Government Unions Attack Free-Market Nonprofits via Pension Funds

“The AFT [American Federation of Teachers] will be looking more closely at those who are supporting the dismantling of defined benefit plans at the state and municipal level.”
–  Ranking Asset Managers, A Retirement Security Report on Money Managers for Pension Fund Trustees, March 5, 2014

As reported in a Washington Examiner editorial on April 4th, the American Federation of Teachers – that’s “teachers union” in plain English – has circulated a pamphlet that:

“Calls on pension fund trustees to drop any investment managers that are tainted by connection to free-market nonprofits. They also want those same trustees to force any potential new managers to have to disclose any donations they may have made to the groups on AFT’s blacklist.”

That the AFT can circulate a document like this without generating an uproar in the media reflects a monstrous and tragic double-standard. Money supporting “free-market non-profits” is tainted, which – not entirely logically – also taints any analysis they may produce, or policies they may advocate. But the money supporting public sector unions, involuntarily and automatically taken from their paychecks, ultimately funded by taxpayers, is pristine. Whatever analysis or policies they come up with, including “blacklists,” are beyond criticism.

What the AFT just did may be more explicit than usual, but it’s nothing new. In states like California, politically dominated by public sector unions, almost no businessperson or financial professional is going to identify themselves as supporting a free-market candidate or free-market nonprofit that dares criticize public sector unions or question the sustainability of public sector pensions. They risk retaliatory legislation, official harassment, strikes or “slowdowns,” character assassination, sit-ins and other orchestrated protests, shareholder revolts and boycotts. And if they represent a sufficient threat, their partners, customers, investors and vendors will get similar treatment.

In the financial community, as AFT’s document verifies, union critics stand to lose their biggest customers – the government agencies who come to them to underwrite bonds, and the pension funds whose investments fuel their fees and commissions. Just in California, billions are at stake every year.

Since the American Federation of Teachers fired this latest salvo against the free market, here are a few facts about CalSTRS, the California State Teachers Retirement System:

Three of the nine current CalSTRS board members are union officials:  The Chairperson of CalSTRS, Dana Dillon, “has been active in the California Teachers Association for more than 26 years… and was recently elected to the board of directors.” Their Vice Chair, Harry M. Keiley, is “chair of the California Teachers Association Political Involvement Committee.” Another board director, Sharon Hendricks, “also serves as president of the American Federation of Teachers, local 1521 chapter at Los Angeles City College.”

Most of the remaining six active CalSTRS board members are beholden to unions:  Tom Torlakson serves while also serving as California’s Superintendent of Public Instruction, an office he was elected to with substantial support from public sector unions. Two more board members come from the financial community; Paul Rosenstiel from a municipal bond investment bank, Thomas Unterman from a venture capital firm. Three other members come from government, Michael Cohen from the California Dept. of Finance, John Chiang, the State Controller, and Bill Lockyer, the State Treasurer.

Would it be more than reckless speculation to say the unions have four votes locked, and only need one of the other five in any given decision they make? And who is going to support Lockyer or Chiang if they run for another political office if they cross the unions? The financial community? Unlikely, given the pressure they’re under from the unions.

At this point the reader may be reminded that without reform, without tough, responsible decisions, public sector pension funds are going to crash, and when they do they’re going to take down with them entire cities and states, if not the global economy. The obliteration of defined benefits will be a mere footnote.

CalSTRS pays hundreds of millions each year to financial professionals:  Take a look at page 83 of CalSTRS Annual Report for the fiscal year ended June 30, 2013, under the bland heading of “Other Supplemental Information.” Here’s what’s on the table for the financial community, every year, from a fund that only represents about 30% of the public sector pension fund assets under management in California:  Administrative expenses, $139 million (page 84). Investment expenses including management fees, advisors, consultants, research services, risk management systems, trading systems, etc., $310 million (pages 85-88). Don’t forget “Global Equity Broker Commissions” whose payees include the infamous Goldman Sachs, $25 million (page 104).

CalSTRS invests in companies and financial instruments they supposedly detest:  Skip along in the CalSTRS Annual Report to page 101 and take a look at their “largest equity holdings.” They include Exxon Mobil Corp at the #1 position, and Chevron Crop at #5.  Go back to page 45 to see where CalSTRS has $22 billion in “Private Equity Investments.” How many Wall Street wolves fatten themselves on that rather substantial hunk of fresh meat?

