) claimed was a “meritless lawsuit.” What did the plaintiffs ask for? They wanted to (1) modify hiring policies so excellence rather than seniority would be the criteria for dismissal during layoffs, (2) they wanted to extend the period before granting tenure which in its current form permits less than two years of actual classroom observation, and (3) they wanted to make it easier to dismiss teachers who were incompetents or criminals.

When the Vergara case was argued in court, as can be seen in this mesmerizing video of the attorney for the plaintiffs’ closing arguments, the expert testimony he referred to again and again was from the witnesses called by the defense! When the plaintiffs can rely on the testimony of defense witnesses, the defendants have no case. But in their appeal, the defense attorneys are fighting on. Using your money and mine.

The teachers unions oppose reforms like Vergara, they oppose free speech lawsuits like Friedrichs vs. the CTA, they oppose charter schools, they fight any attempts to invoke the Parent Trigger Law, and they are continually agitating for more taxes “for the children,” when in reality virtually all new tax revenue for education is poured into the insatiable maw of Wall Street to shore up public sector pension funds. No wonder education reform, which inevitably requires fighting the teachers unions, has become an utterly nonpartisan issue.

Hypocrites regarding the management of our economy

Less obvious but more profound are the many examples of public union hypocrisy on the issue of pensions. To wit:

(1)  Public pension systems don’t have to comply with ERISA, which means they are able to use much higher rate-of-return assumptions. Private sector pensions are required to make conservative investments and offer modest but financially sustainable pensions. Public pensions operate under a double standard. They make aggressive investment assumptions in order to reduce required contributions by their members, then hit up taxpayers to cover the difference.

(2)  One of the reasons you haven’t seen the much ballyhooed extension of pension opportunities to all workers in California is because the chances they’ll offer a plan where the fund promises a return of 7.0% per year are ZERO. Once they’re forced to disclose the actual rate-of-return assumptions they’re prepared to offer, and why, the naked hypocrisy of the public sector pension plans using higher rate-of-return assumptions will be revealed in terms everyone can understand.

(3)  When the internet bubble was still inflating back in the late 1990’s, and stock values were soaring, public sector unions didn’t just agitate for, and receive, enhancements to pension benefit formulas. They received benefit enhancements that were applied retroactively. Public pensions are calculated by multiplying the number of years someone worked by a “multiplier,” and that product is then multiplied by their final salary (or average of the last few years salary) to calculate their pension. Retroactive enhancements meant that this multiplier, which was increased by 50% in most cases, was applied to past years worked, increasing pensions for imminent retirees by 50%. Now, with pension funds struggling financially, reformers want to decrease the multiplier, but not retroactively, which would be fair per the example set by the unions, but only for years still to be worked – only prospectively. And even that is off the table according to the unions and their attorneys. This is obscenely hypocritical.

(4)  Take a look at this CTA webpage that supports the “Occupy Wall Street” movement. What the CTA conveniently ignores is that the pension systems they defend are themselves the biggest players on Wall Street. In an era of negative interest rates and global deleveraging, public employee pension funds rampage across the globe, investing over $4.0 trillion in assets with the expectation of earning 7.0% per year. To do this they condone what Elias Isquith, writing for Salon, describes as “shameless financial strip-mining.” These funds benefit from corporate stock buy backs, which is inevitably paid for by workers. They invest with hedge funds and private equity funds, they speculate in real estate – more generally, pension systems with unrealistic rate-of-return expectations require asset bubbles to continue to expand even though that is killing the middle class in the United States. This gives them common cause with the global financial elites who they claim they are protecting us from.

(5)  In America today most workers are required to pay into Social Security, a system that is progressive whereby high income people get less back as a percentage of what they put in, a system that is adjustable whereby benefits can be reduced to ensure solvency, a system that never speculates on the global investment market. You may hate it or love it, but as long as private citizens are required to participate in Social Security, public servants should also be required to participate. That they have negotiated for themselves a far more generous level of retirement security is hypocritical.

The hypocrisy of public sector unions isn’t just deplorable, it’s dangerous. Because public unions have used the unfair advantages that accrue when they operate in the public sector to acquire power that is almost impossible to counter. Large corporations and wealthy individuals are the natural allies of public sector unions, especially at the state and local level, where these unions will rubber-stamp any legislation these elite special interests ask for, in return for support for their wage and benefit demands. Public unions both impel and enable corporatism and financialization. They are inherently authoritarian. They are inherently inclined to support bigger government, no matter what the cost or benefit may be, because that increases their membership and their power. They are a threat to our democratic institutions, our economic health, and our freedom.

And they are monstrous hypocrites.

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Ed Ring is the president of the California Policy Center.

Pension burden in 5 California counties now over 10%

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

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

Five California counties reported that 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), San Diego County (10.4 percent) and San Mateo County (10 percent). We will consider each below.

A sixth county, Merced, is also expected to report that its required contributions topped 10 percent of 2015 revenue when it files its audit. We estimate Merced’s payments at slightly over 11 percent of revenue.

CPC’s review of audited financial statements filed by 30 California counties shows pension contributions accounting for between 3 percent and 13 percent of total county revenue.

“For years, public employee union leaders denied the pension burden was even close to 10 percent,” my colleague Ed Ring notes. “This study shows the burden is now approaching 15 percent of 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.

METHODOLOGY

In 25 of 30 counties, we used 2015 audits. Five other counties had yet to file their 2015 reports; in these instances, we estimated revenues and pension contributions from 2014 audits, 2015 budgets and actuarial valuation reports.

Most large counties operate their own pension systems, rather than relying on CalPERS. These county systems often also serve special districts and even cities in the county. Our survey was limited to pension contributions made by the county governments themselves, and excluded separately reporting units – that is, entities that participate in county systems but produce their own financial statements.

In 2015, state and local governments implemented new accounting standards promulgated by the Government Accounting Standards Board (GASB). Aside from reporting net pension obligations as a liability on the government’s balance sheet, GASB Statement Number 67 requires filers to report “Actuarially Determined Contributions” and actual contributions made to their defined benefit plans. The Actuarially Determined Contribution (ADC), previously known as the Actuarially Required Contribution, is calculated by an independent actuary. The ADC is supposed to be the amount sufficient to finance pensions for current and future retirees while gradually closing any gaps in pension funding.

For the 25 larger counties that had released 2015 audits by late February, we recorded ADCs and total revenue, and calculated the quotient of these two values in order to get a rough idea of the relative burden that public employee contributions place on county finances. Because pension systems usually require their actuaries to assume high rates of return on their investments (typically 7.25 percent or more), it’s arguable that reported ADCs understate actual pension burdens.

That said, the reported ADCs provide a reasonable basis for comparison across counties. Further, California public agencies generally make pension contributions roughly equivalent to their ADCs, so the ADC is at least a good gauge of near-term pension burdens.

Total county revenues, ADCs and pension cost ratios appear in the following table:

California County Pension Burden
Total Annual Pension Payments As Percent of Total Annual Revenue
20160312-CPC-Joffe-County-Pensions2

  1. Santa Barbara County

Despite its strong economic performance, Santa Barbara County had the highest pension cost burden among the 25 counties we reviewed – by a considerable margin. Employer contribution rates ranged from 20.8 percent to 59.5 percent, and have risen substantially since 2007. Employer contribution rates represent the percentage of public employee salaries a public agency contributes to its pension plan; they are generally higher for public safety employees, who receive more generous retirement benefits.

In the fiscal year ended June 30, 2015, the Santa Barbara County Employees’ Retirement System (SBCERS) suffered a decline in its funded ratio, from 81.1 percent to 78.4 percent. The drop was largely due to a disappointing 0.83 percent return on plan assets, compared to an assumed 7.5 percent annual asset return.

Despite the decline, SBCERS is still on somewhat stronger footing than the state’s CalPERS – which was about 73.3 percent funded on June 30, 2015. SBCERS is also amortizing its unfunded liabilities faster than CalPERS, using a 17-year timeframe versus 30 years for CalPERS.

SBCERS ended the fiscal year with an unfunded liability of $698 million, about 93 percent of which was the responsibility of county government (the rest belongs to courts and special districts). The system was last fully funded in 2000.

According to a 2007 report commissioned by the county auditor, the system’s position deteriorated for a variety of reasons including poor investment performance and benefit improvements granted by elected officials. The report does not detail these benefit improvements, but they included a change to the final average salary calculation used to determine benefit levels. Liberalizing final average salary calculations can enable pension spiking – a practice under which employees work extra overtime or get last-minute promotions at the end of their careers to maximize pension benefits.

  1. Kern County

Although Kern County’s ADC/revenue ratio is two points lower than that of Santa Barbara County, its situation is worse in a variety of ways. According to the most recent Kern County Employees’ Retirement Association (KCERA) actuarial valuation report, the system was only 64.08 percent funded as of June 30, 2015 – down from 65.11 percent the previous year.

Also, as of June 30, 2015, the county had $284 million in outstanding pension obligation bonds. If the $51 million in scheduled debt service on these bonds is added to the $201 million in Actuarially Determined Contributions the county was required to make, its pension cost burden would exceed that of Santa Barbara County – which has not issued pension obligation bonds.

KCERA’s funded ratio reflects an assumption of 7.5 percent annual returns on its portfolio. This contrasts with an actual fiscal year 2015 return of only 2.3 percent. On the other hand, KCERA is trying to amortize its unfunded liabilities more rapidly than CalPERS – employing an 18-year amortization period versus 30 years for CalPERS. KCERA’s severe underfunding and rapid amortization help drive relatively high pension contribution rates, which range from 37.8 percent for Kern’s court employees to 63 percent for public safety employees.

Kern County shows other signs of fiscal distress. In January 2015, county supervisors declared a financial emergency, prompted by the precipitous decline in oil prices. When the emergency was declared, oil companies paid about 30 percent of the county’s property taxes. That said, it is worth noting that property taxes accounted for just 15 percent of the county’s total 2015 revenue. Counties receive a substantial portion of their revenue from state and federal grants, so declines in a major source of county tax revenue are often less damaging than they are for cities.

After the emergency declaration, Standard and Poor’s affirmed the county’s A+ rating (four notches below the agency’s top AAA rating) and changed its outlook to negative. No downgrade has followed.

Kern County’s liabilities exceed its assets, leaving it with a negative Net Position – another sign of fiscal stress. Since most of a government’s assets are already committed to specific requirements (like paying debt service) or tied up in capital assets that are difficult to sell, analysts often focus on its Unrestricted Net Position – a measure of reserves that could be freely allocated by elected officials. Kern County has a negative Unrestricted Net Position of almost $2.3 billion – suggesting a serious fiscal problem.

On the other hand, the county has a strong general fund balance – equal to more than six months of general fund expenditures. As we have reported elsewhere, low or negative general fund balances have been the best predictor of municipal bankruptcy in recent years.

More recently, the county made further budget cuts which could result in closures of fire stations, jails and other facilities. If the county was not paying over $1 in every $8 for pension contributions and pension obligation bond debt service, these reductions might not have been necessary.

  1. Fresno County

Like Kern County, Fresno County has used pension obligation bonds (POBs) to address pension underfunding. As of June 30, 2015, the county had $454 million in POBs outstanding. This balance actually exceeds the $402 million principal amount of the POBs when they were issued in 2004, because much of the 2004 offering consisted of capital appreciation bonds (CABs). Interest on CABs is added to principal over the life of the bond and then paid at maturity.

In fiscal year 2015, Fresno was scheduled to pay over $37 million in debt service on its POBs. If this is added to the $153.5 million in Actuarially Determined Contributions the county was obliged to make, its pension-cost-to-revenue ratio would (like Kern County’s) exceed that of Santa Barbara County’s, which did not issue POBs.

Fresno County has the highest employer contribution rates as a percentage of payroll of the counties discussed here. In fiscal year 2015, contribution rates range from 37.4 percent to 74.6 percent for certain public safety employees. The county’s retirement program provisions are relatively generous. According to the system’s actuarial report, most plans allow members to retire at age 50. If they remain on the payroll after 55, many classes of employees accrue additional benefits at accelerated rates.

On the plus side, the Fresno County Employees’ Retirement Association is amortizing its unfunded liabilities over a 15-year period and has a relatively strong funded ratio – 79.4 percent (down from 83 percent at the end of 2014).

Illustrating that optimistic investment forecasts plague local government financials, Fresno County assumes annual asset returns of 7.25 percent. Its actual return in fiscal 2015 was a dismal -0.10 percent.

  1. San Mateo County

Like Santa Barbara County, San Mateo County has a strong economy, so it’s surprising to see it near the top of our list. One driver of the county’s pension burden appears to be high employee salaries. Since pension benefits are based on final average salaries, high employee compensation translates into high pension benefits.

A San Jose Mercury News story revealed that San Mateo County had 78 employees paid over $200,000 in the 2013 fiscal year. More recent data available on Transparent California shows that number grew to 90 employees in 2014.

Employee contribution rates ranged from 28.3 percent to 65.5 percent. For a single employee earning $200,000, the county’s annual pension contribution could be as a high as $130,940.

A 2012 San Mateo Civil Grand Jury report noted that county pension contributions had grown from $78 million in fiscal 2006 to $150 million in fiscal 2012, but the plan continued to generate substantial unfunded liabilities. The jury made a number of recommendations including “significantly decreasing the number of county employees through outsourcing and/or reducing services, and by attrition.”

The county’s board of supervisors agreed with most of the Grand Jury’s findings but did not specifically respond to the call for headcount reductions.

