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Gimmick – a concealed, usually devious aspect or feature of something, as a plan or deal.
In the past week, from Millbrae’s city hall to the inner sanctum of the CalPERS leviathan in Sacramento, defenders of pensions have been active. In particular, they have criticized the recent analysis, published by the California Policy Center, “How Much More Will Cities and Counties Pay CalPERS?” It would advance the ongoing debate over pensions to summarize the points of the CPC analysis, how CalPERS and their allies attacked those points, and how those attacks might be challenged.
On January 19th, in a report published online by Chief Investment Officer magazine entitled “CalPERS: Ring’s Flippant Claim of ‘Tricky Accounting Gimmicks’ Is False,” author Christine Giordano interviewed CalPERS spokesperson Amy Morgan. Tellingly, they did not discuss the substance of the CPC analysis, which specified, using CalPERS’ own data, how much more cities and counties are going to have to pay CalPERS. They focused instead on specific criticisms of CalPERS that followed those payment calculations.
As noted by the title of the report, CalPERS spokesperson Amy Morgan seemed to suggest the characterization of their accounting practices as employing “gimmicks” is not backed up by evidence. Morgan is invited to review the following evidence, after which she may join our readers in deciding whether or not “gimmicks” were employed.
GIMMICK #1 – THE CORRUPTION OF “ASSET SMOOTHING”
Asset smoothing is a practice whereby pension funds do not overestimate their assets after years of good returns, nor underestimate their assets after years of poor returns. It is a good way to avoid overreacting to market volatility. But in 2001, when the Dow Jones stock index had already been correcting for over a year and the Nasdaq was collapsing, CalPERS abdicated their responsibility to set the rules on smoothing.
When participating agencies in the CalPERS system were contemplating whether or not to follow the lead of the California Highway Patrol (SB 400, 1999) and retroactively increase pension benefits, CalPERS sent projections to these agencies in which a CalPERS actuary presented to elected officials three distinct values for the assets they had invested with CalPERS. Remarkably, that document gave these agency officials the liberty to choose which one they’d like to use – the higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating. The usual disclaimers were present, but the mere fact that city officials were given three scenarios is suspect. Obviously these officials would be under pressure to pick the scenario that provided the biggest benefit enhancement for the lowest cost. Read “Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?” for more details including several source documents.
One of the most revealing documents is exemplified by the “Contract Amendment Cost Analysis,” sent to Pacific Grove by CalPERS in July, 2001. Here is an excerpt from that document, showing the choices CalPERS offered Pacific Grove:
The available rate choices are offered under three different Alternatives:
Alternative 1 – No increase in Actuarial Value of Assets
Alternative 2 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 100% of Market Value of Assets
Alternative 3 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 110% of Market Value of Assets
To reiterate: CalPERS provided abundant disclaimers. They suggested that given recent “market volatility,” city officials “are strongly encouraged to have in-depth discussions with your CalPERS actuary about the financial consequences of any amendment.”
Now let’s get real: Further on in this same letter, CalPERS provides a breakdown of how much pension benefit enhancements will cost in terms of annual contributions as a percent of payroll under each of these three scenarios:
Alternative 1 – The actuarial value of the assets is not tampered with, the normal cost goes from 4.6% to 25.0%.
Alternative 2 – The actuarial value of the assets is lifted up to market value, the normal cost goes from 4.6% to 19.9%.
Alternative 3 – The actuarial value of assets goes up to 110% of the market value, the normal cost – to implement a massive, retroactive enhancement to pension benefits – goes from 4.6% to 6.2%.
What option would you choose, if you were a city manager whose own pension would be enhanced, or a city council member who has to answer to powerful unions whose members want more generous pension formulas?
The reason CalPERS was able to cram this through, in July 2001 as the market was cratering, was based on their decision to present various asset “smoothing” options to members. Why? Because the smoothing options they’d been using were understating the value of their assets because stock values had exploded in the final years of the 1990s. One can only speculate as to why they did this as late as July 2001 when it was obvious the internet stock bubble had popped. It’s possible CalPERS officials knew several agencies had already lobbied for pension benefit enhancements and the officials were under pressure to leave no agency behind. But to offer local bureaucrats and elected officials a choice of various asset smoothing methods was passing the buck.
Overnight, the CalPERS practice of asset smoothing went from being a prudent accounting guideline to a clever rationalization for disastrous policy decisions. If that’s not a gimmick, I don’t know what is.
GIMMICK #2 – CREATIVE AMORTIZATION OF UNFUNDED LIABILITY
When you talk about “tricky accounting gimmicks,” it’s hard to find one worse than the methods the participating agencies chose to amortize their unfunded liability. To be fair, final responsibility for these decisions usually rests with the cities and counties. But CalPERS should have tried to crack down on these practices a long time ago, and indeed, has recently become more aggressive in doing just that. The basic choice facing agencies with huge unfunded liabilities is whether they want to pay them off aggressively, or come up with creative accounting techniques that push the tough repayments into the future. For example, instead of using a “level payment” repayment calculation, many of them use a “percent of payroll” scheme which allows for graduated payments.
In practice, this means calculating a stream of payments that will pay off the liability in 30 years, but varying the payments so that as projected payroll increases, the payment increases. This allows agencies to make low payments in the early years of the amortization term, which frequently means the unfunded liability isn’t even being reduced in the early years of the amortization term. Then when the payments become burdensome, they refinance the new, larger unfunded liability, to get that unfunded payment down again, in a new tranche, again using the same “level percent of payroll method.”
Anyone who lost their home because a “negative amortization” loan conned them into buying something they couldn’t afford would likely call that type of loan a “gimmick.” Similarly, negative amortization payment schedules on unfunded pension liabilities are also gimmicks. To their credit, CalPERS is now recommending 20-year straight line amortization. Which begs the question, why didn’t they do this all along?
GIMMICK #3 – OVERESTIMATING LONG-TERM RATE-OF-RETURN ASSUMPTIONS
CalPERS spokesperson Morgan correctly claims that CalPERS returns have averaged an 8.4% return over the past 30 years. But Morgan conveniently selects the 30 year timeframe to capture all of the pre-1999 run-up in stocks that began in the Reagan years as interest rates were reduced from inflation-fighting highs of 16% (30 year T-bill in the early 1980s) and American consumers began piling on debt. The 20-year return for CalPERS investments through June 30, 2017 is 6.58%. And these last 20 years of returns are far more relevant, because not quite 20 years ago is when CalPERS began to offer pension benefit enhancements that were sold as affordable when they clearly are not.
But if CalPERS is exceeding its projected rates of return over the past 30 years, why is it only 68% funded (ref. CalPERS 2016-17 CAFR, page 4, “Funding”)? At the end of a prolonged bull market, pension systems should be overfunded. Being 68% funded would not be terribly alarming if we were at the end of a prolonged bear market, but we’re in the opposite place. How can CalPERS possibly claim their actuaries are doing a competent job, if the system is this underfunded at this point in the market cycle? For more on this, read “If You Think the Bull Market Rescued Pensions, Think Again.”
It is important to emphasize that even if CalPERS can get a 7.0% return on investment – and there is some chance that they can – why did the agency wait until it was 68% funded to announce the drop in its projected returns from 7.5% to 7.0%? The United States economy is in the terminal phases of a more than 60 year long-term credit cycle, and one might argue there is a stronger case to be made that even 7.0% is highly optimistic. But we like optimism, so never mind that for now. Why wait until 2018 to phase in that half-point drop? The actuaries at CalPERS are well aware how sensitive their payment schedules are to even half-point drops in long-term rate-of-return assumptions. Overstating returns understates true cost. Is this an accounting gimmick? Only if you can prove intent. But read on.
GIMMICK #4 – QUIETLY ALLOWING THE UNFUNDED PAYMENT TO DWARF THE “NORMAL” PAYMENT
Every year, each active worker who gets CalPERS benefits vests another year of service. This means that in the future, during their retirement years, they will have an incrementally greater pension benefit in recognition of one more year of work. To pay for that incrementally greater pension benefit in the future, additional money must be invested today. That amount of money is called the “normal” contribution. But when the “normal” contribution isn’t enough, and it hasn’t been for years, the so-called unfunded liability grows. This unfunded liability represents the amount by which invested pension assets need to increase in order to earn enough to eventually pay for all the future pensions that have been promised.
This “unfunded liability” may seem theoretical when a pension system has hundreds of billions in assets. But it has to get paid down, because when there aren’t enough assets in the pension system earning interest, higher contributions are inevitably required from the participating agencies. If the unfunded liability isn’t reduced via catch-up payments, it will grow even if the normal contributions are adequate to cover newly earned benefits.
This reality is corroborated using CalPERS’ own data, which announces that payments required, as a percent of payroll, are set to increase by 50% (in some cases much more) over the next six years in nearly every agency it serves. And where are these projected increases most pronounced? In the unfunded contribution – that payment to reduce the unfunded liability.
And why does the unfunded liability grow in the first place? Because the normal contribution is too low. Why is the normal contribution too low? Could it be because public employees are only required to assist (via payroll withholding) to pay the normal contribution? Could that be the reason that lifespans were underestimated and returns were overestimated? The actuaries obviously got something wrong, because CalPERS is only around 68% funded. You can download the spreadsheet that shows the impact of this on California’s cities and counties here – CalPERS-Actuarial-Report-Data-Cities-and-Counties.xlsx.
In the original CPC report, along with the term “gimmick,” the term “outrageous” was used. If you don’t think sparing the beneficiaries of these pensions any responsibility to share in the costs to pay down the unfunded liability isn’t outrageous, you aren’t paying attention. For example, by 2024, using CalPERS own data, the City of Millbrae will be paying CalPERS a normal contribution of $1.0 million, and an unfunded, or “catch-up” contribution of $5.8 million – nearly six times as much! Is Millbrae just an isolated example? Not really.