What more does it take to make clear there is a phony war going on between public sector unions and the financial community? This isn’t an ideological battle, it’s an intramural struggle for dominance between two groups who are both elitist and privileged, who need each other far more than they need taxpayers.

“Dark money,” or money that doesn’t pass the “smell test,” seems to be a favored meme of public sector unions these days. Especially if that money is used to fund challenges to their interests, hence, a new “blacklist.” But why does public sector union money, sourced involuntarily, falling into their accounts automatically by the millions and billions, emanating directly from taxpayers, used to intimidate opponents, fund political campaigns and academic studies, organize activist groups, and feed Wall Street financiers, get a pass?

*   *   *

Ed Ring is the executive director of the California Policy Center

Editor’s Note:  Since this was posted on April 8th, the list of CalSTRS board members, as posted on their website, has been updated to include Joy Higa, appointed by Gov. Brown on January 27, 2014. Here is her biography:

“Joy Higa is the vice president, regulatory affairs, for UnitedHealthcare, where she manages federal health reform policy and implementation. She previously served as deputy chief of staff to the State Controller from 2004 to 2006 and chief deputy cabinet secretary in the Office of the Governor during 2003. She received her bachelor of arts degree from Cornell University.”

16 replies
  1. Avatar
    Tough Love says:

    Nice article.

    Ok, so how, given the political and Union-extortionist/threatening obstacles, fix it …. which I suppose means, to WAKE UP the sleepy apathetic taxpayers who are the one being screwed (with WAY more “screwing” on the horizon if something isn’t done quickly) by this structure ?

  2. Avatar
    reality check says:

    The article, while having some merit and truths in it, is so bias that it can’t be taken seriously by the majority.

    And I know this statement will get flamed on this web site, but it does not change what I said from being true.

    All these so called pension reformers love to attack the $100k+ club, but never mention that most retirees get less then $50k a year in retirement. Which is not enough to live on in California and a lot of us don’t get S/S yet have paid something into it.

    When you quit paying your public employees enough to live, don’t complain about the corruption that is sure to follow like many countries in the world.

  3. Avatar
    Tough Love says:

    Reality Check, The following isn’t “flaming”, it’s simply the truth.

    It’s not only the large Public Sector pensions that cause the financial distress, it’s ALL of them because of the MUCH richer Public (vs Private) Sector pension “formulas” and “provisions” (e.g., COLAs and very young full-unreduced retirement ages).

    Given 2 equally situated workers (one Public Sector and one Private Sector) with the SAME pay, the SAME years of service, and the SAME age at retirement, the pension granted the Public Sector worker will ALWAYS be AT LEAST 2X greater in value at retirement than that granted the Private Sector worker, MOST OFTEN 3X-4X greater, and for safety workers OFTEN 4X-6X greater.

    Given that Taxpayers fund all but the 10-20% of total pension costs typically paid for by Public Sector worker contributions (INCLUDING all of the investment earnings thereon), there is simply ZERO justification for such Grossly excessive pension promises.

    I put together a demonstration of this problem for California Safety workers …. but looking at it from the other direction … not how much greater their pensions are, but how large the Private Sector worker’s pay would need to be to get a pension as large as they get. It follows below. It you think it’s not accurate, please state why, and we can debate it
    In California the typical recent Pubic Safety retiree’s pension starts at just about $100,000 and is COLA adjusted thereafter. By looking at a table of life annuity factors, such a single life immediate annuity has a value or cost upon retirement of just about $1.8 Million (18 times the annual pension). One way to judge if that is reasonable (or “appropriate and fair”) is to answer the question … What would be the necessary INCOME LEVEL (or Final Average Salary … FAS) of a Private Sector worker with the TYPICAL Private Sector DB pension (for the few Private Sector workers lucky enough to still be covered by such a pensions) to obtain a pension from his/her employer with the SAME $1.8 Million “value” upon retirement ?

