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 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.
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
Back in 2013 the City of Irvine had an unfunded pension liability of $91 million and cash reserves of $61 million. The unfunded pension liability was being paid off over 30 years with interest charged on the unpaid balance at a rate of 7.5% per year. Irvine’s cash reserves were conservatively invested and earned interest at an annual rate of around 1%. With that much money in reserve, earning almost no interest, the city council decided use some of that money to pay off their unfunded pension liability.
As reported in Governing magazine, starting in 2013, Irvine increased the amount they would pay CalPERS each year by $5M over the required payment, which at the time was about $7.7M. With 100% of that $5M reducing the principal amount owed on their unfunded liability, they expected to have the unfunded liability reduced to nearly zero within ten years, instead of taking thirty years. Here’s a simplified schedule showing how that would have played out:
CITY OF IRVINE, 2013 – PAY $5.0 MILLION EXTRA PER YEAR
ELIMINATING UNFUNDED PENSION LIABILITY IN TEN YEARS
This plan wasn’t without risk. Taking $5 million out of their reserve fund for ten years would have depleted those reserves by $50 million, leaving only $11 million. But Irvine’s city managers bet on the assumption that incoming revenues over the coming years would include enough surpluses to replenish the fund. In the meantime, after ten years they would no longer have to make any payments on their unfunded pension liability, since it would be virtually eliminated. Referring to the above chart, the total payments over ten years are $127 million, meaning that over ten years, in addition to paying off the $91 million principal, they would pay $36 million in interest. If the City of Irvine had made only their required $7.7 million annual payments for the next thirty years, they would have ended paying up an astonishing $140 million in interest! By doing this, Irvine was going to save over $100 million.
Four years have passed since Irvine took this step. How has it turned out so far?
Not so good.
Irvine was doing everything right. But despite pumping $5M extra per year into CalPERS to pay down the unfunded liability which back in 2013 was $91M (and would have been down to around $64M by the end of 2016 if nothing else had changed), the unfunded liability as of 12/31/2016 is – that’s right – $156 million.
Welcome to pension finance.
The first thing to recognize is that an unfunded pension liability is a fluid balance. Each year the actuarial projections are renewed, taking into account actual mortality and retirement statistics for the participants as well as updated projections regarding future retirements and mortality. Each year as well the financial status of the pension fund is updated, taking into account how well the invested assets in the fund performed, and taking into account any changes to the future earnings expectations.
For example, CalPERS since 2013 has begun phasing in a new, lower rate of return. They are lowering the long-term annual rate of return they project for their invested assets from 7.5% to 7.0%, and may lower it further in the coming years. Whenever a pension system’s rate of return projection is lowered, at least three things happen:
(1) The unfunded liability goes up, because the amount of money in the fund is no longer expected to earn as much as it had previously been expected to earn,
(2) The payments on the unfunded liability – if the amount of that liability were to stay the same – actually go down, since the opportunity cost of not having that money in the fund is not as great if the amount it can earn is assumed to be lower than previously, and,
(3) the so-called “normal contribution,” which is the payment that is still necessary each year even when a fund is 100% funded and has no unfunded liability, goes up, because that money is being invested at lower assumed rates of return than previously.
That third major variable, the “normal contribution,” is the problem.
Because as actuarial projections are renewed – revealing that people are living longer, and as investment returns fail to meet expectations – the “normal contribution” is supposed to increase. For a pension system to remain 100% funded, or just to allow an underfunded system not to get more underfunded, you have to put in enough money each year to eventually pay for the additional pension benefits that active workers earned in that year. That is what’s called the “normal contribution.”
By now, nearly everyone’s eyes glaze over, which is really too bad, because here’s where it gets interesting.
The reason the normal contribution has been kept artificially low is because the normal contribution is the only payment to CalPERS that public employees have to help fund themselves via payroll withholding. The taxpayers are responsible for 100% of the “unfunded contribution.” CalPERS has a conflict of interest here, because their board of directors is heavily influenced, if not completely controlled, by public employee unions. They want to make sure their members pay as little as possible for these pensions, so they have scant incentive to increase these normal contributions.
When the normal contribution is too low – and it has remained ridiculously low, in Irvine and everywhere else – the unfunded liability goes up. Way up. And the taxpayer pays for all of it.
Returning to Irvine, where the city council has recently decided to increase their extra payment on their unfunded pension liability from $5 million to $7 million per year, depicted on the chart below is their new ten year outlook. As can be seen (col. 4), just the 2017 interest charge on this new $156 million unfunded pension liability is nearly $12 million. And by paying $7 million extra, that is, by paying $20.2 million per year, ten years from now they will still be carrying over $35 million in unfunded pension debt.
CITY OF IRVINE, 2017 – PAY $7.0 MILLION EXTRA PER YEAR
REDUCTION OF UNFUNDED PENSION LIABILITY IN TEN YEARS
This debacle isn’t restricted to Irvine. It’s everywhere. It’s happening in every agency that participates in CalPERS, and it’s happening in nearly every other public employee pension system in California. The normal cost of funding pensions, which employees have to help pay for, is understated so these employees do not actually have to pay a fair portion of the true cost of these pensions. If this isn’t fraud, I don’t know what is.
It gets worse. Think about what happened between 2013 and 2017 in the stock market. The Wall Street recovery was in full swing by 2013 and by 2016 was entering so-called bubble territory. As the chart below shows, on 1/01/2013 the value of the Dow Jones stock index was 13,190. Four years later, on 12/31/2017, the value of the Dow Jones stock index was up 51%, to 19,963.
Yet over those same four years, while the Dow climbed by 51%, the City of Irvine’s unfunded pension liability grew by 71%. And this happened even though the City of Irvine paid $12.7 million each year against that unfunded liability instead of the CalPERS’s specified $7.7 million per year. Does that scare you? It should. Sooner or later the market will correct.
DOW JONES INDUSTRIAL AVERAGE
PERFORMANCE FOR THE PAST FIVE YEARS, 2013-2017
While the stock market roared, and while Irvine massively overpaid on their unfunded liability, that unfunded liability still managed to increase by 51%. Perhaps that normal contribution was a bit lower than it should have been?
Irvine did the right thing back in 2013. CalPERS let them down. Because CalPERS was, and is, understating the normal contribution in order to shield public sector workers from the true cost of their pensions. The taxpayer is the victim, as always when we let labor unions control our governments and the agencies that serve them.
CalPensions Article discussing CalPERS recent polices regarding pension debt repayments:
Irvine 2017-18 Budget – discussion of faster paydown plan on UAAL
Irvine Consolidated Annual Financial Report FYE 6/30/2016
Irvine – links to all Consolidated Annual Financial Reports
CalPERS search page to find all participating agency Actuarial Valuation Reports
CalPERS Actuarial Valuation Report – Irvine, Miscellaneous
CalPERS Actuarial Valuation Report – Irvine, Safety
Governing Magazine report on Irvine