Again, using CalPERS’ own data, in 2017-18, their 426 participating cities will contribute $3.1 billion to CalPERS, an amount equal to 32% of their cumulative payroll. In 2024-25, just six years from now, they are estimated to contribute 5.8 billion, 48% of payroll. And the normal vs unfunded contributions? This year in the cities in the CalPERS system, 13% of payroll constitutes the normal contribution and 19% of payroll constitutes the unfunded contribution – for which current employees and retirees have no responsibility to help pay down. In 2024-25? The normal contribution is estimated to increase to 16% of payroll, and the unfunded contribution, rising to $4.0 billion, is estimated to increase to 33% of payroll.
Put another way, today the unfunded “catch-up” pension contribution for California’s cities, cumulatively, is 140% of the normal contribution. By 2024-25, that “catch-up” contribution is going to be 210% of the normal contribution, more than twice as much! And participating individual employees and retirees have zero obligation to help pay it down, even though that payment is now twice as much as the normal payment.
But it’s not the fault of the individual beneficiaries. The responsibility lies with CalPERS and the politicians they reassured for all these years, using gimmicks.
Let’s review these practices: (1) Letting the agencies decide which type of asset smoothing they’d like to employ, (2) permitting the agencies to make minimal payments on the unfunded liability so the liability would actually increase despite the payments, (3) making overly optimistic actuarial assumptions, (4) not taking action sooner so the unfunded payment wouldn’t end up being more than twice as much as the normal payment.
“Gimmicks”? You decide.
THE CASE OF MILLBRAE
On January 22, the San Mateo Daily Journal published an article entitled “Millbrae officials question, criticize pension cost report.”
The paper’s Austin Walsh reports that Millbrae officials told him that using staffing projections to calculate Millbrae’s future pension burden won’t work because Millbrae has fewer employees than most municipalities. Here’s how Millbrae’s Finance Director DeAnna Hilbrants put it: To limit pension costs, Millbrae contracts for positions in police, fire and public works departments. Quote: “Most notably, Hillbrants pointed to Millbrae joining the Central County Fire Department with Burlingame and Hillsborough and contracting with the San Mateo County Sheriff’s Office for law enforcement.”
What Millbrae officials are saying is that because they contract out much if not most of their personnel costs, their pension contribution is a small percent of their total budget. What they neglect to acknowledge is the fact that the Central County Fire Department and the San Mateo Sheriff’s Office themselves have pension costs, which are passed on to Millbrae to the extent Millbrae uses their services. Millbrae may have made a financially beneficial decision to outsource its public safety requirements. But they did not escape the pension albatross.
CALPERS IS NOT UNIQUE
What has been described here does not just apply to CalPERS. It is the rule, not the exception, for every one of California’s pension systems to engage in the same gimmickry. The consequences for California’s cities, counties, agencies, and system of public education are just beginning to be felt.
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Have you experienced water faucets that spray tiny jets of water onto your hands? You know, those eight tiny jets of water, each about 1.0 millimeter in diameter, that are emitted with so much pressure that the paltry quantity of water bounces off your skin before you can get it wet enough to apply soap, and makes rinsing the soap off nearly impossible? You can find these water faucets in airports and other public places, where they constitute a minor annoyance. But wait. Thanks to California’s state legislature, they’re on their way into your home.
You’ll just love your personal space filled up with these expensive gadgets. For example, these faucets will probably require voice-activation, turn off after ten seconds, and send a report to your utility in order to help you manage your usage patterns. Smart faucets. Smart washers. Smart dish washers. Smart shower heads and smart toilets – all coming your way, thanks to the California State Legislature and their partners, the scarcity profiteers of Silicon Valley.
You’ll love how all these water-sipping, next-generation durable goods can go “down,” get hacked, don’t work very well, and require annual warranty payments. You’ll also love purchasing bargain basement annual software upgrades, but only affordable, barely, if you join their green team club for life special VIP program. You’ll love how the control panel on your washer will look like the bridge of a starship, and can only be operated after you’ve mastered the virtual version of a two-inch thick instruction manual.
California’s ruling coalition of government employee unions, extreme environmentalists, and high-tech billionaires are at it again, this time with a water conservation bill, AB 1668, that is going to impose a mandatory limit of 55 gallons per person per day on indoor water consumption. Bring on the gadgets.
To put the impact of this bill into perspective, consider what it would cost to retrofit a household to reduce indoor water consumption:
COST TO RETROFIT A HOME TO REDUCE WATER CONSUMPTION
The biggest cost on this table is the cost for a tankless water heater or a hot water circulation system, necessary if we don’t want to waste water while waiting for it to get hot. Because there’s no good solution to that problem, this is a significant source of water waste that is blithely ignored by water conservation activists. It’s reasonable to expect people in a developed, wealthy nation like America to wait until they have warm water before washing their hands, shaving, hand washing dishes, or showering. And there is no way a person is going to bring their indoor water usage down to 55 gallons a day without either performing all these tasks with cold water, or by installing a system to deliver instant hot water.
But if every Californian did their best to comply with AB 1668, could they reduce their water usage to 55 gallons per day? The next table shows how much they could save, using USGS data. Please note the USGS data is for America, not for California, where decades of conservation incentives have already yielded tremendous reductions in use. Per capital indoor water use in California isn’t anywhere near 139 gallons per day. More on that later.
PER CAPITA POTENTIAL WATER SAVINGS USING WATER EFFICIENCY APPLIANCES
Apart from water efficient toilets which save water and don’t require lifestyle changes, there’s not much here that isn’t expensive and inconvenient. Notwithstanding the fact that Silicon Valley moguls are salivating over the prospects of subsequent mandates that will require all these retrofit appliances to be “smart,” they aren’t going to make life better. Low flow shower heads require longer duration showers, especially if you have to rinse shampoo out of long hair. Consumer reports offer mixed reviews on low water consumption dishwashers and washing machines. Some of us like to wash our dishes by hand – in many cases because it’s less time consuming. And who wants to pull wet clothes out of side loading washers? As for waiting for hot water to make it to faucets, there’s no inexpensive and effective solution.
Enforcing the 55 gallon indoor limit will also be costly not only for California’s residents, but for every water utility in the state. After all, to regulate indoor water consumption, you have to measure indoor water consumption separately from outdoor water consumption. And, of course, residential outdoor water consumption is also in AB 1668’s cross hairs. To accomplish this, AB 1668 calls for dedicated outdoor water meters, separate from indoor water meters, and it calls for water utilities to prepare a water “budget” for each customer parcel based on the size of the parcel and other factors such as the local climate.
THE COST/BENEFIT OF RESIDENTIAL WATER RATIONING
Since AB 1668 proposes to effectively ration residential water consumption, at staggering expense, it’s worthwhile to explore the cost and benefit of this policy. If we assume that five million of California’s 12.5 million households still have legacy appliances, just the retrofit would cost these unlucky homeowners $37.5 billion. But it doesn’t end there, because the water utilities would have to install indoor/outdoor meters on around 10 million households (some households are in multi-family dwellings with no yard or a shared yard). Assuming the cost to install these meters and conduct site visits to assign individual outdoor “water budgets” at $1,000 per household means another $10 billion will have to be spent – i.e., implementing AB 1668 will cost $47 billion.
But how much water would actually be saved, for $47 billion? According to the most authoritative study available on current indoor water consumption, the average Californians uses 62 gallons per day. (ref. California Water Plan Update 2013 Chapter 3, page 12, 1st paragraph “Indoor Residential.”) This means that if California’s 40 million residents got their indoor water use down to 50 gallons per day from 62 gallons per day, it would save 537 thousand acre feet per year (0.54 million acre feet). This is a minute fraction, less than 1%, of California’s total water diversions for environmental, agricultural, and urban uses.
AB 1668 is not about saving water. It’s about control. It’s about power and profit for special interests. Otherwise we could just expand sewage treatment plants, which we should do anyway. How can you waste indoor water if it can go down the drain, to be treated and pumped right back up the hill for reuse?
Let’s keep this in perspective by imagining best case scenarios whereby indoor and outdoor residential water use is dramatically reduced. If Calfornia’s 40 million residents reduced their household water consumption by another 20%, it would only save 0.74 million acre feet per year. An impossible 40% reduction? Savings of 1.5 million acre feet per year. For one-tenth the cost, the proposed “off-stream” Sites Reservoir could easily capture over 2.0 million acre feet each year in storm runoff. Just one good storm dumps ten times that much water onto California’s watersheds.
TOTAL ANNUAL WATER SUPPLY AND USAGE IN CALIFORNIA
So what could Californians do instead with $47 billion? We’ve looked at this before. Limiting ourselves to water infrastructure, here’s a list:
WAYS TO CREATE WATER ABUNDANCE IN CALIFORNIA
First of all, market-based incentives can eliminate water scarcity at almost no cost. For example: Allow farmers to sell their water allotments at market rates without losing their vested rights. Or permit utilities to engage in mild price hikes that encourage people to use less water, instead of resorting to punitive tiered pricing or rationing. These alternatives, to some extent, have already been tried. They work. But if you accept the premise that increasing the absolute supply of water in California is desirable – here are the capital costs for water infrastructure that would create water abundance in California for decades to come.
- Desalinate 1.0 million acre feet of seawater – $15 billion.
- Reclaim and reuse 2.0 million acre feet of sewage – $10 billion.
- Build the Sites Reservoir for off-stream storage of 2.0 million acre feet of run-off – 4.4 billion.
- Build the Temperance Flat Reservoir for 1.3 million acre feet of storage – 3.3 billion.
- Aquifer recharge to store runoff – there isn’t even a good study exploring this option at a statewide level.
As can be seen, all of these water infrastructure projects could be built for $32.7 billion. They could be financed via infrastructure bonds, increased rates to consumers, redirection of funds currently being squandered on high-speed rail, or even redirection of proceeds from carbon emission auctions.