    Assume the CA safety worker has the typical 3% of final average pay per-year-of-service pension factor, had a final average salary of $111,111, 30 years of service and retired at age 55… resulting in the starting pension of $111,111 x .03 x 30 = $100,000. Next, let’s assume the Private Sector worker’s DB pension formula is 1.25% per year of service (a quite typical formula), is NOT COLA adjusted (routine in PRIVATE Sector Plans), and has a full unreduced retirement age of 62 (with a 4% reduction in pension payout for each year of age that you retire begin collecting your pension before age 62).

    For a given Final Average Salary (FAS), this Private Sector worker’s annual pension (P) is given by the formula P = (FAS x 30 x .0125)x (1-((62-55)x.04)), with the latter part of that formula being the adjustment for early retirement at age 55. Shortening that formula, we have P = (FAS x 30 x .0125) x 0.72.

    From above, we saw that the Safety worker’s pension (being COLA-increased) has a lump sum “value” of 18 times the annual STARTING pension. With no COLA increases, the lump sum “value” is only 13 times the annual pension. Therefore the Lump Sum “value” of the Private Sector worker’s pension is given by 13 x P, and since we are SETTING that value equal to the $1.8 Million value of the safety worker’s pension we have $1,800,000 = 13 x P, and solving for P, we have P= $1,800,000/13 = $138,462. This Private Sector non-COLA-increased annual pension of $138,462 can be looked at as being mathematically equivalent to an otherwise identical pension starting at $100,000 that includes 3% annual COLA increases (i.e., the Safety worker’s pension).

    Now since we know the annual Private Sector worker’s annual pension “P”, we can plug it into my above formula of P = (FAS x 30 x .0125) x 0.72 to solve for FAS. Doing so we have, $138,462 = (FAS x 30 x .0125) x 0.72, from which

    FAS = $138,462/(30 x 0.0125 x 0.72) = $512,822

    What this shows is that a Private Sector worker (with a TYPICAL DB pension formula and provisions) would need to have a final average salary of $512,812 to generate a pension from his/her employer with the SAME $1.8 Million “value” as the TYPICAL Safety worker pension …. or $512,822/$111,111 = 4.62 times the Safety worker’s salary.

    And for the skeptics that say …. this can’t be correct …. we can just reverse the order of calculations and SHOW that this $512,822 PRIVATE Sector salary is indeed necessary to generate a pension with a “value” equal to that (the $1.8 Million) of the Public Sector Safety worker … as follows:

    (a) Private Sector worker’s Annual (non-COLA-increased) pension = $512,822 x 30 x 0.0125 x .72 = $138,462
    (b) Lump sum value (using the 13 times life annuity factor applicable to non-COLA-increased pensions) = $138.462 x 13 = $1.8 Million

    While most reasonable people would suggest that (give the nature of the occupations) Safety workers should receive pensions equivalent to Private Sector workers with salaries say 10% or 25% or 50% greater than they, I find it incredulous to believe that ANYONE would feel it appropriate to provide the TYPICAL CA Safety worker retiree with a pension equivalent to that of the Private Sector worker making over $500,000 annually. Taxpayers (who pay for all but the 10-20% of Total Coat Public Sector pensions typically paid for by the worker’s own contributions and the investment earnings thereon) simply cannot afford anything even remotely close to this level of generosity.

  4. Avatar
    Tough Love says:

    And to preemptively address the anticipated comeback ………… the 4.62 times greater CA safety pension is NOT a function of the Officer’s final pay. It would remain 4.62% even if the officer’s final pay (and hence starting pension) were 10%, 20% or even 50% lower.

    The 4.62 time greater CA Safety worker pension results from the MUCH richer Formula and MUCH more generous “provisions” as follows:

    (1) Benefit from the richer “formula” of 3% vs 1.25% = 3.00/1.25= 2.40 greater
    (2) Benefit from only the CA safety worker getting COLA increases = 18/13 = 1.3846
    (3) Benefit from no CA Safety worker pension reduction for full (unreduced) retirement at age 55 = 1.00/0.72 = 1.3889

    The above beneficial ratios are multiplicative, giving the overall advantage of 2.40 x 1.3846 x 1.3889 = 4.62 times.