In late 2013, the board of supervisors decided to make extra contributions to SamCERA (the San Mateo County Employees Retirement Association) in order to more rapidly cut its unfunded liability. The supervisors authorized a one-time payment of $50 million in fiscal 2014 followed by annual $10 million payments in each of the next nine fiscal years. These payments, totaling $140 million over 10 years, are above the county’s Actuarially Determined Contribution.

The extra contributions have improved SamCERA’s funded ratio despite lackluster stock market performance in the most recent fiscal year. The system’s funded ratio rose from 73.3 percent in 2013, to 78.8 percent in 2014 and to 82.6 percent in 2015. The system achieved portfolio returns of 3.5 percent in fiscal 2015 as opposed to a 7.5 percent projected return rate.

Since 2013, the system’s unfunded liability has fallen from $954 million to $702 million. SamCERA amortizes unfunded liabilities over a 15-year period. Given the improvement in SamCERA’s funded ratio, it seems likely that San Mateo County will fall off the list of highly burdened counties in future years.

CONCLUSION

Generous benefits, aggressive return assumptions and (in some cases) high employee pay have left a number of California counties heavily burdened with pension costs. This year’s poor stock market performance will likely mean additional stress.

Over the longer term, the state’s 2013 pension reform should provide some relief, as newly hired employees receive less generous benefits. But if the stock market continues to be weak or if county systems make poor investment choices, asset returns will remain below the 7.25 percent-7.50 percent typically anticipated in actuarial valuations. Under those circumstances, employer contributions and overall pension burdens may continue to rise. The result will likely be ballooning public debt, pressure to raise taxes and cuts in government services.

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About the 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. 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.

University of California Hikes Tuition to Fund Soaring Pensions of up to $350,000 a Year

The University of California (UC) is implementing major changes to their retirement system to address its $12.1 billion unfunded liability, which has been cited as the driving factor behind recent tuition hikes.

The proposed changes include a cap on pension benefits and the possibility of offering a 401(k) defined contribution plan to new hires.

Looking at how UC got here is instructive. In 1990, the plan enjoyed a healthy funded ratio of roughly 135%. The decision was then made to stop making any contributions – employee and employer – and rely on investment earnings to keep the fund afloat going forward.

This continued for two decades. UC only resumed contributions in 2010 when over $6 billion in unfunded liabilities had accumulated and the plan was heading towards ruin, should they fail to act.

The fiscal irresponsibility, first in suspending contributions, and then failing to reinstate them until the very last moment, is staggering. As Moody’s declared, “employee and employer contributions are the bedrock of any defined benefit pension plan.” The American Academy of Actuaries (AAA) concurs, noting that contributions “should actually be contributed to the plan by the sponsor on a consistent basis.”

It should be noted that the spectacular decline in the health of UC’s retirement system occurred despite UC realizing an average annual investment return of 9% over those same 20 years, significantly higher than their assumed 7.5% annual return. Clearly, Moody’s and the AAA understand what is needed to keep pension systems in sound financial shape, while public pensions’ emphasis on investment returns over annual contributions is fundamentally flawed.

So why did UC behave so recklessly? Quite simply, public institutions have the exact opposite incentives necessary to manage a defined benefit system appropriately. The decision makers who authorized the funding holiday in 1990 are all long gone, and none of them will bear any of the cost for their actions. In fact, they all directly benefited from their profound mistakes.

UC regents and plan trustees, all being members of the retirement plan themselves, all saw their take home pay immediately rise as a result of their contributions dropping to 0%. Further, UC administrators saw millions of dollars flow back into their general budget, no longer designated for funding the retirement system.

Pete Constant, Senior Fellow at the Reason Foundation, finds that public pension systems are “actually a perverse system in which there is a win for the entire membership when pension board trustees are wrong!”

He notes that, “The risk associated with not meeting actuarial assumptions is borne entirely by the taxpayers…unfunded liabilities are generally amortized over long periods of time, spreading the associated costs across generations.”

This point is driven home by looking at the several recent UC retirees who are collecting base pensions of over $300,000 a year for life. While these former UC employees were fortunate enough to pay nothing, for at least 20 years of their careers, for such lucrative pensions, the cost is now being borne by an entirely new generation of students and taxpayers.

Further, current UC employees have seen their annual contributions rise dramatically, and new hires will be under a substantially reduced pension system themselves. In short, virtually everyone but the employee who received the benefits, or those who received that employee’s services, are now paying the cost.

UC’s decision to consider shifting new hires to a defined contribution plan is long overdue. In addition to the perverse management incentives and issues of intergenerational inequity outlined above, a shift to defined contribution plans would eliminate the long term liability to taxpayers, while offering greater flexibility and portability to employees.

As UC President Janet Napolitano said, “Pension reform needs to happen. It’s the responsible thing to do.”

Robert Fellner is the Director of Transparency Research at the California Policy Center.

Public Sector Pay: Transparency and Perspective

Public sector labor leaders in California would rather that the public remain relatively ignorant about how well their members are compensated. But they are fighting a losing battle.

Because of California’s massive unfunded pension liability and other scandals, the public is demanding answers. Interests as diverse as taxpayer groups, business organizations, the media and some elected officials have moved aggressively, not only to address these problems, but also to ensure that there is much greater transparency about public sector compensation than we have seen in the past.

For example, attorneys at Howard Jarvis Taxpayers Association won several Public Records Act lawsuits against government interests — mostly at the local level — who were attempting to shield their compensation data from the public. And PensionTsunami.com is a website which for years has been a clearinghouse for articles on pension abuses.

But it is not just conservative interests who are shining the light. Left-of-center newspapers like the Sacramento Bee and San Jose Mercury News, have fought very hard to expose the truth on employee compensation. Self-styled progressive John Chiang developed a powerful data base open to the public about state worker pay when he was California’s Controller. He is now the State Treasurer and we hope he continues his efforts.

Public sector labor is pushing back against all this disclosure asserting that compensation is not excessive in California. For example, they recently claimed that pension benefits are comparable to Social Security payouts. But a new study by Robert Fellner, Research Director for TransparentCalifornia.com, shows that some retired public employees are receiving five times as much in pension benefits — mostly at taxpayer expense — as comparable private sector retirees receive from Social Security. The objective here is transparency, not a war against public employment. We all know someone who works for government and many are extremely competent in their jobs and deserve the pay they get. But there are several aspects of public sector compensation that aggravate taxpayers.

First is the lack of accountability. Taxpayers would gladly pay the highly competent more if government managers were empowered to fire the incompetent, indolent and criminals. Taxpayers and parents chafe at the fact that school districts can’t even fire child molesters without jumping through bureaucratic hoops costing much in both time and money.

Second, citizens are very concerned about how much of public sector compensation will be assumed by future generations, especially pension benefits and guaranteed health care for life. This is not a legacy of which we should be proud to leave our children.

Third, the personnel practices in government are totally out of sync with the private sector.  Just last week, the Center for Investigative Journalism reported that thousands of state workers are hoarding vacation time. Unlike the vast majority of workers in the real world, some state employees will be able to cash out their vacation time worth hundreds of thousands of dollars when they retire.

Fourth, generous compensation for public employees would be far more palatable if others were doing well. But they aren’t. California continues to have one of the highest unemployment rates in the nation and we rank number one in poverty. The economic recovery, trumpeted by political leaders in Sacramento, is shaky at best as many have simply given up looking for work. While so many Californians have seen a decrease in income and opportunity, businesses large and small continue to flee the state to escape high taxes and costly regulations.

Transparency and a more realistic perspective toward public sector compensation will be critical to California’s future. It is simply not healthy to have one segment of the citizenry treated as a protected class to the detriment of everyone else.

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Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

AVERAGE Orange County Pension 88% of Final Salary

Would you take a 12 percent pay cut in exchange for a 100 percent reduction in work? In Orange County, if you’ve worked 30 years – say from age 25 until age 55 – that is exactly what you can expect. And many OCERS retirees are receiving pensions in excess of their highest salary.

For instance, Orange County Department of Education’s former deputy superintendent Lynn Hartline retired in 2013 with an OCERS-reported final average salary of $250,018. Hartline won’t have too much trouble adapting to life without a salary, however. Her 2013 full-year pension benefit from OCERS (Orange County Employees Retirement System) was 100 percent of her final average salary – $250,018.

Charles Walters received the second-highest OCERS yearly payout in 2013. Walters was the former Orange County assistant sheriff who retired in 2008 amidst a criminal grand jury probe for the 2006 murder of John Chamberlain in the jails he oversaw. His pension for the 2013 year was also 100 percent of his final average salary — $226,365.

Unfortunately the examples above are hardly extreme outliers, but rather indicative of an underlying trend. For all OCERS full-career retirees — those with 30 or more years of service credit for retirement — the average annual pension benefit received in 2013 was $73,875, or nearly 90 percent of their final salary.

Focusing on only recent retirees prevents older retirees — who’ve received significant cost of living adjustments to their pension benefit — from artificially inflating the comparison of pension benefits as a percentage of final salary. The average pension benefit received by a full-career OCERS retiree who retired in 2004 or later was $81,283, which represents 88 percent of the average final salary.

OCERS retirees who worked for the O.C. Fire Authority received an even larger percentage of their final salary in retirement. The average full-career Fire Authority retiree received a pension benefit of $117,934 in 2013, which was 94 percent of the average retiree’s final salary. Retirees who had retired after 2004 received an average benefit of $119,326, worth 94.5 percent of their final salary. For 2008 or later full-career Fire Authority retirees, the average pension benefit in 2013 was $122,770, which was 94.75 percent of the average retiree’s final salary.

The data from those who retired after 2008 demonstrates that pension benefits worth 94 percent their final salary is indicative of the base pension amount an employee can expect to receive upon retirement.

Reviewing the OCERS 2013 data reveals that this problem goes beyond fire retirees. In addition to Hartline’s quarter million dollar yearly benefit, a former social services director, assistant public defender, and sanitation district manager all receive annual pension benefits well over $150,000 apiece.

As salaries rise, so too will future pension benefits for which taxpayers are responsible. Consider the Orange County Department of Education’s current superintendent, Alfred Mijares, who received a salary of $287,500 in 2013.  If Mijares retires with at least 30 years of service credit, he will likely receive a pension benefit of over $250,000 his very first year of retirement.

Private citizens usually consider an appropriate pension amount to be what is necessary to cover the cost of living during retirement. Yet for many Orange County employees, pensions have become a continuation of the extravagant salaries they took home during their careers.

This system encourages government employees to retire 10 to 20 years earlier than their private- sector counterparts. Taxpayers are left paying for six-figure government pensions that most can only dream of, while simultaneously trying to fund their own, significantly smaller pensions.

Robert Fellner is a research fellow with the California Policy Center and a transparency researcher for TransparentCalifornia.com.

Public Pension Solvency Requires Asset Bubbles

The title of this post expresses what is probably the greatest example of a monstrous hypocrisy – that public employee unions, and the pension funds they control, are supposedly helping the American economy, and protecting the American people from “the bankers.” Overpriced “bubble” assets caused by banks offering low interest rates hurt ordinary working people in two ways – they cannot afford to buy homes, and they are denied any sort of viable low risk investment opportunity. But without an endlessly appreciating asset bubble, every public employee pension fund in the United States would go broke.

The inspiration for this post is a guest column published on April 27th in the Huffington Post entitled “The Real Retirement Crisis,” authored by Randi Weingarten, the president of the American Federation of Teachers. The totality of Weingarten’s column, a depressing plethora of misleading statistics and questionable assertions, compels a response:

Weingarten writes: “America has a retirement crisis, but it’s not what some people want you to believe it is. It’s not the defined benefit pension plans that public employees pay into over a lifetime of work, which provide retirees an average of $23,400 annually…”

Here we go again. This claim is one of the biggest distortions coming out of the public sector union PR machine, and despite repeated clarification even in the mainstream press, they keep using it, faithfully counting on low-information voters to believe them. “An average of $23,400 annually.” Not in California. In the golden state, public employee pensions average well over $60,000 annually (ref. “How Much Do CalSTRS Retirees Really Make?“), if you adjust for a 30 year career working in public service. And in most cases public employees also receive supplemental retirement health benefits worth additional thousands each year.

With respect to the causes of the 2007-2008 financial crisis, Weingarten continues: “It’s not the cost of such [defined benefit] plans, which may ultimately cost taxpayers far less than risky, inadequate and increasingly prevalent 401(k) plans.”

What! Exactly how can 401K plans ever cost taxpayers more than defined benefit plans? This is absurd. Public sector defined benefit plans represent fixed payment obligations regardless of levels of funding. When they’re underfunded, the taxpayer makes up the difference. A 401K plan that is underfunded creates no lingering obligation to the taxpayer. If someone from the public sector has an underfunded 401K plan, then they will get whatever government assistance or lack of assistance that someone from the private sector might get. That’s tough, but fair. It is hypocritical to pretend to care about workers, but put the welfare of public sector workers above the welfare of private sector workers. If we are to spend taxes on government administered retirement programs, then everyone should earn benefits according to the same formulas and incentives – whatever they are.

Weingarten then suggests we expand Social Security:  “Social Security, which is the healthiest part of our retirement system, keeps tens of millions of seniors out of poverty and could help even more if it were expanded.”

This is a great idea. Why not give every public employee Social Security? Why not insist on this? Social Security is progressive, meaning that high income people get far less back than low income people. Since the public sector workers make far more, on average, than private sector workers, their participation in Social Security will have a significant positive impact on the solvency of Social Security (ref. “Add ALL Public Workers to Social Security“). Why aren’t public sector unions insisting they participate? Don’t they value the progressive benefit formulas? Don’t they want to expand the system? Could it be they are hypocrites?