What California’s ruling junta prefers, however, is to create a surveillance state defined by expensive scarcity. In the 1950s and 1960s, California’s legislature approved and implemented what remains the finest system of inter-basin water transfers in the world. But today, after over 30 years of neglect, at the same time as California’s population has doubled, California’s water infrastructure is crumbling at a time when it should be expanded. The reasons for this are plain enough. Special interests have replaced the public interest.
THE SCARCITY PROFITEERS
Instead of building water infrastructure to increase supplies of water, public employee unions want to see tax revenues pour into their pockets and into the pension funds. High-tech billionaires want contracts to build “smart” appliances and monitoring systems to enforce water rationing. Extreme environmentalists, and the trial lawyers who get incredibly wealthy representing their organizations, want more legal bases upon which to file lucrative lawsuits. Sadly, major corporate agribusinesses often acquiesce to this abuse of residents because they’ve decided that a bigger slice of a smaller pie is all they can hope for from this legislature.
Until Californians realize there will be no end to these encroachments on their freedom and prosperity until they resist, California’s ruling junta will prevail. California will be a harder and harder place to live. If ordinary Californians value their freedom, they will form a coalition with farmers, energy companies, civil engineering firms, and construction unions to demand water abundance. They may rediscover the vision and leadership that built a water infrastructure that is still one of the wonders of the modern world.
Assembly Bill 1668, “Water management planning” Text (Source: California Legislative Information)
Residential Water Use in California:
Water Saving Potential of water-efficient appliances (Source: USGS)
California Water Plan Update 2013 Chapter 3 – Urban Water Use Efficiency
Cost to purchase and install various water-saving appliances:
Cost (including installation) for a tankless water heater
Cost (including installation) for a water efficient dishwasher
Cost (including installation) for a water efficient clothes washer
Cost (including installation) for a low flow toilet
Total precipitation in California during wet, average, and dry years:
California Water Supply and Demand: Technical Report
Stockholm Environment Institute
Table 2: Baseline Annual Values by Water Year Type and Climate-Scenario (MAF)
California water use by sector:
California Water Today
Public Policy Institute of California
Table 2.2, Average annual water use by sector, 1998–2005
California urban water use by sector:
California Dept. of Water Resources
2010 Urban Water Management Plan Data – Tables
Download spreadsheet “DOST Tables 3, 4, 5, 6, 7a, 7b, & 7c: Water Deliveries – Actual and Projected, 2005-2035”
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When speaking about pension burdens on California’s cities and counties, a perennial question is how much are the costs going to increase? In recent years, California’s biggest pension system, CalPERS, has offered “Public Agency Actuarial Valuation Reports” that purport to answer that question. Notwithstanding the fact that CalPERS predictive credibility is questionable – i.e., they’ve gotten it wrong before – these reports are quite useful. Before delving into them, it is reasonable to assert that what is presented here, using CalPERS data, are best case scenarios.
In partnership with researchers at the Reason Foundation, the California Policy Center has compiled the data for every agency client of CalPERS, including 427 cities and 36 counties. In this summary, that data has been distilled to present two sets of numbers – payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year. In calculating these results, the only assumption we made (apart from the assumptions made by CalPERS), was for estimated payroll costs in 2024. We used a 3% annual growth rate for payroll expenses, the rate most commonly used in official actuarial analyses on this topic.
So how much more will cities and counties have to pay CalPERS between now and 2024? How much more will pensions cost, six years from now?
On the table below, we provide information for the 20 cities that are going to be hit the hardest by pension cost increases. To view this same information for all cities and counties that participate in the CalPERS system, download the spreadsheet “CalPERS Actuarial Report Data – Cities and Counties.”
CalPERS Actuarial Report Data
The Twenty California Cities With the Highest Pension Burden ($=M)
If you are a local elected official, or if you are an activist, journalist, or anyone else with a keen interest in pensions, these tables merit close scrutiny. Because they not only show costs estimates today, and seven years from now, but they break these costs into two very distinct areas – the so-called “normal” costs, which are how much employers have to pay into the pension fund for current workers who are vesting one more year of future benefits, and the “catch-up” costs, which are what CalPERS charges employers whose pension plan is underfunded.
Take the first city listed, Millbrae. By 2024, we predict Millbrae will have the highest total pension payments of any city in California that belongs to the CalPERS system.
The table presents are two blocks of data – the set of columns on the left show current costs for pensions, and the set of columns on the right show the predicted cost for pensions. In all cases, the cost in millions is shown, along with the cost in terms of percent of total payroll.
Currently, as can be seen on the table, for every dollar it pays active employees in base wages, Millbrae must contribute 59 cents to CalPERS. This does not include payments to CalPERS that Millbrae collects from its employees via withholding. The same data show that, by 2024, for every dollar Millbrae pays active employees in base wages, they will have to contribute 89 cents to CalPERS. Put another way, while Millbrae may expect its payroll costs to increase by $1.4 million, from $6.3 million today to $7.7 million in six years, their payment to CalPERS will increase by $3.1 million, from $3.7 million today to $6.8 million in 2024.
But here’s the rub. Nearly all of this increase to Millbrae’s pension costs are the “catch-up” payments on the city’s unfunded liability. In just six years Millbrae’s payment on its unfunded liability will increase by 99%, from $2.9 million today to $5.8 million in 2024.
What are the implications?
It is difficult to overstate how outrageous this is. Here’s a list:
1 – Virtually every pension “reform” over the past decade or so has exempted active public employees from helping to pay down the unfunded liability via withholding. Instead, their increased withholding – in some cases supposedly rising to “fifty percent of pension costs” (the PEPRA reforms) – only apply to the normal contribution.
2 – In order to appease the unions who, quite understandably, lobby for the lowest possible employee contributions to pension funds, the “normal cost” is calculated based on financially optimistic projections. The less time an actuary predicts a retiree will live, and the more an actuary predicts investments will earn, the lower the normal contribution.
3 – In order to cajole local elected officials to agree to pension benefit enhancements, the same overly optimistic, misleading projections were provided, duping decision makers into thinking pension contributions would never become a significant burden on cities and counties, and by extension, taxpayers.
4 – Because cities and counties couldn’t afford to pay down the growing unfunded liabilities attached to their pension plans, tricky accounting gimmicks were employed, where minimal catch-up payments were made in the present in exchange for bigger catch-up payments in the future. The closest financial analogy to what they did would be the “negative amortization” mortgages that were popular prior to the housing crash of 2008.
5 – The consequence of this chicanery is that today, as can be seen, catch-up payments on the unfunded liability are typically two to three times greater than the normal contribution. And it’s getting worse. In 2024, Millbrae, for example, will have a catch-up contribution that is nearly six times as much as their normal contribution.
6 – When a normal contribution isn’t enough, and the plan becomes underfunded, the level of underfunding is compounded every year because there isn’t enough money in the fund earning interest. The longer catch-up payments are deferred, the worse the situation gets.
Yet the normal contribution has always been represented as all that should be required for pension plans to remain fully funded. Just how bad it has gotten can be clearly seen on the table.
Take a look at Pacific Grove, fourth on the list of CalPERS cities with the highest pension burden. Pacific Grove is already paying 40 cents to CalPERS for every dollar it pays to its active employees. But in six years, that amount will go up to 75 cents to CalPERS per dollar of salary to active employees. And take a look at where the increase comes from: Their catch-up payment goes from 1.7 million to $4.4 million in just six years.
Why isn’t Pacific Grove paying more, now, so that it can avoid more years of having too little money in its pension plan, earning interest to properly fund future pensions? The reason is simple: Telling Pacific Grove to go out and find another $2.7 million, right now, is politically unpalatable. In six years, most of the local elected officials in Pacific Grove will be gone. But where is Pacific Grove going to find this kind of money? Where are any of California’s cities and counties going to find this kind of money?
One final point: These pension plans are underfunded after a bull market in stocks has doubled since it’s last peak in June 2007, and has nearly quadrupled since it’s last low in March 2009. When stocks and real estate have been running up in value for eight years, pension plans should not be underfunded. But they are. CalPERS should be overfunded at a time like this, not underfunded. That bodes ill for the financial status of CalPERS if and when stocks and real estate undergo a downward correction.
CalPERS, and the public employee unions that dominate CalPERS, have done a disservice to taxpayers, public agencies, and ultimately, to the individual participants who are counting on them to know what they’re doing. They were too optimistic, and the consequences are just beginning to be felt.
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Public employee freedom case is set to be heard by SCOTUS on Feb. 26. Two months from today, the U.S. Supreme Court will hear arguments in the Janus v AFSCME case, with a decision scheduled to be announced in June. If successful, it would free public employees in 22 states from having to pay any money to a union as a condition of employment.
The “nationwide teacher shortage” claim is a myth that has been perpetuated on and off for about a hundred years now. Of late, its inaccurate cousin the “teachers are leaving the profession in droves” fable has been giving it some serious competition however. And California, never a place to avoid a good fad, has hatched a plan to address the mythical problem. In an attempt to lure and keep teachers, there is talk of a “The Teachers Fair Pay” referendum which would align teachers’ pay to the wages of state lawmakers, about $104,000 a year.
The looming Janus vs. AFSCME decision, expected by Spring 2018, is probably going to validate the contention that ALL public sector union activity is inherently political. Once this landmark case is decided, members will not only have the right, already existing, to opt-out of paying political dues. After Janus, they may also have the right to opt-out of paying ALL dues, including “agency fees.”
The scope of this ruling is uncertain, but it’s reasonable to assume that public sector unions are going to become more accountable to their membership than ever before. How will members respond? Will they put California first, or continue to condone the destructive policies their unions promote as long as they benefit?
There are already resources available for unionized government workers and contractors who want to opt-out of paying dues that are used for politics, even though they still have to pay “agency fees.” Resources for most of California’s public employees, including teachers, can be found here. Resources for home health care workers can be found here. After the Janus ruling, those resources will be strengthened and expanded in scope.