    The ROOT CAUSE of CA’s pension woos are grossly excessive generosity and there are NO SOLUTIONS to CA’s financial problems that do not MATERIALLY reduces (by 50+%, and more for safety workers) future service pensions for all CURRENT workers.

  5. Avatar
    Equal Time says:

    If one drills down to delve into the causes of financial stress in places like New Jersey, Detroit, San Bernardino, Stockton, Chicago, etc. you will find that the primary causes are political corruption and bad management by elected officials, including failure of some (like Chicago and New Jersey) to make the necessary annual payments into their retirement funds for years. In all cases I have looked at the pension fund liability that exists is a symptom of this deeper malfeasance. The most recent example is NJ Governor Christie proposing a new budget that fails to make financially necessary pension fund payments, in essence borrowing from the future again by further growing the unfunded pension liability.

  6. Avatar
    Tough Love says:

    So, you are saying that “funding” is the issue …. the ROOT CAUSE not being granting Public Sector workers pension that are ALWAYS multiples greater in value at retirement than those granted similarly situated (in pay, service years, and retirement age) Private Sector counterparts ?

    Really …. in what universe ?

  7. Avatar
    reality check says:

    Tough Love, I feely admit I am a public employee.
    Do you work for this web site or one of these “groups” that sponsor these websites?

    Just a straight question, yes or no???(C’mon, You can be honest)

    btw, 63% of each pers dollar is investment earnings, 22% from employer/taxpayer, 14% from employee/who is also a taxpayer.

  8. Avatar
    Tough Love says:

    Reality check, No I do not, nor do I get paid in ANY WAY (directly or indirectly) for anything I post.

    Isn’t he better question to try to point out anything that I say that is wrong, if you believe so? I willing to discuss anything that I post.

    I am simply trained and well versed in pension design and funding and knew years ago that these extraordinarily generous pension promises would rear their heads in an ugly way, just not when. From a 1975 letter to the head of the Washington Post (in an Appendix to Berkshire Hathaway’s 2013 annual Shareholder letter from Warren Buffet), Mr. Buffet realized and discussed this problem way back in 1975 and that was way BEFORE the massive ramp-up in benefit levels.

    As to CalPERS funding, there are only 2 original sources of contributions … the workers and the Taxpayers. Investment income derives FROM those contributions and is proportionally associated with the original sources.

    It is a rather simply mathematical exercise (via spreadsheet) to “demonstrate” that the sum of all employEE contributions, each contribution increased with investment earnings to the date of retirement will rarely accumulate to a sum sufficient to buy more than 10-20% of the employee’s generous pension. To say that the 80-90% balance comes from any source other than the Taxpayers is simply bogus….. and all but the rare financial economist beholden to the Public Sector union agrees with me.

    And as to Public Sector workers being “Taxpayers”, of course they are, but have you even though about why ONLY Public Sector workers and those who pay very little or no taxes SUPPORT (and often rally for)tax INCREASES ?

    Well the latter group do so becuase they like the higher level of services associated with higher taxes and they don’t pay for them. But for Public Sector workers, it’s more devious. They know that for every $1 in incremental taxes THEY pay, they will get back about $5 (from ALL Taxpayers … 80-85% of whom are PRIVATE Sector workers) in the form of financial support for their over sized pensions and benefits.

    Sorry, while I do not “benefit” from my comments, I will continue to try to educate those Taxpayers (myself being one) …. currently being financially “mugged” by the greedy Public Sector Unions/workers and their bought-off, self-serving elected officials who granted these grossly excessive pensions.

    For what it’s worth, the individual Public Sector workers have done nothing “wrong”. It’s primarily our “elected officials” (and the insatiable greed of your Unions) who are to blame, but it is the workers who are the recipients of these grossly excessive financial promises, so that’s where the Taxpayers need to look to right this wrong …. by reducing these pension & benefit promises.

  9. Avatar
    Frank Baptiste says:

    Reality Check: It would help to stick to the argument. From what I’ve read so far, you are cutting and pasting information from pension fund and union press releases. Tough Love, for all his invective, does his own homework and knows what he’s talking about.

    And “btw,” how much of pensions are funded by taxpayers vs. the employee (notwithstanding the fact that ALL public employee costs are paid by taxpayers, as are ALL their union dues and fees) depends entirely on what return-on-investment assumptions are made. Your 63% number is based on huge and rather optimistic assumptions on the part of these pension funds.