Here’s a macroeconomic “big picture” quote from Weingarten:  “And while the stock market and many pension investments have rebounded, for numerous Americans the lingering economic downturn, soaring student debt, diminished home values, the responsibility of caring for aging parents and other financial demands have made it hard, if not impossible, to save for retirement.”

What Weingarten doesn’t acknowledge is the shared agenda that public sector unions and union controlled pension funds have to perpetuate the asset bubble that’s killing middle class families (ref. “Pension Funds and the “Asset” Economy“). California’s artificially inflated home prices are driving young families out of the state where they were born, preventing them from living near their aging parents, depriving their children of a relationship with their grandparents. But pension fund solvency requires ongoing appreciation of real estate and publicly traded stock even if they are already overpriced. As for student debt – if middle class families didn’t have built into their tuition payments the costs for overpaid, over-pensioned, and under-worked unionized faculty, a bloated workforce of unionized college administrators, and subsidies that make college virtually free for low income students, their “student debt” would be manageable because their rates of tuition would be far lower. Does Weingarten care about the “middle class,” or might hypocrisy be at work here?

Here’s another Weingarten quote that invites a rebuttal:  “Defined benefit plans not only help keep retirees out of poverty, every $1 in pension benefits generates $2.37 in economic activity in communities.”

The problem here is that ALL investments generate economic activity. You don’t have to run it through a pension fund. If taxpayers get to keep the money they would have paid to fund a public employee’s pension, they’ll invest it or spend it too. In California’s case, as is proudly proclaimed in, for example, CalPERS press releases, “9.5% of CalPERS investment portfolio is reinvested in California.” Nine-point-five percent. The other more than ninety percent goes to other states and countries, presumably places with business climates that aren’t poisoned by the policy agenda of public sector unions. How does that help California’s economy?

Finally, Weingarten alludes to a new initiative being advocated by public sector unions to provide enhanced retirement security to private sector workers. She writes:  “The AFT is engaged in a broad-based effort with a bipartisan group of state treasurers, other unions, asset managers and even some large Wall Street firms to vastly expand retirement security through pooled, professional asset management.”

Here is shameful hypocrisy disguised, once again, as altruism. Because these private sector defined benefit plans will not guarantee participants a 7.5% return on investment. They will have to conform to ERISA, meaning the future retirement liabilities that will be offset by invested assets will have their present value calculated at conservative rates. This double standard guarantees the “normal contribution” for public employees in order to generate a given defined benefit will be remain far less than that required of private citizens. Some observers have even suggested these private defined benefit plans, where the assets will be co-mingled with public sector defined benefit plans, will be used as piggy banks to shore up the public sector plans. After all, if the assets are co-invested and earn a rate of return that exceeds the discount rate used to value the future liabilities for the private retirees, but falls short of the discount rate used to value the future liabilities for the public sector retirees, then the surplus from the private sector’s fund will be applied to the deficit in the public sector fund. Why not? It is easy to be diabolical, and hypocritical, when your critics have to dive so far into the weeds to challenge your logic or your morality.

Weingarten doesn’t have to deal with weeds, however, or wonks, or the tough realizations that are the reward of complex analyses. She just has to say things that are emotionally resonant, then let her multi-million dollar PR machine feed it to the masses.

When interest rates were lowered in the 1990’s, stock prices soared, forming what was later called the internet bubble. When that bubble popped in 2000, interest rates – and credit criteria – were lowered even further, forming the real estate bubble. Through it all, pension funds banked profits on artificially inflated asset values, ordinary citizens went into debt to their eyeballs to buy homes and pay tuition for their children, and the unions that controlled the pension funds negotiated massive increases to pay and pension benefits as if these bubbles could last forever. When reality finally returned in 2008, the government unions and their banker allies handed struggling taxpayers the bill, holding onto their excessive pay, benefits, bonuses and pensions, and engaged in quantitative easing and other fiscal shenanigans calculated to perennially inflate new asset bubbles, and the pensions that depend on them.

That is the real story, Ms. Weingarten.

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Ed Ring is the executive director of the California Policy Center

Why Frequently Cited Average Pension Numbers Are Misleadingly Low

Public pension systems in California, most notably CalPERS and CalSTRS, are quick to cite their average pension amount as evidence that their pension benefits are reasonable. In addition to the pension plans themselves, many defenders of public pension plans will cite these averages themselves when attempting to counter claims that pension benefits have become excessive in recent years.

There are three very important factors that need to be accounted for when computing a raw average and using this value as an indication for what a public employee can expect to receive in retirement benefits.

Reason #1 – Failing to Adjust for Years of Service Worked

The biggest and most widely documented factor is overlooking years of service. Most analyses of average benefits include the implicit assumption that the pension benefit cited is for a full career (30 years or more) of service.

Including the pension amounts of those who have not worked a full career produces an average value that is much lower than what those who have worked a full career are receiving. Since a full-career employee is the benchmark used in measuring the equity of pension benefits, it is only appropriate to use the data that reflects that.

Reason #2 – Failing to Account for Beneficiaries

Many pension plans maintain their records in a way that makes the most sense for processing payments, but are incredibly misleading when used to calculate average pension amounts. The case of beneficiaries is a prime example of this. When a public employee qualifies for a pension, there are set guidelines for each plan depending on how beneficiaries are treated, but most plans default to the surviving spouse. In many cases, the retiree can designate additional beneficiaries as well.

So when calculating average pension amounts, if beneficiaries aren’t accurately identified and segregated from active service retirement amounts, the resulting average will be skewed downward. This is because any beneficiary payment will always be a portion of the full retirement amount, which will be incorrectly treated as if it were its own separate benefit amount. An example found on Transparentcalifornia.com illustrates this effect.

In the San Jose Police and Fire Pension Plan, there is no distinction between beneficiary and active service retirees. Consider, however, the following case of multiple beneficiaries. An individual with a retirement year of 2007 and years of service value of 25.02 received a $76,120 pension amount in 2013. Two more entries share the last name of this individual, as well as identical years of service and year of retirement but both only received $7,100 in 2012. As it is inconceivable that a San Jose police or fire retiree could retire with 25 years of service and receive an annual pension of just $7,100, these three separate entries – $76,120, $7,100, and $7,100 – are all components of one pension. So in this case, even when screening to isolate averages for pensioners with 25+ years of service, a $90,320 pension for one individual would impact the averages as three separate pensions of $30,107.

Reason #3 – The Same Pension Amount Reported in Fragmented Parts

Another potential error is when one employee’s pension is reported in fragmented parts, to account for either a divorced spouse receiving a portion of their pension, or even in cases where the retiree changed departments and received a pension amount under two or more different formulas. As indicated above, for every instance this occurs the pension amount will be reported at least 50% lower than its true value in raw average calculations.

Conclusion

It is entirely reasonable for pension plans to keep their payment records in a format that is most efficient and accurate for them. The observations made above are in no way suggesting that any of the data made available by the various plans is compiled in an intentionally misleading way. However, it is the responsibility of anyone who uses pension averages in their arguments, either for or against pension reform, to accurately interpret this data. Public relations professionals who represent pension systems and public sector unions often ignore reasons why pension benefits are far more generous than the statistics they come up with would indicate.

As demonstrated above, when it comes to frequently cited average pension amounts, there is much more to the story than it would appear at first glance. 

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Public Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by the George Mason University.

Add ALL Public Workers to Social Security

“I think expanding Social Security benefits is incredibly important… the current Social Security benefits are not covering the cost of living for seniors.”
– Shenna Bellows, Democrat, candidate for U.S. Senate, Maine, as quoted in Fiscal Times article “Liberal Dems’ New Goal: Boost Social Security Benefits,”

The debate over what role, if any, government should play in ensuring retirement security for all Americans, ought to be creating strange bedfellows. Liberal Democrats like Shenna Bellows want to expand Social Security. Many conservative Republicans want to reform public sector pensions by eliminating them in favor of individual 401K accounts.  They ought to be working together.

There is only one equitable and affordable way to expand Social Security benefits, and that is by requiring all public sector employees, with no exceptions, to participate in Social Security from now on.

The reason for this is because Social Security, unlike typical public sector defined benefits, are progressive. This means that the more you earn and contribute to Social Security during your career, the less you get back. For example, low wage earners will typically get 35% to 40% of their final yearly income back as an annual Social Security benefit. A high wage earner will be lucky to get 20% of their final income back.

Because the average wages of public employees are significantly higher than for private workers, adding tens of millions of public sector workers to the Social Security rolls will fundamentally alter the current and future cash flow of the system. Relative to the general population of workers, with government workers, far more money will be going in than goes out. Liberals should support this, insofar as it is a textbook example of progressive principles in practice. And since government workers are supported by taxpayers, this form of progressive redistribution might even be palatable to conservatives. But there are additional compelling reasons for conservatives to support enrolling all public employees in Social Security.

Giving Social Security to public employees along with individual 401K accounts provides a secure supplement to whatever retirement annuity their 401K savings may enable. The 10 year minimum requirement to vest Social Security can be waived so all public employees are immediately enrolled, even those nearing retirement. They may keep their defined benefits for work performed to-date (subject of course to reductions in order to avoid municipal bankruptcies – or as a result of bankruptcies)  and they may accrue Social Security benefits and contribute to individual 401K plans for the remainder of their careers. Enrolling public employees in Social Security eliminates the objection that 401Ks are not enough – perhaps in some cases they aren’t – but it is reasonable to expect anyone who has a contributory 401K and a Social Security benefit to be able to financially prepare for retirement.

Liberal Democrats, who want to expand Social Security benefits, are the last people who ought to be defending public sector pensions that rob Social Security of vital funds. Imagine if another thirty million people, or more – all of them highly compensated government workers – were suddenly contributing 6.4% of their pay to Social Security? Along with the employer’s matching 6.4%, there would be an immediate jump to deposits into the Social Security fund of approximately 300 billion per year. Because high-income workers put far more into Social Security than they ever get back, the system would return to a cash-positive status and would remain there for years, possibly forever.

Conservatives love to call Social Security a “Ponzi scheme,” despite the fact it lacks most characteristics of a Ponzi scheme: It doesn’t promise unrealistic investment returns, nor does it promise participants an eventual return of principal. And while in practice Social Security uses collections from existing workers to pay retirees, it is a leap of ideological faith to equate any pay-as-you-go system to a Ponzi scheme.

Liberal bias in favor of public sector pensions is harder to defend, because it lacks any ideological coherence. Liberals support public sector pensions because public sector unions give their campaigns money. Period. Otherwise they would object to a system that truly is a Ponzi scheme – promising unrealistic returns while racking up unfunded liabilities that defraud new entrants of what they are promised, and justifying it all on the notion that extraordinary corporate profits will propel these funds to achieve over-market returns forever.

To remain true to their beliefs, liberals would apply the principles that make Social Security a financially sustainable system to public sector union reform. That is:

(1) Progressive so high wage earners do not get the same return in retirement as low wage earners.

(2) Invest in risk-free financial instruments, or not invest at all, since such investments distort the markets, encourage speculation, and create a system dependent on corporate profits.

(3) Calculate retirement benefits on the top 35 years of career earnings instead of the final year, or few years.

(4) Impose a ceiling on maximum possible retirement benefits.

(5) Adjust benefits upwards or downwards to maintain solvency without allegedly “constitutionally protected vested contractual rights” getting in the way.

Or better yet, liberals might simply support enrolling every public sector worker in Social Security. Then they might focus on that one program, Social Security for everyone, and determine to what extent it can be expanded in a manner that is financially sustainable. And they would make those calculations while taking into account a new $300 billion per year infusion from the public sector workforce!

Liberals and conservatives alike ought to support the notion that every American worker – to the extent they earn and benefit from any government collected and government administered retirement plan – face an identical set of challenges and incentives. Social Security is a good place to start. And finish.

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Ed Ring is the executive director of the California Policy Center

The Partisan War on "Income Inequality"; Law of Bad Ideas

Debate rages over “income inequality”. CEOs makes hundreds or thousands of times more than workers. That is one aspect of income inequality. And it’s easily explained: The Fed’s inflation policies, bank bailouts, Fractional Reserve Lending, and crony capitalism are to blame.

That blame is nonpartisan.

Rather than attack the problem, “progressive” partisans howl over minimum wages.

Democrat-Sponsored Income Inequality

There is one major aspect of “income inequality” that you never hear president Obama or the Democrats mention, precisely because they are to blame.

Democrat [mostly, increasing numbers of Republicans condone this] sponsored “income inequality” is even more insidious because it directly affects middle-class Americans who pay high taxes so public employees can retire in comfort with gold-plated guaranteed-for-life pensions.

Gold-Plated Retirements

In support of my above thesis, please consider this report published February 25, 2014 in the Washington Post, entitled “In San Jose, Generous Pensions for City Workers Come at Expense of Nearly All Else“:

“Here in the wealthy heart of Silicon Valley, the roads are pocked with potholes, the libraries are closed three days a week and a slew of city recreation centers have been handed over to nonprofit groups. Taxes have gone up even as city services are in decline, and Mayor Chuck Reed is worried.

The source of Reed’s troubles: gold-plated pensions that guarantee retired city workers as much as 90 percent of their former salaries. Retirement costs are eating up nearly a quarter of the city’s budget, forcing Reed (D) to skimp on everything else.

20140315_Shedlock

Employee costs are growing nearly five times faster than revenues leading to fewer workers and budget deficits.

“This is one of the dichotomies of California: I am cutting services to my low- and moderate-income people . . . to pay really generous benefits for public employees who make a good living and have an even better retirement,” he said in an interview in his office overlooking downtown.