But what sort of platforms will emerge for government workers who wish to remain union members, but want to challenge the political agenda of their unions? Will these dissidents, who often constitute a majority of the membership, have a way to influence the political agenda of their biased leadership? In the wake of Janus, innovative ways to facilitate this internal revolution within government unions should be a priority for anyone trying to bring real reform to California politics.
For decades, public sector unions have been the quiet, gargantuan impetus behind the growth of government at all levels, especially at the state and local level where 60% of all taxes are collected and spent. There are obvious consequences of a political agenda that wants to expand government without any regard to the cost or benefits, such as relentlessly increasing taxes at the same time as services are diminished. But there are two even more profound consequences that elude casual scrutiny. Both are extremely expensive for ordinary Californians.
The first is California’s status as a magnet state for welfare recipients and destitute, unskilled immigrants. Many of these immigrants come from cultures that devalue education, accept corruption as normal, and are hostile to American values and traditions. Apart from the staggering cost to taxpayers to provide these newcomers direct benefits, this policy necessarily requires more police, more prisons, more translators, more multi-lingual educators, more public housing and subsidized housing, more subsidized health care, more welfare and government aid of all types. Other indirect costs must include more public university majors in identity politics so less qualified students can get a “degree,” more quotas in hiring and college admissions so less qualified applicants can avoid being victims of “discrimination,” and more bureaucrats, social workers and college “administrators.” A gold mine for government unions.
The second is California’s embrace of an extreme environmentalist agenda. These policies create artificial scarcity not only for public services, but more significantly, for housing, water and energy. While ordinary private citizens suffer, and unionized public employees get cost-of-living recompense, demand driven asset bubbles inflate investment portfolios, most particularly the $1.0+ trillion in California’s state and local public employee pension fund assets. Artificial scarcity also requires expensive, expanded enforcement apparatus – more code inspectors, mass transit workers, higher fees for any sort of construction. And of course, artificial scarcity creates a housing price bubble that translates directly into massive increases in property tax revenue. Again, for government unions, extreme environmentalism is the gift that keeps on giving.
California’s government unions control the state legislature and nearly every city and county. Their policy is to invite in millions of dependent people, costing taxpayers hundreds of billions, while at the same time making it unaffordable for middle class taxpayers to live here through policy-driven artificial scarcity. This is more than just self-serving madness, it is oppression.
Public servants have hard choices to make. They may consider the following:
(1) As public servants your loyalty is to California’s citizens first.
(2) If you are public safety employees, your sworn duty is to keep California’s citizens safe.
(3) As union members, your priority should be the welfare of all of California’s workers, not just government workers.
What should public servants do? When the Janus ruling forces government unions to be more accountable, how will their members raise their collective voice? Will they understand that their unions should be fighting for policies that (1) welcome skilled workers who are encouraged to assimilate, and (2) support enactment of sensible environmentalist laws?
The hard fact is this: The more cultural upheaval there is, and the higher the cost-of-living gets, the more government expands and the more government unions benefit. And the more government expands to address these self-inflicted problems, the less government resources are left to complete infrastructure projects and provide other basic services to taxpayers. This is why there is an inherent conflict between the interests of public sector unions and the public interest. This is why public sector unions should be outlawed.
But so long as public sector unions exist, to condone their destructive political agenda in exchange for personal gain, even via sins of omission, is unforgivable.
A new poll shows that teachers are politically divided, but union political spending is anything but. The results of a poll released last week by the Education Week Research Center reveal that teachers are evenly distributed across the political map. 29 percent said they are liberal, 27 percent conservative and the remainder describe themselves as moderate. The results are not really surprising, as an internal National Education Association poll dating back to 2005 shows pretty much the same thing. In fact, the 2005 NEA survey, consistent with previous results, found that members “are slightly more conservative (50%) than liberal (43%) in political philosophy.”
Flawed reports aside, charters – schools of choice – are flourishing. As I wrote last week, too many government-run schools are failing and the future for them, collectively, is not rosy. But the monopolists running our traditional public schools (TPS), in addition to blaming lack of funding, have been busy lashing out at charter schools, which are decentralized and give parents a right to choose where to educate their kids.
One year ago the Dow Jones stock index was 19,756. Today it closed at 24,211, an increase of 23%. Pretty good for one year! When the stock market does well, pension funds do well, since that’s where these funds place most of their portfolio investments. But CalPERS, the largest public employee pension system in the United States, is not doing well. Why not?
The table below shows how well CalPERS, the California Public Employees Retirement System, has performed with its investments over the past twenty years through their most recent fiscal year ended 6/30/2017.
As can be seen, CalPERS, like the stock market, and like all pension systems that rely primarily on the stock market to drive the performance of their investments, has had good years and bad years. Back in the late 1990’s, when the stock market was roaring, CalPERS put together a string of great years, including a whopping 20.1% return in 1997 and a 19.5% return in 1998. Then in 2001, after the internet bubble burst, CalPERS lost 7.2%, followed by a 6.1% loss in 2002.
A similar up/down story can be told during the stock market recovery in the mid-2000’s, where CalPERS logged a 16.6% return in 2004, 12.3% in 2005, 11.8% in 2006, and a spectacular 19.1% in 2007. Then when the housing bubble burst, CalPERS lost 5.1% in 2008, followed by a 24.0% loss in 2009. Now the stock market has turned in eight years of positive returns. What could go wrong?
CalPERS Investment Returns, 1997-2017
One could argue that stocks rise and fall unpredictably but over the long run their positive performance is reliable. This is validated by looking at the average returns for CalPERS over the past 20 years, as shown in the next chart. As can be seen, over the past 20 years, CalPERS has generated an average return of 6.58%, very close to the average they claim they can earn, currently set at 7.0%.
CalPERS Average Return Over Various Time Spans Ending 6/30/2017
Ok, so CalPERS said they could hit 7.0% and over the last twenty years, they hit 6.58%. What’s wrong?
Actually, a lot is wrong. Here goes:
(1) It doesn’t seem like very much, but the difference between a 7.0% rate of return and a 6.58% rate of return is actually quite significant. The impact of compound interest over the multi-generational time span of pension fund investments magnifies the impact of even a small reduction in how much pension systems expect to earn. For example, the difference between 7.0% and 6.58% is 0.42%, a little less than one-half of one percent. But that 0.42% reduction increases the required annual contribution as a percent of payroll from 23.0% to 25.8% – and as a fully funded plan becomes unfunded, as will be seen, the “catch up” contributions start to pile up.
(2) While CalPERS currently assumes a long-term annual rate of return of 7.0%, back in 2001 they assumed an 8.25% rate of return (ref. CalPERS 2001 CAFR, “Economic Assumptions,” page 73). The gap between 8.25% and 6.58% is huge. If pension system actuaries predict an 8.25% annual investment return, a fully funded plan only has to receive annual contributions of 16.4% of payroll, compared to 25.8% based on a prediction of 6.58% returns. Based on this analysis, back in 2001, when CalPERS should have been collecting 25.8% of payroll, they were only collecting 16.4% of payroll.
Before all these numbers start to swim about incoherently, the next chart shows the bottom line result. Back in 1999, CalPERS had invested assets totaling $149 billion. The present value of their pension obligations to current and future retirees was estimated at $116 billion, which is to say they had a surplus of $33 billion. Put another way, their assets exceeded their liabilities by 128%. No wonder they worked with public sector unions to increase pension benefit formulas. But by 6/30/2016 – the most recent data available – CalPERS had assets of $298 billion, but they had liabilities of $436 billion. That is, they were now only 68% funded, and they had a deficit of $138 billion. The chart below dramatically illustrates this nearly twenty year decline in the financial health of CalPERS.
CalPERS Unfunded Liability by Year, 1999-2016
The financial challenges facing CalPERS are even worse than this chart indicates, because when a pension system is fully funded, it can much more easily absorb a few years of market losses. But despite earning 6.58% over the past 18 years, CalPERS has gone from 128% funded to only 68% funded. They have gone from having a $33 billion surplus to having a $138 billion deficit. When the investments that have soared over the past eight years endure the inevitable downward correction, CalPERS will be even more underfunded. Put another way, pension systems should be registering deficits like this at the end of a bear market, not after eight years of a bull market.
The bull market did not save the pension funds. If it had, CalPERS would have a surplus, not a $138 billion deficit.
Taxpayers, public servants, elected officials, pension fund management, public sector union leadership: Beware. Public sector pensions are not financially healthy, they are going to require higher contributions every year, and what precarious stability they do maintain is only a result of a bull market that is very long in the tooth.
CalPERS Annual Report 2017 (ref. page 120 for data on funded status 2007-2017)
CalPERS Annual Report 2008 (ref. page 64 for data on funded status 2006-2002)
CalPERS Annual Report 2004 (ref. page 56 for data on funded status 2001-1999)
The source for the pension contributions required at various rates of return were calculated using the downloadable Excel spreadsheet “Pension Analysis Model.” A tutorial on how to use that model is provided in the article “A Pension Analysis Tool for Everyone.” Please note this Excel model calculates the “normal contribution” only, and does not calculate required contributions as a percent of payroll for underfunded systems.
The Coming Public Pension Apocalypse, and What to Do About It, CPC Study, 2016
Marc Joffe from the Reason Foundation contributed to this article.
California’s ruling elites have enacted policies that make it impossible for middle class citizens to live here. They have artificially elevated the cost of living, nearly destroyed public education, decimated public services, neglected public infrastructure, and declared war on small business. To deflect criticism, they’ve convinced a critical mass of voters that any attempts to roll back these abominable policies are being engineered by racist, sexist plutocrats, and their willing puppets in the Republican party.
Exposing this diabolical, conniving scam won’t be easy. The ruling elites are a powerful coalition, comprised of left wing oligarchs including most of Silicon Valley’s billionaires, California’s public sector unions armed with the billion dollars (or more) they collect every year in forced dues, and the environmentalist lobby and their powerful trial lawyer cohorts.
