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CalPERS "Myths vs. Facts" Propaganda Will Not Change Reality

California’s largest state/local government employee pension system, CalPERS, has posted a page on their website called “Myths vs. Facts.” Included among their many rather debatable “facts” is the following assertion, “Pension costs represent about 3.4 percent of total state spending.”

This depends, of course, on what year you’re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of California’s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the “view CalPERS employers” page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.

In a study earlier this year, “California City Pension Burdens,” the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for California’s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.

UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesa’s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.

20151103-UW-Costa-Mesa

Costa Mesa’s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. California’s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.

For every dollar they pay their employees in salary, should California’s cities be sending, year after year, $.50 cents or more to CalPERS? That’s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes they’ve got the demographic projections correct this time, and won’t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.

And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under California’s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions – with a ceiling of 8% for regular employees, and 12% for public safety employees.

If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason – it is absolutely impossible for a private company to afford this in a competitive economy.

Returning to the Myths vs. Facts page posted by CalPERS, they also assert that “The average CalPERS pension is about $31,500 per year.” This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the “average pension,” because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.

If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.

One can debate forever regarding how much of a premium public employees should receive over private sector workers because they’re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.

The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.

CalPERS and California’s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that California’s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do – not only to the beleaguered taxpayers, but to their own members.

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

Retiree with $183,690 Annual Pension Attacks Pension Critics

“Critics of public employee retirement benefits are engaging in hyperbole and pointing to potholes as evidence that millions of elderly Californians should be stripped of their retirement savings.”
Brian Rice, president, Sacramento Area Fire Fighters, Sacramento Bee, June 2, 2015

Notwithstanding the possibility that saying pension reformers want to see “millions of elderly Californians stripped of their retirement savings” is itself “hyperbole,” Brian Rice’s recent Sacramento Bee submission requires a detailed rebuttal. Rice’s piece, entitled “Pensions aren’t being paid at expense of filling potholes,” was in response to a study written by Stephen Eide and released by the Manhattan Institute entitled “California Crowd-Out, How Rising Retirement Benefit Costs Threaten Municipal Services,” published in April 2015.

Rice leads off by attempting to link the Manhattan Institute to the supposedly infamous Koch Bros., despite offering zero evidence that the Koch Brothers contribute to that organization. And, of course, he is relying on this unsubstantiated link to discredit Eide’s work, apparently because if the Koch’s funded the work, then the author had to come up with data and conclusions that fit their agenda, instead of the facts and logic.

We’ll get to facts and logic in a moment, but first it is necessary to consider Brian Rice’s agenda. Because there is virtually no comparison between California’s urban firefighters and the “working class,” “minority, low-income and rural communities,” to whom Rice makes reference in his article, and for whom unions are more legitimately challenged to represent. Brian Rice, who retired in 2011 after 28 years of service, collected a pension in 2013 of $183,690, NOT including other benefits which probably add at least another $10,000 to his total retirement package.

Here’s pension data for Brian Rice. Notice how during retirement his pension still increases each year.

Here’s pension data for Rice and his fellow retirees from Sac Metro Fire – and Rice isn’t even in the top ten. The top spot is held by James Eastman, who collected a modest pension of $231,428 in 2013.

Rice writes: “Public employees have traded off other compensation in order to have a secure retirement.”

Really? Here’s payroll and benefits data for Sac Metro Fire’s active employees. Eleven employees made over $300,000 in 2013, 195 made over $200,000 in 2013, and 408 made over $150,000 in 2013. The Sacramento Bee recently published an analysis of average pay, not including benefits, for Sacramento firefighters. The data shows the average firefighter makes $122,677 per year, NOT including current benefits such as health insurance, and not including the employer’s pension contribution. Add those and the average goes up to $194,083. And no, that average does NOT include captains, who average $163,040 before benefits.

Quite a trade off. Modest pay in return for a secure pension. No hidden agenda there, right? No motive to engage in “hyperbole” when you encounter critics?