In San Jose and across the nation, state and local officials are increasingly confronting a vision of startling injustice: Poor and middle-class taxpayers — who often have no retirement savings — are paying higher taxes so public employees can retire in relative comfort.

“I got sick and tired of cutting services to my people — 10 years of services cuts — in order to balance the budget,” Reed said. “We got to the point where we were facing service delivery insolvency.”

In California, cities large and small are struggling to pay the growing public-sector retirement tab. Meanwhile, 55 percent of the state’s private-sector workforce — 6.3 million — have no retirement plan on the job.

Other governments are also struggling. In Chicago, Mayor Rahm Emanuel (D) has been pushing to scale back pensions for city workers, warning that without reform, city services will wither. Rhode Island enacted pension reforms in 2011 that trimmed retirement benefits for new workers and for those already on the payroll.”

Enter the Law of Bad Ideas

Instead of admitting the system is hopelessly broken, Sacramento lawmakers want to create the nation’s first retirement savings plan for private-sector workers in which the state manages the money and guarantees a minimum rate of return.

Both cities and the State of California are struggling to pay pensions, yet the proposed solution by California lawmakers is to have the state guarantee even more pensions.

Worst yet, this guarantee would come when treasury yields are in the gutter and stocks 50% overvalued and poised for losses in any time period shorter than seven years according to John Hussman (and I happen to agree). For details, please see It Is Informed Optimism To Wait For The Rain

Note: John Hussman is one of many great speakers at Wine Country Conference II. If you haven’t yet signed up, please do.

For such ideas to be proposed at the worst time is mind-boggling, yet strictly in accordance with “The Law of Bad Ideas“.

A number of corollaries clearly apply.

Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented.

Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists.

Corollary Five: No politically acceptable idea is so bad it cannot be made worse.

The reason CEOs make out like bandits is explained in Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another  

Brief History

  • Monetarists act on the theory falling prices are a bad idea
  • The Fed prints money and holds rates too low
  • Housing bubble builds
  • Medical and education prices soar
  • Student loans soar to “help” the students
  • Because housing is not affordable numerous affordable housing programs appear causing still more unwarranted housing demand. Few see the bubble because housing is not in the CPI
  • Housing crashes
  • The affordable housing advocates are abhorred by falling prices
  • Fed bails out banks and steps in to support housing prices
  • Income inequality soars
  • Students remain stuck with debt

Because of one idiotic notion, that “falling prices are a bad thing”, the Fed has generally managed to keep the CPI rising, with some prices rising much faster than others.

That leads to corollary number six, mentioned in the above link:

Law of Bad Ideas Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.

And so here we are. To bail out the absurd idea that public pension promises are supportable, complete with 7.5 to 8.0 percent annual returns, when 10-year treasuries yield 2.67%, California proposes insuring private pensions as well.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

 

How Does "Zero-point-Eight at Sixty-Eight" Sound for a Pension Plan?

The economy is picking up steam. State, city and county employees have willingly accepted millions upon millions of dollars in cuts to their pensions. California’s largest pension fund has recouped every single investment penny it lost from the Great Recession. So I thought perhaps California police officers, teachers, firefighters, and other public employees could finally exhale. I hoped we could finally enjoy relief from daily attacks for the modest pensions we count on for retirement security.
Buddy Magor, Peace Officers Research Association of California
Public CEO, January 27, 2014, “Stop Blaming Public Employee Pensions for Problems

Whether or not the economy is “picking up steam” at a rate sufficient to rescue California’s financially challenged public sector pension funds is a debate that is by no means over. But let’s consider Mr. Magor’s other point regarding the “modest pensions we count on for retirement security.”

By now everyone should be familiar with the so-called “three-at-fifty” pension formula which, starting in 1999 with the passage of SB 400, was steadily adopted throughout California’s cities and counties for public safety employees. Simply stated, “three-at-fifty” means that public safety employee pensions are calculated as follows:  Their final salary is multiplied by 3.0%, with the result multiplied by the number of years they worked. For example, if a public safety employee’s final salary is $100,000, and they worked for 30 years, then their pension would be $100,000 times 3.0% times 30 (years), equaling $90,000 per year. The “fifty” in the pension formula refers to the minimum age of eligibility.

In some cases, recent reforms have moved the age of eligibility to age 55, meaning the formula is unaltered, but the retiree isn’t eligible for their pension until they’re 55 years old instead of 50 years old. Other reforms have increased the amount public safety employees need to personally contribute to their pension benefits via payroll withholding, although in virtually all cases these increased contributions only apply to the “normal” payment and not to the monstrous unfunded liabilities. But let’s not get into the weeds, because the real question is this:

COMPARISON TO SOCIAL SECURITY

How does this “modest” (and reformed) pension formula, “three-at-fifty-five,” compare to Social Security? Perhaps an “apples to apples” comparison will establish which of these benefits is modest (and sustainable), and which is not.

In the spreadsheet analysis which anyone who wishes to verify these calculations can download here, an attempt is made to express the Social Security benefit in the same terms as a public sector pension formula. Instead of 55, the age of eligibility is 68. Instead of 30 years as the typical term of service – representing age 25 through age 54 for a public safety employee – the multiplier is 43, representing age 25 through age 67 for a Social Security recipient. By entering a birth date of 12-31-1945 in the Social Security Administrations “Quick Calculator,” along with a final salary of $80,000 per year, it is simple enough to verify that a 68 year old retiree would be eligible for a 2014 Social Security benefit of $26,532.

Here is the comparison between this Social Security benefit and a pension for a 55 year old public safety employee who retires after working for 30 years, who also had a final salary of $80,000 in 2013:

Public Safety:  “3.0% @ 55,” Multiply $80,000 x 3.0% x 30 = pension benefit of $72,000 at age 55.

Social Security: “0.77% @ 68,” Multiply $80,000 x 0.77% x 43 = Social Security benefit of $26,532 at age 68.

This is the true apples to apples comparison that renders any suggestion that public safety retirement benefits are “modest,” even at the reformed “3.0% at 55” formula, to put it charitably, highly questionable. Are these pensions, fantastically better than Social Security, meant to make up for a career of modest earnings? That’s also debatable.

A recent California Public Policy Center study entitled “How Much Do California’s State, City and County Workers Really Make?” estimated the average pay and benefit for full time state/local government employees in California. The study used data provided by the State controller’s office and includes downloadable spreadsheets for anyone who wants to verify the findings. The average 2012 base pay – pension eligible pay – for full-time public safety employees in California was estimated (ref. Table 3 in the study) at $76,251 for state agencies, $76,864 for counties, and $91,782 for cities. And these numbers are not skewed by the presence of executive positions – repeated analysis has demonstrated that median figures are consistently higher than averages for public sector compensation, especially for public safety employees.

In reality, the final year salaries that public safety pensions are calculated on are much higher than these mid-career averages. Most public safety employees retiring today after a 30 year career in California can expect pensions of about $100,000 per year. Since Social Security benefits are progressive, and pensions are linear, an apples to apples comparison using larger examples would yield even greater disparities. But we’re getting into the weeds again.

RETURN ON INVESTMENT FOR SOCIAL SECURITY CONTRIBUTIONS

Here’s one more statistic that should be of interest. Public sector pension funds earn 7.5% per year. That’s pretty much guaranteed, because if they don’t, the taxpayer covers the difference, not the beneficiary.

What about an independent contractor in the private sector who turns over 12.4% of their gross earnings to the Social Security Administration, year after year, and retires after earning $80,000 in their last year of work? What’s their return on investment? It is a whopping 1.5%. For all practical purposes, middle and upper income Social Security participants earn nothing on their Social Security contributions.

It isn’t necessary to eliminate defined benefits for public employees, nor is it inappropriate for public safety employees to earn better retirement benefits than private taxpayers. But to earn three times as much, thirteen years sooner, is not affordable or fair. It is certainly not “modest.”

*   *   *

Ed Ring is the executive director of the California Public Policy Center

Forming a Bipartisan Consensus for Public Sector Union Reform

Across the United States there is an escalating political conflict over the role of labor unions in society. But it is inaccurate to characterize this conflict as one between Republicans and Democrats. There are members of both major political parties, as well as independents of widely diverse ideologies, who are concerned about civil liberties, the growth of authoritarian government, inadequate investment in infrastructure, and poorly funded social programs. Explaining to these diverse groups that public sector unions are a threat to civil liberties, impel authoritarian government, and preclude investment in infrastructure and social programs – and that by and large, private sector unions do not – is the key to successful public sector union reform.

While reformers who are immersed in the topic may consider this obvious, the fact that public sector unions are fundamentally different from private sector unions is still a relatively new concept to the general public. Some of these differences might be summarized as follows:

(1) Public unions elect their own bosses, private unions have minimal role in selecting their management.

(2) Unlike private unions, public union members run government agencies, which gives them the ability to intimidate their opponents with state-sanctioned force.

(3) Public unions derive their revenue from compulsory taxation, private unions depend on consumers voluntarily purchasing products and services.

(4) There is a trade-off between infrastructure spending that benefits private unions, vs. more pay and benefits for unionized government workers.

(5) Public unions and Wall Street financial interests benefit when public entities borrow money and enhance pension benefits, since financial firms underwrite the bonds and invest the pension funds. Private unions have no similar conflict of interests.

(6) Unlike private unions, public unions have an incentive to enact more laws even at the expense of civil liberties and economic growth, because it grows their organizations.

Recognition of differences between public and private sector unions can come from unlikely places. Last month the Boston Globe published a guest editorial entitled “Martin Walsh’s [Boston mayoral candidate] sensible kind of unionism.” The author, Hugh Kelleher, is executive director of the Plumbing-Heating-Cooling Contractors Association of Greater Boston. He writes:

“Construction unions in Boston and elsewhere are cognizant of the bottom line in these key ways:

  • Unlike public unions representing teachers, police, and firefighters — construction unions provide no job guarantees. There is no tenure or seniority.
  • Our layoff process rarely involves any subsequent arbitration. Workers understand that their jobs depend upon performance and the availability of work.
  • How much notice must the employer give a union construction worker before layoff? Fifteen minutes.

The construction industry’s emphasis on reliability and performance offers lessons for city government.”

Imagine if public sector unions had to work under these rules. Job security would be based on job performance rather than seniority. And as for retirement security, why should members of construction unions oppose public sector pension reform? The retirement plans that benefit unionized private sector workers must conform to ERISA (ref. “Actuarial Assumptions and Methods), meaning their pensions are modest but sustainable, because they have to use conservative rates of return when calculating the present value of their future pension payment liabilities.

It’s not just more efficient work rules and sustainable pensions that differentiate unionized government workers from private union workers, however. It is the profound difference in overall incentives that drive each of them. Public sector unions want more tax revenue for themselves. Private sector unions want that money for infrastructure. And funding infrastructure remains a pipe dream as long as public sector unions successfully resist streamlining and modernizing government, and prioritize allocating tax revenue to more compensation and benefits.

The agenda of private unions for infrastructure – real infrastructure, by the way, not environmentally correct useless monstrosities such as California’s “bullet train” and delta tunnels – is matched by the agenda of liberal Democrats for social programs. There will never be adequate money for either, as long as every spare dime goes to pay public employees literally twice as much, on average, as private sector workers earn.

Where the interests of liberal Democrats and libertarian Republicans may intersect is depicted on the table below. As shown, the “left” may oppose a union reform such as Right-to-Work (RTW) in the private sector, but for the public sector, they may view it as the only way to rescue their ambitious agenda for infrastructure projects and social programs. The “right” may support Right-to-Work for all unions, but will recognize that the most egregious threat to economic health and property rights comes from the government unions, who might be diminished if they were subjected to Right-to-Work laws.

FORMING A BIPARTISAN CONSENSUS FOR PUBLIC SECTOR UNION REFORM

PublicSectorUnionReformParadigm_400pxAnother area of intersection between liberal Democrats and libertarian Republicans would concern the special case of public safety unions. Despite troubling nationwide examples of how public safety unions use their immense power at the local level to negotiate unaffordable compensation and intimidate political opponents (ref. “Battle over police pensions in U.S. cities takes ugly turn,” Reuters, January 2014), Republicans have exempted public safety unions from public sector union reform legislation. Their omission, from Wisconsin to Pennsylvania and elsewhere, not only leaves intact what are perhaps the most inappropriate types of public sector unions, but precludes an alliance with reform-minded liberal Democrats.

Finally, a coalition of liberal Democrats and libertarian Republicans may jointly recognize that public sector unions are partners with Wall Street speculators and middlemen; entities who contribute nothing to the productive economy. For years, bond underwriters and hedge funds alike have had union controlled cities and states – and their public employee pension funds – as their biggest customers, and both reap short-term gain from accumulation of bond debt and unfunded pension liabilities that will eventually wreak financial catastrophe – that process has already begun.

Liberal Democrats and libertarian Republicans will never agree on the optimal size of government. But they can recognize together that public sector unions are the force behind an inefficient, over-built, over-compensated, increasingly authoritarian government that violates the spirit and diminishes the potential of the American dream, in all of its diversity.

*   *   *

Ed Ring is the executive director of the California Public Policy Center.