Defeating California’s ruling elite requires a new coalition, comprised of the private sector middle class, enlightened members of the public sector middle class, and members of disadvantaged communities that aspire to the middle class. Attracting members of these communities, especially California’s Latinos, Asians, and African Americans, requires convincing them that current policies actually harm their interests.
To do this, there are two moral arguments the elites make that have to be debunked, because they underlie all of the intrusive, statist policies that are destroying California’s middle class. The first is the argument that capitalism is inherently evil and must be strictly curbed if not completely replaced by socialism. The second is the argument that unprecedented sacrifices must be made in order to save the planet from an environmental catastrophe.
Corrupt Capitalism vs Competitive Capitalism
Here are examples of two very different ways to critique wealth. In each example, the first phrase is employed by the ruling elites. It feeds on resentment and ignorance. The second phrase is offered as a counter argument. It appeals to the aspiring middle class family, or the small businessperson. It is designed to extol the positive virtues of capitalism and expose the opportunistic cynicism of the statist elites.
(1) “Tax the corporations” vs “make corporations compete.”
(2) “Capitalism is inherently evil” vs “no economic system in history has delivered more individual freedom and prosperity.”
(3) “Wealth is usually the result of privilege” vs “Wealth is usually the result of hard work in a free society.”
(4) “Government needs to regulate corporations” vs “corrupt corporations use regulations to destroy their smaller competitors.”
(5) “We have to redistribute wealth so people can afford to live” vs “we have to nurture capitalist competition to lower the cost of living.”
These arguments shine a spotlight on the great con job promulgated by the elites: The ruling class does not care about you, but we do. Because like you, we have to try to make payments on a half-million or even a million dollar mortgage, just to own a small house. Like you, we have to pay more for gasoline and electricity than any other citizens in any other state in America. Like you, we have to send our children to failing K-12 schools, then sink further into debt to pay tuition for them to attend colleges and universities where they don’t get a good education.
Extreme Environmentalism vs Practical Environmentalism
Apart from the distraction of race and gender, environmentalism provides the moral argument used as cover for policies that have imposed a punitive cost of living on Californians. It is important to make the distinction between attacks that discredit environmentalism in its entirety, and environmentalist reform that exposes the hidden agendas and inherent futility of California’s extremist environmental policies. Here are examples of two very different ways to apply environmentalist values.
(1) “Stop urban sprawl” vs “California has 163,000 square miles of land and is nearly empty, adding 10 million more people on quarter acre lots (even including new roads and new commercial/industrial centers) would consume less than 2,000 square miles!”
(2) “People need to live in multi-family dwellings” vs “detached single family homes are cheaper per unit to build than multi-family dwellings, and are more popular among buyers.”
(3) “There isn’t enough water for people to have detached homes and yards” vs “for less than $20 billion, we could build enough desalination capacity to provide water to every home and business in Los Angeles County; farming consumes 80% of all water diversions in California, we are exporting water intensive crops like alfalfa, grown using massively subsidized water, in the Imperial Valley (desert)!”
(4) “The government needs to discourage further development of fossil fuels such as clean natural gas” vs “Californians are paying as much as ten times what energy consumers pay for electricity in low cost states, and that California’s CO2 emissions are a minute fraction of those from other nations such as China and India.”
(5) “We have to get people out of their cars and build passenger rail” vs “cars, trucks and buses offer far more convenience and versatility, and are on the verge of becoming 100% clean and sustainable modes of transportation.”
(6) “No new mines and quarries should be allowed within California, and existing ones should be phased out” vs “developing in-state natural resources creates in-state jobs and costs less than importing materials from elsewhere in the U.S. and Canada.”
When the elites demand “environmental justice” for people of color, ask them (using the San Francisco Bay Area as an example) what any of that has to do with why we can’t build homes on the eastern slopes of the Mt. Hamilton Range, or in San Jose’s Coyote Valley, or along the I-280 corridor in the Santa Cruz mountains. Ask them why they’re paying 60% of their income for rent or a mortgage, when California has 163,000 square miles of land and is nearly empty. Ask why money that is being spent on high speed rail, using imported materials, isn’t instead being used to create high paying jobs in road and infrastructure projects that will actually improve lives. Ask why thousands of people aren’t working in high paying jobs in mining and quarrying, so building materials can cost less.
For aggressive reformers, good questions are plentiful. What have California’s elites done for working families? Have they gotten you better jobs? Have they nurtured robust and competitive housing markets to lower the price of a home? Have they widened the freeways? Have they enabled competition to drive down the cost-of-living? Have they made your communities safe and prosperous and affordable? Have they done anything other than bribe your so-called leaders with campaign contributions so they’ll do what they’re told?
It comes down to this: These purported spokespersons for true environmentalist values have become personally successful by fomenting environmentalist panic, but they do not represent the best interests of ordinary Californians, and they do not articulate a realistic or practical vision of environmentalism.
California’s elite has declared war on the working class. They have used race as a distraction, and extreme environmentalism as the phony moral justification for their self-serving policies. They must be exposed.
The Moral High Ground
This fact – that the rhetoric of California’s elite does not translate into a better quality of life for the people they govern – is the core moral argument against current policies. Across virtually every issue, the policies of the elites are failing ordinary Californians. Pouring money into public schools has not helped students. Raising taxes has not improved services. Expanding college curricula that replace academic rigor with what amounts to political indoctrination has not improved employment opportunities for graduates. And creating artificial scarcity in the name of saving the planet has not helped the planet, but it has impoverished millions of California’s most economically vulnerable residents.
In claiming the moral high ground, reformers can use the same rhetoric the elites have employed for decades, and by doing so will find the elites have already done much of their work for them. The seditious goal of making California friendlier to small businesses, with more affordable housing, more affordable energy, better jobs and better schools is furthered by reminding Californians what the elites have done. They have engaged in one of the biggest cons of all time, enriching themselves at the expense of the average worker.
Once the issues of race and environmentalism are exposed as overstated issues, overemphasized in order to manipulate the electorate, then the resentment the elites have inculcated in their constituents can be turned against them.
Pro-growth policies don’t have to rely on terminology that has been tainted by the status-quo elites. “Free market,” “Libertarian,” “Conservative,” “Classical liberal,” etc. have seductive appeal for many ideologically driven reformers, but they have limited value in California politics. Reformers have to supplement their vocabulary, borrowing more from the left than from the right. The values and slogans that the ruling class has invested decades in inculcating in the minds of Californians can be used against them, because these elites have engaged in rank hypocrisy. Terms such as “social justice” and “equity” now have tremendous value to reformers, because reform policies will further those goals, whereas the policies implemented by California’s elite have condemned ordinary people to poverty.
Examples of using terms popular with the left to advance reformer causes:
Social justice – charter schools, teacher accountability
Civil Rights – the right to a quality education in a school chosen by parents
Equity – competitive land development to create affordable housing
Micro-aggression – countless taxes, hidden taxes, fees and regulations
Fairness – prices for energy and water competitive with other states
Progressive – pension benefits with lower percentage formulas for highly paid public employees
Diversity – college curricula that embrace conservative as well as liberal values
Anti-Discrimination – merit based, color blind criteria for hiring and college admissions
A pragmatic, centrist ideology that co-opts the rhetoric of the status-quo elites to attack the ruling class can resist being pigeonholed as left or right, or conservative or socialist. We are pragmatists. We are pro-growth, pro-job Californians and our policies will lead to prosperity, affordable housing, affordable utilities, affordable education, and social justice and equity for all Californians, and not just the elites.
How can you persuasively counter arguments for diversity quotas, when implacable fanatics purporting to represent every identifiable group whose aggregate achievements fall short of the mean will argue it is discrimination, not merit, that determine outcomes? Expect no help from government unions. Resentment gives them passion, restitution gives them power. Undermining the meritocracy is key to their survival.
Imagine a public school system where the excellence of teachers was the only institutional criteria for their job security and prospects for career advancement. Imagine government bureaucracies where innovative, more effective practices were adopted even if it meant smaller budgets and fewer employees. Imagine law enforcement agencies that had zero tolerance for officers that abused their authority. Are we there yet? Not if government unions have anything to say about it.
But the government union war on the meritocracy goes well beyond protecting bad employees. Government unions representing K-12 teachers and college faculty have been overran by “social justice warriors” who preach identity politics as the new religious gospel and the new academic canon. They have taken their war on the meritocracy into the classrooms and lecture halls, saturating the curricula from kindergarten to graduate school. Their message? Unless you are a heterosexual white male, you are a victim of discrimination by heterosexual white males. You live in an unjust society. Merit, according to this doctrine, is a smokescreen. It is discrimination in disguise.
What do you do if you believe in meritocracy? What do you do about this?
Math SAT Scoring Distribution by Ethnicity – 2015
If you want to earn more money in a merit-based, productive market economy, quantitative reasoning skills are required. The more of these skills you’ve got, the more money you’ll earn. So what happens when you have far, far higher percentages of highly qualified individuals in some groups than in other groups?
When it comes to college admissions and college curricula, the solution of the social justice warriors, and the faculty unions who nurture them, is many faceted. Here are some of their mitigating strategies:
- Invent “holistic” admission criteria that diminishes the importance of quantitative aptitude.
- Concoct theories of cognition that claim math itself is an arbitrary and subjective expression of white power (yes, this really happened).
- Create entire college departments that are academically weak but instead offer separatist political indoctrination.
- Blame most if not all of the gap in aptitude on systemic discrimination by the “white patriarchy.”
- Demand race-driven quotas of ever-expanding scope; in hiring, promotions, housing, wealth, political office, whatever.