  10. Avatar
    Tough Love says:

    Frank Baptiste, Invective … ouch.

    Do you think playing nice or pussyfooting around with the Public Sector Unions will accomplish anything of material value?

    History has demonstrated that for every $1 in givebacks DESPERATELY need, they will very grudgingly offer 5 cents.

    I believe change who come about ONLY by it being forced upon them by whatever means the Taxpayers can legally muster … and with no less aggressive determination as these Union/workers have shown in not only trying to keep ALL that they have been promised, but continuing to press their bought-off elected officials for MORE.

  11. Avatar
    Tough Love says:

    Frank, While I understand your “point” re the high investment earnings assumption underlying the 63%, it’s really immaterial.

    It’s the SPLIT of principal contributions from the EE and Taxpayers that is relevant. All earnings DERIVE from those contributions proportionally and in the absence of the need for such high Taxpayer contributions to fund these generous promises, earnings from Taxpayer contributions would have stayed in the Taxpayers’ pockets (perhaps to fund there much smaller retirements).

  12. Avatar
    reality check says:

    Well, I am glad you said “the workers” haven’t done anything wrong. Thank You for that.

    We joined the game and are just playing by the rules handed to us. And in some ways, routed so we have no choice now. I won’t get S/S or medicare/aide because of the rules I am governed by. The reason being because “I wouldn’t need it” is how it was presented back in the 80’s when I started.
    I would have done things differently if I knew the deal would be different when I got to the end, but to change it for those who played by the rules handed them after they have no chance to recover is not right either.

    I can say there are things I disagree with regarding public pensions, I actually pay “the employee” portion and even cost-share some of the employer share. There are agencies that pay the total employee share so the employee puts nothing into their own retirement… and of course, people like me that pay our share and even some of the employer share get lumped in with them.

    I can’t say I can agree to changing my deal I have been told I would get all along, and have been paying into to get, is something I would agree with, But I do think every employee should be paying into their retirement, and some aren’t.

  13. Avatar
    reality check says:

    And to be fair, there were years the employer share fell to zero while the employee still paid(If they were paying in the first place) but those days are long gone. I don’t recall anyone complaining the employer wasn’t paying anything back then, but I could be wrong.

  14. Avatar
    reality check says:

    It would be nice if it was that simple, but being in the “industry” as long as I have been, they would not have given the money back or even taken less of it. and if they did not spend it on the employees, they would have spent it on other things that may or may not have been beneficial to the taxpayer. It may have even been worse, building things that were even more expensive to maintain.

    I understand the complaints, some I even agree with. But the only way the government will spend less money is do not give it to them in the first place and do not let them fee us to death when they reach tax saturation.

    I wish you luck with those goals.

    All the systems are based on “more” if it does not “get” more, it will decline and crumble.

    The real question is, have we reached the point that even doing the “right thing” will cause it all to fall to the ground?

  15. Avatar
    Tough Love says:

    Re your last sentence, if doing the “right thing” includes fully funding Public Sector pensions as currently promised, then yes, without doubt it WILL all come tumbling down.

  16. Avatar
    Tough Love says:

    Quoting …”I would have done things differently if I knew the deal would be different when I got to the end, but to change it for those who played by the rules handed them after they have no chance to recover is not right either.”

    How can you reconcile that demand with the FACT that it is both legal and quite routine for the Corporate sponsors of Private Sector Plans to prospectively (for FUTURE Service) reduce the pension accrual rate or freeze the Plan with no further accruals ?

    They do to reign in the huge cost and risk of such Plans. PUBLIC Sector Plans are ALWAYS far more generous that Corporate plans and hence the costs and risks are appreciably greater.

    While Corporate management MUST address the issue of responsibly as a fiduciary obligation to protect shareholder interests, the situation is really no different in Public Sector Plans. It’s just that our elected officials aren’t spending THEIR money, but Taxpayer money so they don’t care …. ESPECIALLY when supporting the Public Sector workers/Unions all but guaranteed the steady flow of campaign contributions and election support they need to get re-elected. The Taxpayers are simply betrayed and cheated time and again.

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.