Related Posts:

Avoiding the Oversimplifications of ‘Right Wing’ vs. ‘Left Wing’, December 16, 2013

How Unions and Bankers Work Together to Protect Unsustainable Pensions, November 26, 2013

Bipartisan Solutions for California, October 27, 2013

Exponential Technological Advances and the Role of Unions, July 23, 2013

How Public Sector Unions Skew America’s Public Safety and National Security Agenda, June 18, 2013

Why Public Sector Unions are “Special” Special Interests, June 11, 2013

The Prosperity Agenda, April 2, 2013

Should Police and Firefighters be Exempted from Union Reforms?, March 12, 2013

Would ANY Public Sector Union Reform Appeal to California’s Democrats?, February 12, 2013

The Ideology of Public Sector Unions vs. Private Sector Unions, February 20, 2012

The Differences Between Public and Private Sector Unions, May 13, 2011

Detroit’s Emergency Manager Threatens Pension Fund Takeover

Detroit’s emergency manager Kevyn Orr says a pension fund takeover is a “right, if not an obligation” after Orr learned of extra, unwarranted pension payments.

Please consider Emergency Manager Weighs Pension-Fund Takeover.

Kevyn Orr said in a recent interview that at the current pace, the city’s General Services System pension fund could lose its ability to pay pensions owed to current and future retirees within 12 years. A takeover is a “right, if not an obligation, that I have to consider under the statute, and we’re considering that right now,” he said.

Representatives of the pension board said Mr. Orr’s figures were faulty.

The Oct. 25 draft report by the city’s auditor general and inspector general, which was reviewed by The Wall Street Journal, found that during the 12 years ended in fiscal year 2012, the pension funds paid $1.22 billion of interest credits into retirees’ savings accounts while the funds had losses of $2.05 billion, or 29% of their net asset value.

Earlier this year, Mr. Orr unveiled a proposal calling for the city to pay 20 cents on the dollar for the $3.5 billion that the city says it owes its two pension funds, one for 20,500 nonuniformed retirees and one for 12,700 retired police and firefighters.

“When workers in Chicago and L.A. realize that their pension benefits are no longer inviolate, unions are going to say what they really want is not bigger benefits but better funding. And that’s going to put enormous pressure on current budgets,” said Robert Novy-Marx, associate professor of finance at the Simon Business School at the University of Rochester.

A person familiar with the matter said Mr. Orr would like to engineer a takeover of the city’s General Retirement System for nonuniformed employees and retirees. Mr. Orr’s office estimates that the fund has only 64% of what it needs to meet its obligations, while fund officials put the figure at 80%. The separate fund for the city’s police and firefighters is in better shape, both Mr. Orr and fund officials say.

Michigan’s emergency-manager law allows for the takeover of a municipal pension system that is less than 80% funded.

20 Cents on the Dollar

Twenty cents on the dollar sounds about right to me. But Orr ought to take over both funds. More importantly, new rules are needed.

From my Lesson for Union Dinosaurs post …

I propose the final settlement should include …

  1. An agreement to end collective bargaining for all city workers
  2. An end to defined benefit pension plans for new workers and also for workers with less than 10 years of service
  3. A sustainable benefit model for existing workers with over 10 years of service, with pension plan assumptions equal to the long-term treasury rate
  4. Automatic provisions for further pension cuts if plan assumptions were not met
  5. An end to the right to strike for public safety workers
  6. An end to all prevailing wage laws

Point number 4 highlighted in red would in theory allow the union to value the pension fund however optimistically it wanted.

Unfortunately, that would unfairly benefit those first on the totem pole (the already retired) over everyone else.

Mish’s Eight-Point “Bold” Plan 

On April 23, 2012 in Public Unions Bankrupt Illinois I proposed a similar “bold” plan.

  1. Immediately kill public defined benefit plans going forward
  2. End collective bargaining of public unions
  3. Scrap prevailing wage laws
  4. Tax at an 85% rate all defined benefits above $80,000
  5. Claw back all pension-spiking
  6. Lower corporate tax rates to previous levels to attract businesses.
  7. Set long-term pension plan assumptions at 5% or the 30-year Treasury rate, whichever is lower (currently 3%).
  8. Default, if necessary on pension benefits above a certain level, whatever it takes to make the state solvent within 10 years, using conservative pension plan assumptions.

Points 4, 7, and 8 are the critical ones.

The “bold” plan has considerable merits vs. an across the board 20 cents on the dollar offer of Orr.

I am not sure what the cutoff should be in point number 4.  Perhaps it’s lower or higher. It depends on plan funding.

It’s the concept that is important. And I strongly suggest unions openly embrace the idea as being more fair.

What’s Fair?

From Yahoo!Finance … Juanita Sailes-Jackson, 64 years old, a Detroit retiree who worked as a typist and parking enforcement officer, said she opposed the idea of any takeover of the city’s pension funds, because she believes the system works well. Ms. Sailes-Jackson, who collects $500 a month in pension, said, “I can’t have any cuts because I wouldn’t be able to pay most of my bills.”

I don’t know how long Sailes-Jackson worked to accumulate her promised benefit. Thus such quotes only exist to play on emotions.

But cuts are coming. And they should come, because the system clearly doesn’t work! But how to distribute them?

Negotiated Settlements

The fairest possible thing to do is sit down at the table and negotiate a settlement, with everything taken under consideration, but with a 100% premise of no taxpayer responsibility.

As a starting point, I suggest, those with the least pension benefits get the smallest cuts, and those with the most benefits get the biggest cuts.

Indeed, if unions were smart, the majority could come to negotiated terms with a starting point along the lines of

  • No cuts in benefits for the bottom 30%
  • Small cuts in benefits for the next 30%
  • Big cuts in benefits for the top 40%, on a sliding scale

Such a negotiated settlement would be the fairest thing for everyone, pensioners and taxpayers alike.

Two Choices to Deal With “Collective Theft” 

In Two Choices to Deal With “Collective Theft” I outlined the choice unions have to make, whether they like it or not.

 Two Choices!
At this point, unions have two choices.

  1. Negotiation ahead of bankruptcy
  2. Negotiation in bankruptcy court

Blame the Unions 

Unfortunately, it’s highly unlikely unions would ever do what I suggest. So, the most likely consequence is an across the board cut even if it means Sailes-Jackson collects $100 a month instead of $500, regardless of how long she worked.

When that happens, don’t blame me, and don’t blame Orr. Blame the unions (and the crooked politicians who went into bed with the unions).

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

Pension Battle Shifts to San Jose, San Bernardino, Stockton

Now that a federal judge in Michigan has properly ruled pension obligations are not sacrosanct (see Lesson for Union Dinosaurs) the spotlight is once again on union dinosaurs in California.

Bankrupt San Bernardino foolishly did not attempt to shed pension obligations in bankruptcy, but perhaps it can now reconsider.

What about Stockton and Vallejo?

On April 1, 2013 Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith. Hopefully Stockton will follow inevitable pension cuts in Detroit.

Second Chance for Vallejo

Vallejo had a golden opportunity to shed pension obligations in its first bankruptcy. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.

That prediction appears well-founded. On October 20, 2013 I penned Vallejo, Mired in Pension Debt Again; Lesson for Stockton and Detroit – Shed Those Pension Obligations Now!

My comment from above: “Stockton and Detroit have a choice. They can cut pensions now, or cut them later in a second bankruptcy, just like Vallejo will.

Will Stockton get it right? Hopefully, but some things will depend on Detroit. We have not yet seen the final ruling, but steep haircuts on pension promises and unsecured general bonds should be forthcoming.

Battle in San Jose

The battle in San Jose, population 983,000 and California’s third-largest city, is of a similar nature.

San Jose spends 33% of its general fund revenue on pensions, the highest among the 25 most populous U.S. cities.

Mayor Chuck Reed wants to make changes to the pension plan. Specifically, Reed, a 65-year-old Democrat, is leading a statewide voter initiative to allow changes in future benefits for existing employees.

Union Dinosaurs Part II

Of course union dinosaurs are fighting the initiative, which means unions would rather see San Jose go bankrupt than negotiate.

Bloomberg reports San Jose Pension Crush Spurs Bid to Ease California Pacts.

San Jose, a city of 983,000 that is California’s third-largest, has been forced to make deep cuts in basic services as its retirement costs soared to $245 million in 2012 from $73 million in 2002. The city’s pension and retiree health-care liability is almost $3 billion, according to Reed, who was first elected in 2006.

San Jose voters last year approved retirement changes requiring new employees to pay 50 percent of the plan’s total cost, or about twice as much as current employees. Workers already on the city’s payroll could keep their existing plans by increasing their contributions or keep their costs steady by choosing a plan with more modest benefits.

Unions including the San Jose Police Officers’ Association and the San Jose Retired Employees Association sued to block the change. The case is pending.

Reed’s ballot initiative would amend the California constitution to give local governments the power to negotiate changes to existing employees’ future pension or retiree health care, while protecting benefits they’ve already earned.

“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

“It’s a vested right,” Low said.

“In talking with other mayors around the state, everybody would benefit from having clear authority to be able to negotiate changes for future benefits for work yet to be performed for current employees,” Reed said of his ballot measure.

Mayors Pat Morris of bankrupt San Bernardino, Tom Tait of Anaheim and Bill Kampe of Pacific Grove are backing the plan. Santa Ana Mayor Miguel Pulido dropped out as a formal supporter and was replaced by Vallejo Vice Mayor Stephanie Gomes. Opponents include Oakland Mayor Jean Quan and San Francisco Board of Supervisors President David Chiu.

Also assailing the plan are the California Public Employees’ Retirement System, the largest U.S. public pension, and the California State Teachers’ Retirement System, the second-biggest U.S. public pension contending with a $70 billion unfunded liability.

The proposal “threatens the retirement security of existing and future educators, who have provided many years of service to California’s students,” Jack Ehnes, the teacher pension’s chief executive officer, said in a statement.

Reed said cities can continue to cut services and raise taxes, make employees pay more, cut benefit payments to retirees or cut benefits for current employees.

“None of those is fair, so it is better to talk about changing expectations of future accruals for future work,” Reed said.

CalPERS, Oakland Mayor Against Reed’s Plan

It’s not yet official, but Oakland is as bankrupt as bankrupt can be. Why its mayor would not want to back Reed’s initiative has three possibilities: reelection motives, sheer stupidity, or to preserve her own ill-gotten pension.

Rights of Dinosaurs vs. “Right Thing” 

Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees, whines “It’s a vested right“.

Low can whine all he wants, but bankruptcy is a “right” as well. And rights in bankruptcy overrule alleged rights of unions.

Speaking of which, those alleged rights were primarily obtained via a process of coercion, threats, bribery, and back-room deals with crooked politicians willing to give unions what unions want so the politicians can get elected.

What’s “right” about that?

From a taxpayer perspective, the “right thing” to do is end collective bargaining of all public unions, after-which public unions, like dinosaurs, will become rightfully extinct.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

How Unions and Bankers Work Together to Protect Unsustainable Defined Benefits

One of the biggest unreported, blockbuster stories in modern America is the alliance between public sector unions and the speculative banking industry. It is a story saturated in greed, drowning in delusion, smothered and marginalized by an avalanche of propaganda – paid for by taxpayers who fund both the public sector unions and the public employee pension funds.

The problem with public sector defined benefit pensions can be boiled down to two cold factors: They are too generous, and they rely on rate-of-return assumptions that are too optimistic. The first is the result of greed, the second of delusion. To indulge these vices requires corruption, and it is a rot that joins public sector unions with the most questionable elements of that Wall Street machine they so readily demonize.

If you honestly review the numbers, the greed is obvious. The average pension for a public servant who has worked 30 years or more in public service is more than four times what the average social security benefit is for someone who has worked 40 years or more in the private sector. To cite examples – the average CalPERS retiree who retired in the last five years, after 30 years service, collects a pension of $67,980, for CalSTRS, the average for recent retirees with 30+ years of service is $66,828 per year. Most of California’s independent city and county pension funds are even more generous; Orange County’s employee retirement system, for example, pays the average recent retiree with 30+ years of service a pension of $81,000.

These numbers are ridiculously out of step with reality. If every Californian over the age of 55 got a pension that averaged $65,000 per year, it would cost over $650 billion per year, one-third of California’s entire GDP. But the average public employee who works from age 26 through age 55 will easily collect that much. This is impossible to justify, and impossible to sustain. The average Social Security benefit for a 68 year old new retiree: $15,000 per year.

Greed is compounded with corruption and delusion, when in response for calls to bring public sector pensions into line with what is affordable and fair, unions and pension bankers claim 7.5% annual rates of return can be sustained forever. Their first mistake is suggesting that 7.5% rates of return is all they need. Current levels of underfunding mean either annual contributions go way up, or returns have to greatly exceed 7.5%. For example, CalSTRS is 67% funded, and to avoid becoming more underfunded, they must either earn 11.2% per year, or they must make a supplemental “unfunded contribution” of $4.1 billion per year – last year their unfunded contribution was only $1.1 billion. We are at the top of another bull market and in the terminal phases of a long-term credit cycle – anyone want to bet that CalSTRS is going to earn 11.2% a year for the next 30 years?

In an attempt to earn in excess of 7.5% per year, pension funds are increasingly turning to hedge funds, whose charter, essentially, is to earn over-market returns. To do this, they do all the things that public sector unions are supposedly opposed to and wishing to protect us from – opaque private equity deals, currency speculation, high-frequency trading – all those manipulative tools used by the super-wealthy, super empowered Wall Street players to siphon billions out of the economy. Except now they’re using tax dollars, channeled to them via government payroll departments, and cutting the government workers in on the skim. And if it goes south? Taxpayers pay for the bailout. And even if these funds can keep the lights on for a few more years before the whole scam collapses, isn’t it inherently exploitative for a government-ran pension fund, operated for the benefit of government employees, to aspire to over-market returns? To the extent the market is manipulated and over-market returns are extracted for an elite few, value investors with their individual 401Ks are penalized. That fact is irrefutable, simple algebra.