The problem with these solutions, if you want to call them that, are their actual consequences. In pursuit of quota driven diversity, colleges are turning away qualified applicants at the same time as colleges are failing to produce anywhere near the number of STEM graduates that American industry demands. Meanwhile, the students that are waved in despite being marginally qualified to pursue higher education are being trained to ascribe any failures they may encounter to racism, and any successes they may encounter to fortuitous state intervention. And not least, there is the consequence of bitterness and cynicism being bred into the psyche of all those more qualified students and future employees who are passed over in favor of meeting diversity quotas.
How does one challenge the doctrine of equality over merit? How do you challenge allegations of systemic racism? How do you do it persuasively, with hard facts, but also with compassion and empathy? It’s not easy. College youth need passion, they need a cause, they need clarifying polarities. The teachers unions offer them a good one: A rich and wealthy white patriarchy that has exploited people of color for centuries, one that must be resisted, uprooted, and replaced.
Tough love arguments should be part of any campaign of persuasion. Reality therapy. Why are people with lower test scores admitted to college if they’re being discriminated against? That’s ridiculous. And why do they think taking classes that replace difficult coursework with political indoctrination – fomenting resentment and advocating separatism – are going to give them marketable skills? Do they really believe they need on-campus “cultural safe spaces”? Aren’t those just a 21st century version of Jim Crow laws? Where does this end? And why do Asians perform so well on college aptitude tests? Why are Asians so successful economically? Aren’t they also “people of color”? Could it be because they study so diligently, and that a meritocracy is colorblind?
Along with tough love, opponents of quotas should offer understanding. It is our individuality that defines our abilities and challenges much more than the groups we’re a part of. All ethnic groups are collections of individuals with infinite diversity; short and tall, thin and obese, weak and strong, plain and beautiful, slow and smart, timid and assertive, surly and charming, lucky and unlucky, good and bad. As individuals we succeed and we fail. We endure crushing disappointments and spectacular success. Life is not always easy or fair – for anyone. We are joined by our common humanity, no matter what color we are. And nothing overcomes prejudice, should it ever exist, better than a smile.
Despite occasional rhetorical acknowledgments, government unions don’t like the message of individual accountability. But that is the message that must prevail, if we are to avoid the tyranny of quota-driven equality of outcome.
Race gaps in SAT math scores are as big as ever – Brookings Institution (source for chart)
As the ethnic composition of America changes from mostly white to a kaleidoscope of color within a generation, there is no better way to fracture society than to teach everyone to resent everyone else. Nurturing tribal resentment is a winning strategy for government unions, because a swollen, authoritarian, unionized government becomes the referee. Government union power increases every time another “person of color” becomes convinced that only government redistribution and racial quotas can mitigate their persecution at the hands of a racist white “patriarchy.”
When society fractures, when we face increasing unrest and poverty, government unions win. It is inherently in the interests of government unions for society to fail. If public education fails, hire more teachers and education bureaucrats. If crime goes up, hire more police and build more prisons. If immigrants fail to assimilate, hire more multilingual bureaucrats and social workers. If poverty increases, hire more welfare administrators.
If you don’t think this strategy can work, come to California, America’s most multi-ethnic state, and a place where government unions wield absolute power. Their wholly owned subsidiary, the Democratic party in California, has spent the last 20+ years perfecting the art of convincing the electorate that Republicans are racists. The strategy has been devastatingly effective, especially with people of color.
According to the Public Policy Institute of California, among California’s “likely voters,” slightly more Whites remain registered as Republicans, 39%, than Democrats, 38%. Among Latinos the registered Democrats, 62%, far outnumber Republicans, 17%, and among Blacks the disparity is even greater, 82% Democrat vs. 6% Republican. Among Asians, where the disparity is less, the Democrats still have a nearly two-to-one advantage, 45% to 24%.
All of this racial perseverating comes at tragic cost. Among the fifty states, California has the highest taxes, the highest state and local government debt, the most welfare recipients, the most people living in poverty, and the highest cost-of-living. The roads and bridges are crumbling, and the water and energy infrastructure hasn’t been significantly upgraded in 30 years. But purveyors of identity politics have a strategy that earns votes, so why engage in actual governance? It’s all about race, stupid. Hire more bureaucrats.
The worst consequence of choosing identity politics over actual governance is the slow but relentless destruction of California’s once great system of public education. There has been negligible improvement in educational achievement for members of California’s disadvantaged, despite decades of political control by public sector union funded Democrats who pander incessantly to the voter’s lowest common denominator of resentment, race. Rather than admit that failures of culture, community, and public education are the real reasons some ethnic groups underachieve, the Democrats that run Sacramento attribute every disparity in outcome among races to the pervasiveness of racism. Their solution? Quotas.
Here is an interesting comparison to prove that quotas are being used to discriminate against California’s “privileged” youth. All data is for 2017. The first column shows what percentage of students taking the SAT, by ethnicity, achieved a score at or above the minimum to be considered “college ready.” The second column shows the ethnic breakdown of college age students in California. Column three uses a factor calculated from columns one and two, for each ethnicity, the percent of college ready students is multiplied by that ethnicity’s percent of the total pool of college age Californians. Each factor is then divided by the sum of all four factors, to calculate a crude but significant indicator of what percentage of 2017 college admissions would be offered to students of each ethnicity, if admissions were based on merit as expressed by SAT scores. Column four shows the actual admissions to California’s UC System in 2017 by ethnicity.
California’s UC System – 2017 Admissions – Actual vs. SAT Based
There are a few obvious takeaways from the above chart. Most salient is the fact that white applicants, if SAT scores were the sole basis for admission, are clear victims of discrimination. After all, if based on their college readiness as assessed by their SAT performance combined with their percentage of the population, they should have earned 43% of the admissions to the UC System, why did they only represent 23% of the incoming freshmen in 2017? But there are other disparities that point to an even bigger problem.
Why, for example, do actual Asian admissions, 34%, exceed the merit based admissions percentage, 21%, as indicated based on their percentage of the college age population and the percentage of them achieving the SAT benchmark? Why, for that matter, are the actual Latino admissions, 33%, slightly less than the amount they would theoretically earn, 35%, based that same criteria? The answer in both cases is the same, and can be best summarized in this quote taken from a report released earlier this year by the Brookings Institution:
“Race gaps on the SATs are especially pronounced at the tails of the distribution. In a perfectly equal distribution, the racial breakdown of scores at every point in the distribution would mirror the composition of test-takers as whole i.e. 51 percent white, 21 percent Latino, 14 percent black, and 14 percent Asian. But in fact, among top scorers—those scoring between a 750 and 800—60 percent are Asian and 33 percent are white, compared to 5 percent Latino and 2 percent black. Meanwhile, among those scoring between 300 and 350, 37 percent are Latino, 35 percent are black, 21 percent are white, and 6 percent are Asian.”
What this means in plain English is that in the UC System, where supposedly only the most elite high school graduates are granted admission, you will find the distribution of the higher SAT scores by ethnicity skewed even more in favor of Asian and White students than you find when evaluating how many students merely achieve the “benchmark” SAT score. This is why Asian admissions, which are arguably the only UC admissions in 2017 that were based truly on merit, skew higher than you would otherwise expect. That is also the reason that Latino admissions skew somewhat lower. And it also indicates that White applicants are discriminated against even more than shown on the table.
Such is the landscape of California’s public system of higher education, considered among the best in the world.
To further investigate this evidence, I talked someone who spent over a decade serving on the Board of Regents at the University of California. They did not mince words. Here are a few of the things they had to say:
– SAT scores have become less important because the university has gone to “holistic admissions” instead of SAT based admissions – the SAT is also watered down with a subjective 3rd “essay” section. The subjectivity of the admissions criteria makes it harder to prove discrimination.
– For years now, the UC System has diversified the faculty by taking more professors to fill positions in African American and Latino studies and shielded itself from discrimination because they can say the person hired had strength in the discipline they needed to fill.
– Ethnic studies departments are academically weak and don’t provide graduates with anything they can use. Most ethnic studies departments are growing because people are being hired and enrolled in order to fulfill de facto diversity quotas both for faculty and students. The alternative would be to destroy the integrity of the hard sciences with unqualified faculty and students.
– After the passage of Prop. 209, the admission of Asians rose to about 35% because you could not suppress their achievement without admitting you’re breaking the law. Latino and Black admissions track at 29% and 6%, respectively, more consistent with their percentage within California’s population. To accommodate the Asian over-enrollment and the Black and Latino quotas, qualified White applicants are the victims – Whites represented less than 25% of admissions to the UC system last year.
– California’s legislature is controlled by the Latino Caucus, which makes sure that 25% Latino admissions are maintained. Whites don’t go out and protest and make noise because that is politically incorrect and the media doesn’t report the data anyway.
Readers are invited to challenge the accuracy of any of the above statements, made by an informed observer. And what is the result of all this mediocrity that hides behind diversity, this discrimination that hides behind achieving quota-driven equality of outcome? A fracturing of society into identity groups, each of them, whether via propaganda or via reality, encouraged to harbor resentment towards every other group.
If one were to identify which of California’s public sector unions is the most guilty of fomenting racial disharmony, it would certainly be the ones representing K-12 public school teachers and the ones representing college faculty. Their outlook, which is reflected in their policies, their curricula, and only somewhat camouflaged on their websites, is to blame the academic achievement gap on anything but their own poor performance as the most influential determinant of educational policy in California. Blame the rich. Blame capitalism. Blame Western Civilization. Blame “white privilege.” Blame racist Republicans. But don’t look in the mirror.
A rising trope among these neo-racialist purveyors of separatist identity politics is that white people should engage in “allyship,” which to them means for well behaved white people to do whatever they’re told by the high priests of the disadvantaged, no matter how disingenuous or ridiculous. But a true ally would provide tough, genuine love, and tell the truth. Which is if you want to achieve in America, the most inclusive and tolerant nation in the history of the world, you have to work hard, stay sober, stay out of jail, keep your families intact, be thrifty, and hit the books.
That truth would unify and enrich this nation. And a unified and prosperous nation would mean less government, less government employees, and weaker public employee unions. We can’t have that now, can we?