Which brings us to sheer abuse of power. Hypocrisy aside – and how much more hypocritical can it be for union leaders to hurl the word “profit” the way most of us might utter obscenities, yet ignore the fact that only “profits” can impel pension funds to appreciate at rates of 7.5% per year or more – it is raw power, sheer financial and legal might, that enables pension funds, with unions cheering them on every step of the way, to sue city after bankrupt city to ensure their “contracts” are inviolable, that the pension money keeps pouring in, even if it means raising taxes via court order, then selling the parks, selling the libraries, closing government offices and “furloughing” public servants, and giving raw deals to newly hired employees. But as courts will eventually sustain, perhaps out of financial necessity, the moral worth or worthlessness of a contract supersedes its technical validity. Power is a ship. Financial reality is a lighthouse.

Public sector retirement benefits – like all taxpayer funded entitlements – should provide an austere safety net, like Social Security. Pensions should not enable a retirement lifestyle of luxury and ongoing leverage, exempting government workers from the challenges to save and prepare that face every other American citizen. Nor, in the process, should they impoverish taxpayers, enrich banks, and flush the social contract into oblivion.

The reason pension reform doesn’t happen isn’t merely due to the greed and exceptionalism of public sector unions. Despite their overwhelming power, unions probably couldn’t stop reforms all by themselves. Public sector unions receive formidable political, legal and financial support, along with intellectual cover in the form of delusional financial projections, from their partners in the financial sector, corrupt, crony capitalists who indeed give capitalism a bad name.

*   *   *

Ed Ring is the executive director of the California Public Policy Center.

Rolling Stone Magazine: Attacks Wall Street, Gives Public Sector Unions a Pass

When people think of Rolling Stone magazine most only think of music. The reality is that Rolling Stone is very influential in the politics of young people. It is the print version of the Daily Show. One of Rolling Stone’s top political writers is Matt Taibbi. He garnered national attention towards the end of the Bush Administration for railing against the bail out of Wall Street. In particular he deserves our amusement, if not admiration, for famously describing investment bank Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Tabbi’s writing is a mix of populism and left leaning ideology.

In Taibbi’s recent piece, “Looting the Pension Funds: All Across America, Wall Street is Grabbing Money Meant for Public Workers,” published in September 2013, he obfuscates with half-truths the public union’s responsibility for the pension problems while excoriating their partner in crime Wall Street. The two have nearly identical goals, and that is to asset strip the private sector. Taibbi writes a credible case against Wall Street and the hedge fund industry, but then chooses to completely neglect their corrupt partner, the public unions. Corruption and fraud in public unions is probably more prolific and costly to society than Wall Street’s. Taibbi makes a lot of good points, but be sure to watch out for the obvious bias.

So let’s put on our critical thinking caps and dissect what Taibbi is saying.

“This is the third act in an improbable triple f—ing of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era. Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember..”

Granted there is plenty of fraud on Wall Street, and it is a travesty of justice that no one on Wall Street has paid for their crimes. But that does not mean that the citizens of this country should also turn a blind eye to the fraud and corruption that public unions have wrought. Tabbi writes:

“In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America’s states and cities.”

Two wrongs don’t make a right. Unions and associations representing teachers, and especially fire and police, share much of the blame. Ignorance is not a defense. Without egregious salary escalation and pension increases there would be no crisis. These unions used campaign contributions to bribe politicians into awarding clearly unsustainable pay and benefit packages.

Just because Wall Street creates an epic bubble, it does not mean that municipalities can throw all fiscal restraint to the wind and spend with reckless abandon on the public union members. In fact a hero of many left of center economists, John Maynard Keynes, would have recommend that these municipalities practice restraint during those artificial boom years and save for the inevitable rainy day. Of course they didn’t, and now they are trying to convince the public that the budget they set during the boom years cannot be adjusted down. Tell that to the millions who lost their jobs in the great recession and had to make adjustments to their families budgets. The budgets are only difficult to reduce because of overly generous union contracts that the “well-funded” politicians agreed to.

It even gets so ridiculous that these lavish union agreements can be signed by a simple majority of the city council, and once agreed to become constitutionally guaranteed in many states. It is really easy to give these benefits in the good times, and because they are constitutionally protected, it is nearly impossible to reduce them in the bad times. Private sector unions used think their benefits were rock solid too, but then they met the bankruptcy judge.

Public employees are enjoying superior rights compared to the rest of us. It is too bad the steel workers and airline employees couldn’t get added to the constitution that their pensions could in no way be harmed. Instead they were subject to ERISA, the PBGC and the bankruptcy judge. Many saw their pensions reduced to a quarter of what they had expected.

It should also be noted that private sector unions actually experienced an adversarial negotiation with their companies. In the public sector we only have the illusion of an adversarial negotiation. Not only is the person negotiating probably getting campaign contributions from the union, but they probably have a “me too clause” in their contract, meaning if the union gets more so do they. Why should they care when it isn’t their money? This is corruption.

“ERISA forces employers to provide information about where pension money is being invested, gives employees the right to sue for breaches of fiduciary duty, and imposes a conservative “prudent man” rule on the managers of retiree funds, dictating that they must make sensible investments and seek to minimize loss. But this landmark worker-protection law left open a major loophole: It didn’t cover public pensions. Some states were balking at federal oversight, and lawmakers, naively perhaps, simply never contemplated the possibility of local governments robbing their own workers.”

Taibbi cannot see what is staring him right in the face. The unions and politicians did not want to be a part of ERISA, because it would make it much harder for them to trade in favors. With ERISA public plans would have had to use a much more conservative discount rate. This would have led to higher contributions to the funds and smaller pensions to the union members. Obviously this was not appealing to either.

The lesson from ERISA is that defined benefit plans that rely on optimistic earnings assumptions to justify overly-generous benefits and minimal annual contributions will all eventually fail. ERISA tried to help, but all it did was forestall the failures for a few years. We shouldn’t be surprised that these funds are in bad shape. Most of are run like Ponzi schemes. That may sound hyperbolic, but the mechanics of a Ponzi Scheme and a deeply underfunded public pension plan are the same.

“Then they get elected, and instead of paying for the cops, garbage men, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff.”

In large part, that “other stuff” was payoffs to the unions. Instead of hiring more cops and fire fighters like they promised (In many cases unnecessary as well due to ridiculous union work rules), they just paid the existing ones more money and offer better pensions. Anyone who has driven around in California can tell you that the “intercepted” money is certainly not being used to fix roads.

So the reality is that these “other budget items” are mainly made up of police and fire budgets. Police and fire take up nearly 80% of most municipalities’ budgets in California. So what really happened is, the city promised too much to current and retired employees, and tried to pay for it with accounting gimmicks. The same group of people who are being hurt with underfunded pensions are the ones who created the problem.

“What the study didn’t say was that this supposedly massive gap could all be chalked up to the financial crisis, which, of course, had been caused almost entirely by the greed and wide-scale fraud of the financial-services industry – particularly with regard to state pension funds.”

“Instead, it was then that the legend of pension unsustainability was born, with the help of a pair of unlikely allies.”

The above statement is ludicrous, but neatly summarizes the misconception that Taibbi, along with literally thousands of union and pension fund spokespersons, have been spreading. Public sector defined benefit pension funds can go on for quite some time, but anything that is predicated on a growth rate above the true growth rate of an economy will eventually runaway. It is the math of exponents. This is an immutable reality. It is the reason private sector pension funds all blew up once reform regulations forced them to recognize lower, more sustainable projected rates of return.

Public pension plans admit that they are underfunded, but what they don’t tell you is that the reality is much worse. Some claim they are 75% funded, but to get to 75% they have to use an unrealistic discount rate. There have been numerous studies published using realistic discount rates showing these funds to be extremely underfunded. Also, let’s not forget that the stock market is again at all-time highs. Therefore blaming it on the financial crisis is really a stretch. It is simply too many big political promises coming due.

As for unlikely allies perhaps Mr Taibbi should put a little more critical thought into the link between public unions and Wall Street.

“So even if Pew’s numbers were right, the “unfunded liability” crisis had nothing to do with the systemic unsustainability of public pensions. Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic sub prime products crashed the market, these funds were out some $930 billion. Yet the public was being told that the problem was state workers’ benefits were simply too expensive.”

In California currently there are 12,000 CALPERs retirees receiving $100,000+ pensions. Some 6,000 retired educators receive $100,000+ pensions. Then there are thousands more from places like Los Angeles who do not participate in CALPERs. If you drop the threshold from 100K to 70K, still a nice retirement, the numbers get very large. Nearly all retiring public safety union members are receiving pensions of at least 80K. How expensive is this!

A recent egregious example of these lavish pensions comes from Oceanside, California, a small town in north of San Diego. At the age of 51 with 29 years of service, Chief Frank McCoy retired from his $287,000 a year job and will receive a pension benefit of $172,000 a year. To put this in perspective, making prudent earnings assumptions, a private employee who wishes to retire at this age with this income would need to have saved at least 3.5 million; probably much more in order to also cover medical costs.

“The supposed impending collapse of Social Security, which actually should be running a surplus of trillions of dollars, is now repeated as a simple truth. But Social Security wouldn’t be “collapsing” at all had not three decades of presidents continually burgled the cash in the Social Security trust fund to pay for tax cuts, wars and God knows what else. Same with the alleged insolvencies of state pension programs. The money may not be there, but that’s not because the program is unsustainable: It’s because bankers and politicians stole the money.”

This one is a whopper. While Social Security is currently unsustainable it is also easily fixed. Congress just needs to pass a law to change how it is setup. Tweaking it around the edges will fix it. Small changes in the FICA tax percentage, an increase in the income cap, an increase in the eligibility age, means testing, and a small reduction in benefits and Social Security is fixed.

Under Social Security the maximum amount you get is about $24,000 a year depending on your age at retirement. That works out to be worth approx $289,000. Most people don’t get the maximum and those that do, especially higher wage earners, put in far more than $289,000. Annual Social Security payments in this country total 1.2 Trillion dollars, whereas payments from public pensions are estimated to total 1.5 trillion dollars. The number of people who collect Social Security (not including the many public servants who have qualified for both Social Security AND a public pension) is about four times more than the number of those on public pensions. Public sector pensioners, while only one quarter the number of Social Security recipients, receive more money. What does that say about the relative sustainability of these programs?

Comparing public sector pensions to Social Security is red herring argument.

As for stolen money, politicians have been taking money from private sector taxpayers and handing it over to the public unions for years.

“The Arnold Foundation released a curious study on pensions. On the one hand, it admitted that many states had been under contributing to their pension funds for years. But instead of proposing that states correct the practice, the report concluded that “the way to create a sound, sustainable and fair retirement-savings program is to stop promising a [defined] benefit.”

How then, does Mr. Tabbi propose they correct the underfunding problem? The money doesn’t exist. Politicians have been bribed for years to give these unsustainable benefits to public employees. The typical liberal response would be to raise taxes. Well that has been going on for years. The primary reason taxes have gone up, especially at the state and local level, is to pay for more public union benefits. Instead of confronting the financial issues that challenge pensions, Mr. Taibbi uses a typical ideologue defense, creating a “boogeyman.”

The northern California city of Vallejo went into bankruptcy in 2008 because of its union obligations. At the time its bankruptcy pension costs consumed 11% of the city’s budget. The city failing to address these obligations exited bankruptcy in 2011 with pensions consuming 14% of the budget. Today the pensions eat up 18% of the city’s budget and the city will most likely find its way back to the bankruptcy court.

Taibbi goes on to make a lot of good points about hedge funds and their fees. It is hard to disagree with much of what he writes. So the question is, why are we not arguing for imposing strict standards for investing public pension funds? Why doesn’t ERISA apply to public pension funds? Why should public pension funds be allowed to take so much risk when the taxpayers are ultimately the ones who are asked to make up the difference? Taibbi conveniently fails to address any of these issues.

Of course the answer is that the unions and Wall Street are both guilty of pillaging Main Street. One could go as far as saying they are in bed together. If you don’t believe that then take a look some big name Democratic donors. The top donors are always Wall Street and the public unions. The unions need Wall Street. They need Wall Street to take on risky investments as a cover for their extravagant benefits. If changes were made to reduce the risk in public pension’s investment portfolios, then all benefits would need to be slashed due to the massive underfunding.

In finance risk is equal to reward. Simply put the more risk you take the greater your chances of making a high return are, but you also equally increase your chances of a big loss. When the taxpayer is the insurer of public pension funds, it is inappropriate for the money to be invested in risky investments. One can agree with Mr. Taibbi that they should not be investing in hedge funds. Public pension funds are acting like a person with a gambling addiction. They are doubling down in hopes of making big returns so they can avoid the inevitable insolvency for a few more years. In this case, however, the gambler knows that when they screw up the taxpayer will be there to bail them out.

Public employees should be entitled to the assets that are currently in their pension funds, but the taxpayer backstop needs to be lifted. They should be subject to the same economic laws that private union members were when their pension plans became insolvent.

Wall Street and the public unions have created tremendous distortions in our economy. If the issue of public pension unsustainability is not addressed soon, the distortions and damage to our social fabric may be too great. It used to be that people went to work for the government to serve the public. They generally were paid less, but enjoyed job security and a modest pension. In the past several decades the public unions have turned that old axiom on its head. We are quickly turning into a three tiered society of the elites, government workers, and the rest of us. Matt Taibbi is invited to apply his passion and prose to this complexity. Instead, he is entertaining and influencing the youth of America with comforting partisan indignation that has the ironic effect of reinforcing a great injustice.

Bill White is a financial analyst with over a decade of experience. He holds a MBA in Finance and has consulted for various industries. He became interested in municipal finance when he realized what a threat it was to the social fabric of our country and has since dedicated much of his time to informing the citizenry about the powder keg that municipal finance has become. He believes strongly that a democratic republic can only prosper with a informed electorate.