Race and voting in California: Public Policy Institute of California
Class of 2017 SAT Results, College Board
California Demographics by Age and Ethnicity – University of California
Percentage of 2017 UC Admissions by Ethnicity – EdSource
Race gaps in SAT scores highlight inequality and hinder upward mobility – Brookings Institution
Even With Affirmative Action, Blacks and Hispanics Are More Underrepresented at Top Colleges Than 35 Years Ago – New York Times
Are We All Unconscious Racists? – City Journal
Nobody argues that California’s roads need huge upgrades. But the solution didn’t require the $0.12 per gallon tax hike that goes into effect today. The root cause of these neglected roads – and the reason even more taxes will never be enough to fix them – is the power of public sector unions, whose agenda is consistently at odds with the public interest. Let us count the ways.
1 – CalTrans mismanagement:
CalTrans could have done a much better job of maintaining California’s roads. One of the most diligent critics (and auditors) of CalTrans is state Senator John Moorlach (R, Costa Mesa), the only CPA in California’s state legislature. Last year, Moorlach released a report on CalTrans which he summarized in “7-Step Fix for ‘Mismanaged’ Caltrans,” an article on his official website. Just a few highlights include the following:
- In May 2014 the Legislative Analyst Office determined that CalTrans was overstaffed by 3,500 architects and engineers, costing over $500 million per year.
- While to an average state transportation agency outsources over 50% of its work, CalTrans outsources only 10% of its work. Arizona and Florida outsource more than 80%.
- 54% of CalTrans staff is at or near retirement age, so a hiring freeze would reduce staff merely through attrition, without requiring layoffs.
But Moorlach didn’t make explicit the reason CalTrans is mismanaged. It’s because the unions that run Sacramento don’t want to outsource CalTrans work. The unions don’t want to reduce CalTrans headcount, or hold CalTrans management accountable. Those actions might help Californians, but they would undermine union power.
2 – Bullet train boondoggle:
Money that could have been allocated to maintain and improve California’s roads is being squandered on a train that will do nothing to ameliorate California’s transportation challenges. A LOT of money. According to the American Road and Transportation Builders Association, California’s freeways can be resurfaced and have a lane added in each direction at a cost of roughly $5.0 million per mile in rural areas, about twice that in urban areas.
Meanwhile, the latest estimate for California’s “bullet train,” is $98 billion (that’s $245 million per mile), thanks to construction delays, and design challenges including nearly 50 miles of tunnels through seismically active mountains to the north and south. And hardly anyone is going to ride it. Ridership won’t even pay operating costs. But Sacramento pushes ahead with this monstrous waste when that same money could (at the urban price of $10 million per mile) resurface and add a lane in each direction to 10,000 miles of California’s freeways. Imagine smooth, unclogged roads. It’s not impossible. It’s just policy priorities.
But while bad roads destroy the chassis of millions of cars and trucks, and commuters endure stop-and-go traffic year after year, the California High Speed Rail Authority dutifully pushes on. Why?
Because that’s what the government employee unions want. They don’t want roads, with all the flexibility and autonomy that roads offer. They want to create a gigantic high-speed rail empire, with tens of thousands of new public employees to drive the trains, maintain the trains, maintain the tracks, and provide security, running up staggering annual deficits. But all of them will be members of public sector unions.
3 – All rapid transit boondoggles:
In a handful of very dense urban areas around the U.S., fast intercity trains make economic sense. But most light rail schemes, along with laughably absurd “streetcar” schemes that actually block urban lanes sorely needed by vehicles, do not achieve levels of ridership that even begin to justify their construction when the alternative is using that money for better, wider connector roads and freeways. The impact of ride sharing apps, the advent of non-polluting cars, and the option of using buses to accomplish mass transit goals all speak to the superior versatility of roads over rail for urban transportation.
So why do California’s cities continue to poor billions into light rail and streetcars, when that money could be used to unclog the roads?
To reiterate: The public sector unions that run California want tens of thousands of new public employees to operate the trains and streetcars, maintain them, maintain the tracks, and provide security, running up staggering annual deficits. But doing this means that public sector union membership – hence public sector union power – will increase.
4 – CEQA reform so people can live closer to the jobs:
The median home value in the United States today is $202,700. The median home value in California today is $509,600, 2.5 times as much! There is no shortage of land in California, and the alleged shortages of energy and water are self-inflicted as the result of policies enacted by California’s state legislature. But instead of reforming California’s Environmental Quality Act, SB 375, AB 32, and countless other laws that have made building homes in California nearly impossible, California’s legislature is doubling down on more government solutions – primarily to subsidize either extremely high density housing, or subsidized housing for the economically disadvantaged, or both.
None of this is necessary. Outside of California’s major urban centers, there is no reason homes cannot be profitably built and sold at a median price of $202,700, and there is no reason the people living in those homes cannot drive or ride share to work on fast, unclogged freeways.
But California’s public sector unions want more regulations on home building, and they want more subsidized public housing. Because those solutions, even though inadequate and coercive, enable them to hire vast new bureaucracies to enforce the many regulations and administer the public assets. Unleashing the private sector to build affordable homes in a competitive market would rob these unions of their opportunity to acquire more power. It’s that simple.
5 – Insatiable appetite for pension fund contributions:
According to a California Policy Center study, taking barely adequate annual employer pension contributions into account, the average unionized state/local government worker in California makes over $120,000 per year in pay and benefits. But to adequately fund their promised pension benefits, employers will need to pay at least another $20,000 per employee to the pension funds. This funding gap, which equates to over $20 billion per year, is the additional amount that is required to cover the difference between how much California’s public employee pension funds currently collect from taxpayers, and how much they need to collect to keep the promises that union controlled politicians have made to the government unions they “negotiate” with. That is a best-case scenario.
It could be much worse. A 2016 California Policy Center analysis (ref. table 2-C) estimated that under a worst-case scenario, the annual costs to fund California’s public employee pension funds could cost taxpayers nearly $70 billion more per year than they are currently paying.
And by the way, California’s pension funds are themselves almost entirely under the control of public sector unions – research the background of CalPERS and CalSTRS board directors to verify the degree of influence they have. Absent significant reform, funding California’s public employee pensions is going to continue to consume every dollar in new taxes for the next several decades. The cumulative financial impact of funding these pensions is easily triple that of the bullet train’s $100 billion fiasco, probably much more.
Let’s be perfectly clear. Government unions control California. They collect and spend over $1.0 billion every year, and spend most of that money on either explicit political campaigning and lobbying, or soft advocacy via expensive public relations campaigns and sponsored academic studies. Their presence is felt everywhere, from local transit districts to the governor’s office. They make or break politicians at will, by outspending or outlasting their opponents. At best, California’s most powerful corporate players do not cross these unions, often they collude with them.
California’s public sector unions operate as senior partners in a coalition that includes left-wing oligarchs especially in the Silicon Valley, extreme environmentalists and their powerful trial lawyer cohorts, and the Latino Legislative Caucus – usurped by leftist radicals – and their many allies in the social justice/identity politics industry. The power of this government union led coalition is nearly absolute, and the consequences to California’s private sector working class have been nothing short of devastating.
Government unions force California’s agencies to over-hire, overpay, and mismanage, because that benefits their members even as it harms the public. These unions enforce absurd policy priorities that further harm the public in order to increase their power. They are the reason California has increased its gas tax.
Pump bump: California drivers to pay 12 cents more per gallon starting Wednesday – San Jose Mercury, Oct. 31, 2017
California’s gas tax increases Wednesday – Los Angeles Times, October 31, 2017
How much you’ll REALLY pay in gasoline tax in California – San Diego Union Tribune, Apr. 23, 2017
What Californians Could Build Using the $64 Billion Bullet Train Budget – California Policy Center, Mar. 21, 2017
American Road and Transportation Builders Association – FAQs, ref. “How much does it cost to build a mile of road?
High-Speed Rail Delay More than Triples Planned Cost to San Jose – San Jose Inside, Oct. 2, 2017
A 13.5-mile tunnel will make or break California’s bullet train – Los Angeles Times, Oct. 21, 2017
California Environmental Quality Act – Wikipedia
State Senate bills aim to make homes more affordable, but they won’t spur nearly enough construction – Los Angeles Times, Aug. 11, 2017
California’s Public Sector Compensation Trends – California Policy Center, Jan. 2017
What is the Average Pension for a Retired Government Worker in California? – California Policy Center, Mar. 2017
The Coming Public Pension Apocalypse, and What to Do About It – California Policy Center, May 2016
“A public employer shall provide all public employees an orientation and shall permit the exclusive representative, if applicable, to participate.”
– Excerpt from California State Assembly Bill AB 52, December 2016
In plain English, AB 52 requires every local government agency in California to bring union representatives into contact with every new hire, to “allow workers the opportunity to hear from their union about their contractual rights and benefits.” What’s this all about?
As explained by Adam Ashton, writing for the Sacramento Bee, “New California government workers will hear from union representatives almost as soon as they start their jobs under a state budget provision bolstering labor groups as they prepare for court decisions that may cut into their membership and revenue.”
Ashton is referring to the case set to be heard by the U.S. Supreme Court early next year, Janus v. American Federation of State, County, and Municipal Employees. A ruling is expected by mid-year. It is possible, if not likely, that the ruling will change the rules governing public sector union membership. In pro-union states like California, public sector workers are required to pay “agency fees,” which constitute the vast majority of union revenue, even if they laboriously opt-out of paying that portion of union dues that are used explicitly for political campaigning and lobbying.
Needless to say, this law is designed to allow union representatives to get to newly hired public employees as soon as they walk in the door, in order to convince them to join the union and pay those dues. But can anyone argue against union membership?
The short answer is no. To deter such shenanigans, SB 285, thoughtfully introduced by Senator Atkins (D-San Diego), adds the following section to the Government Code: “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” Governor Brown signed this legislation on October 9th. So much for equal time.