Ten Fallacies Used To Justify Opulent Government Pensions

There are many implicit rationalizations justifying paying generous government pensions. Here are my nominations for the top ten bogus excuses:

1. “Public employees deserve high pensions because of their low pay.”

FALSE. Perhaps true at one time, but not anymore. In many instances, today’s government employees are earning 10%-30% more than their true private sector counterparts — with far better job guarantees.

2. “Government employees should not have to save for retirement.”

FALSE. They can use retirement accounts to add to their nest eggs — just like the rest of us. They can invest in stocks, real estate, annuities — just like the rest of us.

3. “Government employees deserve to retire earlier than private sector employees.”

FALSE. If they do “need” to retire early, they can get another job to supplement income (as do most military retirees).

4. “Government employees and their families deserve to live and retire comfortably from a single 40 hour a week job.”

FALSE. Today most private sector middle income and upper middle income couples fully expect to generate multiple incomes — working over 40 hours and/or both working.

5. “Government workers deserve guarantees because they are ‘public servants’ not motivated by greed.”

FALSE. As a group, public employees, thanks to their their unions, are as greedy as they come, and they rely on the force of government to get what they want. The REAL “public servants” are the TAXPAYERS.

6. “No matter how many or few years a public employee works for government, their only source of retirement income is (and should be) their government pensions.”

FALSE. Downright ludicrous. Yet government pension apologists will point to a 10 year government worker’s relatively modest pension, bemoaning the worker’s poverty-stricken plight at retirement. They include such workers in their “average government pension” propaganda.

7. “Many government employees don’t get social security.”

LARGELY FALSE — or at least misleading. While many public employees don’t pay into social security, most can qualify for at least a minimum social security income from other jobs.

8. “Without guaranteed pensions, many government employees would retire in poverty.”

LARGELY FALSE — or at least not the fault of taxpayers. This assertion is based on the absurd assumption that, unlike private sector employees, government employees would (and should) otherwise save nothing for their senior years.

9. “Many government employees should be able to retire with essentially the same income they earned on the job.”

FALSE. This is the “90% pension at 30 years” common in public safety jobs — and for too many other government employees (including all San Diego County government employees). Indeed, given that a retired employee no longer pays for pensions, union dues, Medicare, or commuting costs, a 90% pension is actually HIGHER than the net salary received while working.

10. “We have to pay top pensions to attract ‘the best and the brightest’ to government work.”

FALSE — and a bad idea to start with. We DON’T want to attract “the best and the brightest” to government work. We need such folks in PRODUCTIVE employment in the private sector. All that government pensions do is to assure that government employees STAY as government employees – regardless of work quality.

Richard Rider is the chairman of San Diego Tax Fighters, a grassroots pro-taxpayer group. Rider successfully sued the county of San Diego (Rider vs. County of San Diego) to force a rollback of an illegal 1/2-cent jails sales tax, a precedent that saved California taxpayers over 14 billion dollars, including $3.5 billion for San Diego taxpayers. He has written ballot arguments against dozens of county and state tax increase initiatives and in 2009 was named the Howard Jarvis Taxpayers Association’s “California Tax Fighter of the Year.”

Orange County Pensions At Risk – Unions Just Call Critics “Extremists”

“Just as the overseer of Detroit lied to the public about Detroit’s unfunded pension liability, these extremists are likewise lying to the taxpayers of Orange County, and they’re following his playbook.”
–  Jennifer Muir, Communications Director, Orange County Employees Association

We’re not lying, Jennifer. We’re not even stretching the truth.

What government union spokesperson Muir is referring to is an analysis released last week by the California Public Policy Center entitled “Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?

They aren’t adequate. They aren’t even close to adequate. No lie.

The problem with pensions, unfortunately, as Teri Sforza aptly put it in her coverage of the CPPC study on September 10th in the Orange County Register, is “the nature of America’s public pension systems is to peer 20 to 30 years into the future – and the crystal ball can get a bit murky.”

And hiding behind this convenient murkiness, defenders of the system – inadequate payments included – can call anyone concerned about the long-term solvency of the system “liars,” and “extremists.”

It’s much easier, and certainly much more effective, to disparage the critics than grapple with facts. But anyone familiar with the real estate and credit crash of 2008 should understand that ignoring financial fundamentals is a dangerous game. Here are the financial facts:

As of 12-31-2012 the Orange County Employee Retirement System had invested assets of $9.47 billion. For the plan to be fully funded, those assets needed to be equal to the liabilities; defined as the present value of the system’s financial obligation to pay all active participants – working and retired – retirement pensions. Here’s where the crystal ball gets murky – because how big that liability is today depends on what rate of interest the assets will earn each year, for the next 20-30 years. At a projected rate of return of 7.25%, those liabilities are valued at $15.14 billion. Underfunding = Assets – Liabilities.

OCERS is officially underfunded – according to their own annual report, by $5.67 billion. No lie. Fact.

Now it is fair to argue over what rate of return is truly realistic. But even if we use a higher rate, say, 7.5%, that liability only shrinks to $14.69 billion. Put another way, if you increase the projected rate of return by one-quarter of a percent, your unfunded liability will go from $5.67 billion down to $5.22 billion.

To verify these numbers, download the spreadsheet created by CPPC analysts and see for yourself. Go to table 1 “unfunded liability” and enter .075 in the yellow highlighted cell D23, and look at the result in the green highlighted cell D26. To construct this spreadsheet, the CPPC relied on those extremists at Moody’s Investor Services, whose formulas are meant to provide credit analysts with accurate tools to perform what-if analysis.

The point of all this?

In order to pay down their unfunded liability of $5.67 billion – or $5.22 billion if you want to use something approximating the union’s number – during 2012 OCERS contributed $218 million. Was that enough?

If there were no interest at all on this unfunded liability, at a rate of $218 million per year, it would take OCERS 26 years to pay off $5.67 billion; 24 years to pay off $5.22 billion. But it isn’t that simple.

Pension plans like OCERS rely on investment returns for most of their annual contributions. The assets they’ve got invested are supposed to earn – presumably – 7.25% per year. Investment returns, not contributions, are the intended source for most of the money OCERS needs to fund current and future pension payments. And if OCERS were fully funded, their investments would be earning $1.1 billion each year, that’s $15.14 billion times 7.25%. But because OCERS was only 63% funded in 2012, because they only had $9.14 billion of invested assets, at their projected rate of return of 7.25% they would only have earned $687 million. To earn the required $1.1 billion, at a 63% level of funding OCERS would have to have earned 11.6% – and they would have to do that every year just to avoid going further in the hole.

Does anyone really think OCERS is going to average a return of 11.6% per year for the next 25 years? Should only “liars” and “extremists” be concerned?

The reason OCERS got away with contributing a mere $218 million during 2012 towards a liability of $5.67 billion is because they intend to eventually increase these annual payments. Meanwhile, OCERS CEO Steve Delaney acknowledged that during 2012 the OCERS unfunded liability experienced “negative amortization,” despite better than normal investment returns. How much do these payments need to increase?

If OCERS were serious about restoring adequate funding, they would adopt the recommendations of Moody’s Investor Services – those extremists with the green eye shades – who in April 2013 called for a “20 year level payment” plan for reducing the unfunded liabilities of pension plans. At 7.25%, that would equate to $546 million per year. And if reality reveals over time that OCERS can only earn 6.2% per year on average, that payment would increase to $685 million per year. By this reasoning, the OCERS unfunded contribution was well over $300 million short in 2012, and the longer they wait to increase their annual unfunded contribution, the greater – above and beyond $300 million – the required increase.

By adopting graduated repayment schedules instead of telling the truth about just how perilous the situation is for OCERS, defenders of the status quo are putting the entire system at risk of a complete collapse. They are committing precisely the same unsustainable excess as the issuers of subprime mortgages ten years ago – financial instruments with graduated payment plans that mislead borrowers into thinking they could buy things that they couldn’t possibly afford.

Jennifer Muir, Nick Berardino, and others who have been outspoken critics of pension reformers, are invited to download the spreadsheet the CPPC has produced to evaluate the financial health of OCERS. Before trotting out the insults, perhaps they might first familiarize themselves with the liberating reality of algebra, a discipline that is indifferent to lies, extremism, and all other flights of wishful fancy.

*  *  *

Ed Ring is the executive director of the California Public Policy Center, and the editor of UnionWatch.

Saving Pensions Will Require Unions To Face Reality

“Not surprisingly, within moments of news of Detroit’s bankruptcy, pension scare mongers took to their pedestals to place all the blame on pensions. California, Los Angeles, and other governments would surely follow Detroit’s footsteps in short order, they cried. It’s simply not true, like most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Ralph Miller, President, LA County Probation Officers’ Union, AFSCME, Fox & Hounds, August 20th, 2013

Miller has a point. California is not Detroit. California’s population has not imploded, nor will it. Detroit’s economy was reliant on one industry, California’s huge economy is diverse and relatively healthy. Turning California around, while daunting, is going to be a lot easier than turning around Detroit. And, yes, it was a collapsing industrial base and an imploding population that did as much or more than unsustainable pay and pensions to destroy the city of Detroit’s finances. Fair enough.

Where Miller goes off the rails is when he then infers that equally bogus are “most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Few, if any pension reformers want to take away anyone’s retirement security. But as a nation, we are currently on track to pay more money each year in pensions to retired government workers than we pay in Social Security to everyone else. The average pension for a recently retired government worker in California who logged at least 30 years of full-time service is about $65,000 per year. The average Social Security benefit for a private sector retiree who logged 40 years or more of full-time work is $15,000 per year.

This is not a valid social contract. Government workers, through these pensions, are no longer required to endure the economic challenges facing the taxpayers they serve. And despite rhetoric and reporting that confuses these issues, Social Security is a relatively healthy system that can remain solvent with minor adjustments to withholding and benefit formulas, whereas public sector pensions are going to catastrophically collapse the very next time there’s a bear market.

There are really two primary issues that ought to be the focus of debate: (1) What is a realistic rate of return, after adjusting for inflation, for pension funds over the next 30 years? (2) If you don’t believe that pension funds are going to continue to deliver 7% returns, 4% real returns after inflation, year after year for the next three decades, do you fix the system by converting participants to an adjustable defined benefit, or by converting participants to a 401K?

To the first question, if you truly believe real rates of return are going to hover somewhere north of 4% per year, forever, then you should have no trouble agreeing to an adjustable defined benefit. This would simply be a modification of pension formulas, whereby pension benefits would be reduced by a uniform percentage, applied to everyone – new hires, active employees, and retirees – by as much as necessary to maintain an adequate funding ratio. By applying this formula to everyone equally, the amount of sacrifice for any given participant is minimized.

The alternative, should markets turn downwards, is to intensify attempts to protect veteran employees and retirees at the expense of new entrants to the public workforce. The fatal problem with this method is that new entrants have lower rates of pay and a very long wait until they retire, both factors that minimize any benefit to the fund’s solvency by reducing their pension formulas.

The other alternative, which many pension reformers have determined is inevitable given the intransigence of public sector unions to even consider options such as an across-the-board adjustable defined benefit, is to go to a 401K defined contribution plan. That would force every individual to hope they successfully pick the best investments, subjecting them to the caprice of a highly volatile, highly manipulated global market. It would also force every individual to hope they die before they run out of money. It is not a preferable option. It is as brutal as it is whimsical.

What government union leaders and their members must realize is they have set themselves apart from the rest of the American people during a unique period in our nation’s history. Between 1980 and 2030 the percentage of Americans over age 65 is projected to double, from 11% to 22%. At the same time, the costs of healthcare march relentlessly upwards – partly because medicine can do so much more to improve the length and quality of life. Moreover, we are entering the terminal phase of a global debt bubble that has been inflating at least since 1980. It’s about to pop. Passive investment funds are not going to be coining money like they used to.

Government unions can continue to demonize wealthy people, hoping enough voters will be duped by this scapegoating, but they must understand that “wealthy people” is becoming synonymous with “old people.” Their rhetoric, therefore, will foment discord between generations. Yet the reality is quite different. If things continue the way they are today, the discord, and the wealth disparity, will not be between old and young, but between old government workers (and the super rich, of course), and everyone else – young and old private sector workers, as well as newly hired government workers.

Ensuring that every American can enjoy sufficient retirement security to allow them to live their final years with some measure of dignity is not going to be easy. The solution is to lower defined benefits for all government workers to financially sustainable levels, as needed, and more generally, to move towards applying the same set of taxpayer funded benefit formulas and incentives to all American workers equally, for them to earn regardless of whether or not they work for the government.

*   *   *

Ed Ring is the executive director of the California Public Policy Center and the editor of UnionWatch.org.

Social Security is Healthy Compared to Public Sector Pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today about 20% of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is over $60,000 per year, and their average retirement age is 58. Because they retire ten years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30% of the retired population. The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security – which many of them do) there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year. Got that? The total pension payouts to government retirees, who were only 20% of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80% as much.

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20%, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks – one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees – who represent 20% of the active workforce – than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two powerful special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401K funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401K accounts, regardless of their volatility.

The reality is that defined benefits are always preferable to 401K accounts because they greatly reduce market risk and they virtually eliminate mortality risk – i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt saturated, deficit ridden, aging society, and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using taxpayer’s money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

*   *   *

Ed Ring is the Executive Director of the California Policy Center.

Social Security is Healthy Compared to Public Sector Pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today about 20% of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is over $60,000 per year, and their average retirement age is 58. Because they retire ten years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30% of the retired population. The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security – which many of them do) there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year. Got that? The total pension payouts to government retirees, who were only 20% of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80% as much.