So what can local elected officials do, those among them who actually want to do their part to attenuate the torrent of taxpayer funded dues pouring into the coffers of public employee unions in California? Can they provide the contact information for public employees to outside groups who may be able to provide equal time?
Once again, the answer is no. To deter access even to the agency emails of public employees, a new law bans public agencies from releasing the personal email addresses of government workers, creating a new exemption in the California Public Records Act. Those email addresses could be used by union reformers to provide the facts to public employees. How this all became law provides another example of just how powerful public sector unions are in Sacramento.
In order to quickly get the primary provision of AB 52 enacted, which allows union representatives into new public employee orientations, along with a provision to deny public access to public employee emails, both were added at the last minute to the California Legislature’s 2017-2018 budget trailer bill, AB 119. The union access to new employee orientations is Article 1. The denial of email access is Article 2.
So how are the unions preparing for the Janus ruling? By (1) making sure the union operatives get to new employees as soon as they begin working, (2) by preventing agency employers from saying anything to deter new employees from joining the unions, and (3) by preventing anyone else from getting the official agency emails for new employees in order to inform them of their rights to not join a union. That’s a lot.
So what can you do, if union reformers control a majority on your agency board or city council, and you in a position to try to oppose these unions?
First, examine the legal opinions surrounding the wording of SB 285, “A public employer shall not deter or discourage public employees from becoming or remaining members of an employee organization.” The words “deter” and “discourage” do not in any way preclude providing facts. Consider this preliminary opinion posted on the website of the union-controlled Public Employee Relations Board:
“One major concern I have is that the terms “deter” and “discourage” are not defined. What if an employee comes to an employer with questions about what it means to be a member of the union, and the employer provides truthful responses. For example, assume that the employer confirms that being a member will mean paying dues. What if that has the effect of deterring or discouraging the employee from joining the union?”
It is possible for employers to present facts regarding union membership without violating the new law. Find out what disclosures remain permissible, and make sure new employees get the information.
Another step that can be taken, although probably not by local elected officials, is to challenge the new law that exempts public agency emails from public information act requests. And apart from accessing their work emails, there are other ways that outside groups can communicate with public employees to make sure they are aware of their rights.
California’s public employee unions collect and spend over $1.0 billion per year. If the Janus vs AFSCME ruling takes away the ability of government unions to compel payment of agency fees, and imposes annual opt-in requirements for both agency fees and political dues, these unions will collect less money. How much less will depend on courage and innovative thinking on the part of reformers who want to rescue California from unionized government.
Get a state job and meet your labor rep: How state budget protects California unions, Sacramento Bee, June 21, 2017
AB 52, Public employees: orientation and informational programs: exclusive representatives, California Legislature
Janus v. American Federation of State, County, and Municipal Employees, Supreme Court of the United States Blog
SB 285, Atkins. Public employers: union organizing, California Legislature
2017-2018 budget trailer bill, AB 119, California Legislature
California Public Records Act, Office of the Attorney General
Fact Sheet – AB 52 (Cooper) & SB 285 (Atkins), California Labor Federation
Legislative Bulletin – California School Employees Association
SB 285: Public Employers Cannot Discourage Union Membership, Public Employee Relations Board
Public employee unions wield hefty Atkins stick [SB 285], San Diego Reader
How would you like it if every time you received a property tax bill from your county assessor, you also received a notice that disclosed the amount of the county’s total debt, annual operating expenses, total unfunded liability for pensions, and total unfunded liability for retirement healthcare?
You might not like it, but you’d have a better understanding of what all those property taxes are paying for. And in Marin County, back in 2013, after years of effort by a local group of activists – Citizens for Sustainable Pension Plans – that’s exactly what happened.
Take a look at the copy of this “2016-2017 Property Tax Information” courtesy of Marin County, sent to one of their property owning taxpayers. Towards the bottom of the page, in the section entitled “MARIN COUNTY DEBT AND FINANCIAL DATA,” even the casual observer can quickly see that (as of 6/30/2015, the numbers are over a year behind) Marin County recognizes $549 million of debt on their balance sheet. The not so casual observer might have additional questions…
* * *
QUESTIONS RAISED BY “MARIN COUNTY DEBT AND FINANCIAL DATA”
For example, why does the total “Retiree Related Debt” of $746 million exceed the “Total Liabilities per Balance Sheet” of $549 million? While the 6/30/2015 Consolidated Annual Financial Report (CAFR) for Marin County does report total liabilities of $549 million on page 9, “Condensed Statement of Net Position,” there is no schedule anywhere in the remaining document that provides the details behind that number, making reconciliation impossible. A simple keyword search on the number “549” proves this.
Elsewhere in Marin County’s 6/30/2015 CAFR, on page 61 “Note 8: Long Term Obligations,” the balance payable on pension obligation bonds is disclosed at $103 million, which matches the amount disclosed on the property tax information. Since on this same chart in Marin County’s 6/30/2015 CAFR the “Total Long Term Obligations” are reported to be $286 million, it is reasonable to assume that Marin County’s non-retirement related debt is the difference, i.e., $176 million.
So what does this all mean to the non-casual observer?
It means that Marin County’s total long-term debt as of 6/30/2015 was $922 million, and $746 million of that was for earned but currently unfunded retirement obligations to county workers. That is, 81 percent – eighty-one percent – of Marin County’s long-term debt is to fulfill promises the supervisors made to provide pensions and healthcare to their retirees, but have not paid for. At 7%, just the annual interest on this $746 million is $52 million per year. Imagine what Marin County could do with an extra $52 million per year.
There’s more. The non-casual observer will note that just the interest on Marin County’s unfunded retirement obligations, $52 million per year, equates to 11.2% of their entire reporting operating expenses in the 2014-2015 fiscal year, $464 million. But Marin County doesn’t just have to pay interest on their unfunded retirement obligations, they have to pay them off.
In the private sector, compliant with reforms for which, inexplicably, public sector agencies are exempt, pension systems have to amortize (pay off) their unfunded liabilities within seven years. At that rate, at 7%, the payment on Marin County’s unfunded retirement liabilities would be $138 million per year. That would be the financially responsible thing to do.
Wait! There’s much more. After all, Marin County doesn’t have to just pay off their unfunded retirement obligations, they have to make ongoing payments, as a percent of payroll, for the future pension benefits their active employees earn every year they’re working. How much is that?
Learning how much Marin County spends on payroll is tough, even though it should not be. Their CAFR discloses costs per department, in some cases, but finding a simple “Total Costs for Employees” appears to be impossible.
Rather than wade through Marin County’s entire 224 page CAFR for FYE 6/30/2015, payroll information can be found on Transparent California. Going to their Marin County page and downloading the Excel spreadsheet readily reveals that in 2016 they spent $275 million on pay and benefits, roughly 60% of their total expenditures. Payments for benefits – mostly retirement but also for current healthcare – totaled $71 million of that. Needless to say, that $71 million is not nearly enough to pay for (1) current healthcare insurance plus (2) currently earned pension and (3) retirement healthcare benefits, along with (4) any sort of aggressive paydown of the debt for retirement benefits earned in prior years, but not funded at the time. Even if you add in the amount employees themselves contribute via withholding (Information on that? Somewhere. Good luck finding it).
If you’ve made it this far, braving this mind numbing arcana that obfuscates one of the greatest betrayals of the people by their government in American history, let’s break this down just a bit further.
Even on a 30 year repayment schedule, at 7%, Marin County’s unfunded retirement debt of $746 million would require an annual payment of $60 million. Coming out of $71 million, that leaves $11 million to work with (plus whatever employees contribute via withholding), to pay (1) current healthcare insurance AND (2) whatever new retirement healthcare benefits were earned in that year, AND (3) whatever new pension benefits were earned in that year. This amount paid to fund pension benefits earned in the current year, called the “normal contribution,” is usually expressed as a percent of payroll. According to Transparent California, Marin County’s base payroll in 2016 was $186 million. That means that if they were making just the bare minimum payments on their unfunded retirement liabilities, their total payments for currently earned benefits – normal pension contribution plus normal OPEB contribution, plus current year healthcare, plus whatever other benefits they offer – only amounted to 6% of payroll. Only six percent! There is no way that difference was made up via employee contributions.
Based on these numbers, it appears impossible that Marin County is adequately funding retirement benefits for their employees. Not even close. And it should be easy to coax these numbers from the reports available, and it should be easy for anyone with a reasonable amount of financial literacy to find these numbers and come to the same conclusion. It is not.
(1) Make a “Debt and Financial Data” disclosure mandatory on all property tax bills, in all California counties.
(2) Have this data include the following twelve numbers, with the expense subtotals showing the percentage of total expenses, and the debt balance subtotals showing the percentage of total debt:
- Total county expenditures,
- Total county expenses for payroll and benefits,
- Amount paid towards retirement healthcare (OPEB) earned in current year,
- Amount paid towards unfunded retirement healthcare (earned in previous years),
- Amount paid towards retirement pensions earned in current year,
- Amount paid towards unfunded retirement pensions (earned in previous years),
- Amount paid on pension obligation bonds,
- Amount paid for all other debt,
- Total debt,
- Total debt for healthcare,
- Total debt for pensions (unfunded pension liability),
- Total debt for pension obligation bonds.
(3) Include on county CAFRs for the same year a section that contains all of the above information, with a through reconciliation to the official financial statements and schedules, so even the casual observer can verify the accuracy (or at least the consistency) of all numbers reported on the property tax schedule.
Marin County Board of Supervisors, 7/30/2013 Minutes (ref. item 3, page 1)
Marin County Board of Supervisors, Meeting Archives
Marin County Citizens for Sustainable Pension Plans
Marin County 2015-2016 Consolidated Annual Financial Report
Marin County Archive of Consolidated Annual Financial Reports
Transparent California, 2016 salary and benefit payments for Marin County