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20%, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks – one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees – who represent 20% of the active workforce – than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two powerful special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401K funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401K accounts, regardless of their volatility.

The reality is that defined benefits are always preferable to 401K accounts because they greatly reduce market risk and they virtually eliminate mortality risk – i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt saturated, deficit ridden, aging society, and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using taxpayer’s money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

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Ed Ring is the editor of UnionWatch, and can be reached at editor@unionwatch.org.

California Pension Reformers Plan New State Ballot Initiative

A statewide constitutional initiative planned for 2014 would tackle the biggest obstacle to meaningful pension reform: vested benefits. Right now, with certain exceptions, California municipalities may not reduce pension benefits for current employees—unlike in the private sector, where employers can change the terms of employees’ current pension plans, making them less generous. The courts have said that benefit increases, even retroactive ones, constitute binding contracts that must be paid for the life of all current employees. The ballot measure, largely conceptual at this point, would allow cities to change future pension benefits. San Jose voters did that last year, voting to change benefit levels for current employees.

The initiative will probably also include a requirement that all agencies offering defined-benefit plans put them up for a vote. These plans impose debt on the public, so reformers reason that voters should have a say in whether to approve any new plans or change existing ones, as San Jose did. The measure would also likely include limits on pension-spiking and governance reforms for the union-dominated California Public Employees’ Retirement System (CalPERS).

Unions are already challenging San Jose’s June 2012 ballot initiative, as well as a similar measure San Diego voters approved that same month, in court. They understand that these reforms, if allowed to stand, threaten to demolish the status quo. San Jose officials believe that they have a strong chance to prevail because of the way their city charter is written, but not all California municipalities are charter cities. It’s unclear what a favorable court ruling for San Jose would mean for them.

The unions are waging their fight against pension reform in the hope of blunting San Jose’s effects statewide. A Monterey County superior court ruled recently that a pension initiative passed in Pacific Grove is unconstitutional because it rolls back benefits for current employees. Like San Jose, Pacific Grove is a charter city, but each city’s charter is different. The Monterey County judge ruled that Pacific Grove’s charter vests compensation power in the hands of the city council, not voters. The court reaffirmed that “what is vested in the employee is the right to earn a pension on the terms promised to him or her upon employment.” Therefore “no subsequent legislation . . . can take these rights away once given.” The Peace Officers Research Association of California (PORAC)—a union group best known for bankrolling the defenses of police officers accused of wrongdoing—funded the case, knowing that it would have statewide implications. Organizations such as PORAC will be ready when a reform initiative reaches the statewide ballot.

Meantime, CalPERS is worried that municipal bankruptcies elsewhere could undermine the state pension fund’s income stream. In San Bernardino, for example, city officials have stopped making contributions to the fund. Stockton’s bankruptcy is still winding through the courts, but a central question remains whether CalPERS must join other creditors in taking a haircut. To avoid similar debacles during future (practically inevitable) municipal bankruptcies, CalPERS is lobbying for a bill that would make it easier for the state pension fund to put liens on city assets. The city of Vallejo, which has emerged from bankruptcy, is headed into the fiscal morass again because it never embraced the kind of rollbacks that reformers say are necessary.

The now-concluded strike by Bay Area Rapid Transit (BART) workers underscores the ongoing pension struggles local governments face. Union members clearly prefer stopping work to helping pay for their benefits. As the liberal Contra Costa Times editorial board put it: “They’re already the top-paid transit system employees in the region and among the best in the nation. They also have free pensions, health care coverage for their entire family for just $92 a month and the same sweet medical insurance deal when they retire after just five years on the job.” As the editorial points out, BART’s pension and retirement-benefit debt is a whopping $636 million, while the transit system faces a $142 million operating deficit in the coming decade. BART has also piled up billions in deferred maintenance and repair costs. Something’s got to give.

Pensions will remain big news, if the BART strike is any indicator. And reformers have suffered a number of setbacks in recent months. In November, prominent San Diego pension reformer Carl DeMaio lost his bid to become mayor to Bob Filner, a union-friendly Democrat, and Democrats gained supermajorities in both houses of the state legislature, thus assuring the defeat of any pension-reform measure. Even the so-called Democratic moderates who hold increased power in Sacramento are uninterested in further reform. A year ago, mayors of California’s eight largest cities sent a letter to the state senate and assembly leadership arguing, “Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit.” The legislature never responded.

It remains to be seen whether reformers can generate enough funding to run a viable statewide initiative campaign. Union spokespeople continue to portray them as the tools of Wall Street and right-wing groups. But reformers—many of whom gathered in May in Sacramento to plot strategy—are a remarkably diverse group. And there’s no reason to think that last year’s setbacks will be permanent, despite the unions’ wishful thinking. “Today, we spend $1 out of every $7 on pension and benefit costs for city employees; by 2018, it will be one out of every $4,”observed San Francisco public defender Jeff Adachi, an outspoken liberal Democrat. Conservatives aren’t the only ones concerned about the problem.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity and a contributor to City Journal’s new collection, The Beholden State: California’s Lost Promise and How to Recapture It. Write to him atsteven.greenhut@franklincenterhq.org. This article originally appeared in City Journal on July 17, 2013, entitled “Tackling the Pension Problem,” and is republished here with permission.

How Public Sector Unions Skew America’s Public Safety and National Security Agenda

It would be redundant to summarize recent revelations concerning just how big America’s national security state has become. Two reports, both written in the last two days, do a really good job: “The Making of a Global Security State,” by Tom Engelhardt, published by The Nation Institute, and “5 Alarming Things We Should Have Already Known About the NSA, Surveillance, and Privacy Before Ed Snowden,” by Brian Doherty, published by the Reason Foundation.

It is encouraging that both of these articles address the same topic and summon the same moral concerns, despite being published by top-tier think tanks – the Reason Foundation and the Nation Institute – that occupy opposite positions on the right/left continuum. What is discouraging is neither of these articles explore the connection between unionized government and the alarming police state trends they describe so thoroughly.

The centrality of patriotism and law-and-order priorities blinds many on the right to the role of unions in skewing America’s public safety and national security agenda. Reverence for the labor movement blinds those on the left from seeing government unions as complicit in the erosion of civil liberties. These sentiments work against what ought to be a growing bi-partisan consensus: public sector unions do not operate in the economic or political best interests of the general public.

It isn’t hard to find examples from history of how elites co-opted the personnel of government in order to secure a commitment to preserving their power and privilege. From the tenuous relationship between the Roman nobility and their legions of centurions, to the party members of the cold war era communist nations and their security services – authoritarian regimes have always relied on their versions of the Nomenklatura. And the defining characteristic of the Nomenklatura, in all of its historical iterations, was privilege. They were economically exempted from the hardships that faced ordinary citizens.

The power of public employee unions in government is the primary reason that government workers now make approximately twice as much in total compensation as private sector workers. This headline from an a USA Today article explains how federal compensation has outraced the private sector “Federal workers earning double their private counterparts.” California Public Policy Center studies provide recent and ample evidence of the same phenomenon at the state and local level (ref. “Calculating Public Employee Total Compensation,” “California’s Public Safety Compensation Trends, 2000-2010,” “Self-Employed Workers vs. Government Workers – A Financial Comparison,” as well as compensation analyses for the cities of San Jose, Irvine, Costa Mesa, and Anaheim).

Nowhere is the disparity between the fortunes of unionized public sector workers and the private citizens they serve more glaring than in their respective formulas to earn retirement security. Social security pays, on average, about $15,000 per year, starting at age 68. California’s public servants, on the other hand, at the end of a 30 year career can expect to collect on average a pension in excess of $60,000, easily attainable by age 60 or sooner. Tell a self-employed person who must contribute 12.5% of their gross pay to Social Security why they should get 25% as much as a public servant, ten years later in life?

The failure of politicians – abetted by unions – to give all Americans the same deal as government workers alienates Americans from their government and impugns the motives of government policymakers. Frighteningly, it also alienates government workers from Americans.

As we enter an era of ubiquitous surveillance, for good or ill, it is vital that civil libertarians on both sides of the political spectrum recognize that government unions have a vested interest in expanding the size and the powers of government. The inordinate power of public sector unions in California is beyond debate among anyone who closely participates in the political process. Less obvious but equally real is the closely aligned interests of big government unions with the agenda of banks who profit by financing deficits and investing pension assets, large corporations who benefit from over-regulation because it kills emerging competitors, and the high-tech industry that invents and sells tools of surveillance and cyber-war.

A major step towards ensuring that America’s public safety and national security agenda is not divorced from the general interests of private American citizens would be a bipartisan call for all taxpayer funded, government administered retirement benefits to be earned by every citizen – public or private – according to the same set of incentives and formulas. The vehemence with which public sector unions would fight this necessary reform might finally provide sufficient evidence to liberals of how selective their concern is for “working families.” This one dramatic policy shift would go far towards realigning the interests of government workers with that of the citizens they serve.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org

Related Editorials

Why Public Sector Unions are “Special” Special Interests

The Special Privileges And Exemptions of Public Sector Unions

Should Police and Firefighters be Exempted from Union Reforms?

Understanding the Financial Disclosure Requirements of Public Sector Unions

The Preexisting Political Advantage of Government Workers

California’s Government Unions Fight Reformers

The Ideology of Public Sector Unions vs. Private Sector Unions

Wall Street & Public Sector Unions

New Actuarial Rules Will Force States to Admit Pension Problems

Editor’s Note:  This post by UnionWatch contributor Mike Shedlock covers familiar territory. Our parent organization, the California Public Policy Center, has published detailed analyses of the new GASB and Moody’s rules, including: “Moody’s Final Adopted Adjustments of Government Pension Data,” “How New Rules from Moody’s and GASB Affect the Financial Reporting of Pensions in Seven California Counties,” “How Lower Earnings Impact California’s Total Unfunded Pension Liability,” and “The Impact of Moody’s Proposed Changes on Government Pension Pension Data.” But in this post, Shedlock mentions one of the key reasons why pension fund return projections are overly optimistic. He writes, “Pension plans typically assume 7.5% returns. That’s  not going to happen on a sustained basis with 10-year treasuries yielding close to 2%. Yet, any significant rise in bond yields will crush existing bondholders as well as wreak havoc in equities.” This underscores a key consequence of the Fed’s policy to lower interest rates – a run that over the past 30 years has seen the 30 year T-bill go from 16.0% down to under 3.0%.  Every time the Fed lowered their rates, new bond issues and other fixed income securities lowered their coupon rates as well. This meant that all previously issued bonds, which had all been issued at higher rates of interest, became worth more. Basically, as long as interest rates kept dropping, the prices for bonds and all fixed income securities appreciated. To the extent these investments are a significant part of pension fund portfolios – and they are – they have delivered consistently high returns, especially over the past ten years. But interest rates can’t get any lower. There is nowhere left to go. Many pundits, including economists who ought to know better, claim that the dangers of debt accumulation are overstated. The inevitable end of the bull market in bonds, and how it will add yet another challenge to pension funds striving for that mythical 7.5% return per year, is a tangible refutation to anyone spewing sanguinity in the face of peak debt.

Many states, especially California and Illinois, have had severe pension underfunding problems for many years.

However, new actuarial pension rules will finally force states to admit the problem. Thus, it should not be surprising that talk of “technical bankruptcy” and “service insolvency” is growing.

Here are some pertinent ideas from California on the Brink: Pension Crisis About to Get Worse

  • Moody’s new credit standards for public pensions would nearly double the unfunded liabilities for state and local pension plans in California to $328.6 billion from $128.3 billion.
  • California has the second lowest credit rating at Standard & Poor’s of all 50 states; Illinois now has the worst. Moody’s new standards would drop the funded status of these plans to 64%, versus a previous estimate of 82%, the Center said.
  • “By standard accounting methods, some state pension funds will run out of assets within as little as five years”
  • New rules will lower expected rates of returns on their pension assets, instead of the often overstated returns they now use to paper over holes in their plans blown out by bad investments.
  • Meredith Whitney says California is papering over budget holes with gimmicks, like raising taxes retroactively, pushing state expenses onto local towns and cities that can’t afford them, and underfunding their pension funds. “It’s so much worse than the rosy picture that the headlines suggest,” the CEO of Meredith Whitney Advisory group says.
  • The Senate Joint Economic Committee reiterates what Whitney says. “Many states and localities have regularly skipped or underfunded contributions to pension plans,” the report said. “Over the past five years, state and local governments have underpaid actuarially required pension contributions by more than $50 billion. The worst culprit of all, Illinois, has underpaid its pension contributions to the tune of $28 billion over the past 15 years.”
  • Illinois’ plan is just 44% funded, or 30% using “conventional accounting standards,” the Senate committee says. Los Angeles’ combined plans would fall from 77% funded to 50% funded.
  • San Jose’s combined plans would fall from 75% to 60% funded.
  • San Francisco’s combined plans would fall from 88% funded to 69% funded.

Trouble Will Escalate

Many California cities are in serious trouble, and that trouble will grow by leaps and bounds as soon as there is a significant stock market correction.

Pension plans typically assume 7.5% returns. That’s  not going to happen on a sustained basis with 10-year treasuries yielding close to 2%. Yet, any significant rise in bond yields will crush existing bondholders as well as wreak havoc in equities.

Moody’s wants states to assume 5.5% returns, but even that is far too high. The stock and bond markets are now so bloated thanks to Fed bubble-blowing policies that 0-2% returns for a full decade is a distinct possibility. And not a single pension plan in the US is remotely prepared for such an event.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.