Back to potholes. A California Policy Center study published in February 2015, “California City Pension Burdens,” documents the average employer pension contribution for California cities in 2013 at 7% of total revenue. CalPERS is increasing their required pension contribution by 50%, meaning the average will become over 10% of total revenue. And that assumes the markets don’t correct downwards. Many cities are in far worse shape. Is it really necessary for 10% of every dollar in local tax revenue go to pay pensions that average over $100,000 per year for public safety employees who retire early and whose pensions get annual cost-of-living increases?

The “crowding out” effect is real, and it affects more than potholes. Rice is perhaps at his most hyperbolic when he writes “each year, the $13 billion that much-maligned CalPERS pays Californians in pension payments creates $30.4 billion in economic activity. The California Public Employees’ Retirement System also invests in big infrastructure projects for the state, and makes capital available to minority, low-income and rural communities.”

Bull. Bull. And Bull. To wit:

(1) The $13 billion creating $30.4 billion in economic activity is known as a “multiplier.” As Rice puts it, “They spend it on housing, food, gasoline, other necessities, gifts for the grandkids and more – which drives economic activity, creates jobs and increases tax revenues.” We hate to break it to you, Mr. Rice, but if we had been able to keep that money, instead of paying higher taxes so you can have your $183,690 per year pension, we would have also been able to “spend it on housing, food, gasoline,” etc. No net benefit there.

(2) Rice claims $13 billion is paid out annually by CalPERS to pensioners. Actually last year it was $17.7 billion (ref. CalPERS CAFR 6-30-2014, page 24). But Rice neglects to mention that 15% of those pensioners have moved out of California. And Rice ignores the other side of the equation, which is that based on their asset allocation to-date, 91% of the $12.6 billion paid into CalPERS last year was invested out-of-state. CalPERS has $301 billion in assets, and ninety-one percent of that money is invested out-of-state. As it stands today, California’s citizens, their cities, and the overall economy would be a lot better off if CalPERS, and every other pension system in California, did not exist.

(3) When it comes to infrastructure, not only is CalPERS investing a ridiculously minute portion of their portfolio, but the primary reason there isn’t money for infrastructure is because cities, counties, and the state are too busy allocating all of their financial resources to overcompensated public employees. And if CalPERS and the other pension systems were willing to invest for reasonable rates of return, instead of speculating on global markets, they could take their roughly $700 billion in assets and finance revenue producing civil infrastructure such as dams, upgraded water treatment to allow reuse of waste water, desalination plants, aqueduct upgrades, port expansions, road and freeway upgrades, bridge repair – the list is endless.

Despite Mr. Rice’s hyperbole, most pension reformers do not want to abolish defined benefit pensions for public employees, if these pensions could be made fair and financially sustainable. That would require returning to the conservative investment guidelines in place until Prop. 21 was passed in 1984, and it would require returning to the modest and fair benefit formulas that were in place until SB 400 was passed in 1999. Taking these steps would not only save defined benefit pensions, but enable massive investment by the pension systems in revenue producing civil infrastructure.

There’s a lot of middle ground between someone collecting a pension of $183,690 per year, and being “stripped of their retirement savings,” Mr. Rice.

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

The Glass Jaw of Pension Funds is Asset Bubbles

“Calpers argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an ‘arm of the state,’ including a lien on municipal assets.”
–  Wall Street Journal Editorial, “Calpers Gets Schooled,” February 8, 2015

If you want powerful evidence of crony capitalism at its worst, look no further. In the Stockton bankruptcy trial, the pension fund serving that city’s employees threatened to seize municipal assets to pay pension fund contributions. They’ve made similar threats to other cities that protest against the escalating contribution rates. And they’ve made the cost to exit pension plans confiscatory. It is hard to imagine a bigger or more blatant example of collusion between business interests and government employees at the expense of ordinary private citizens.

In the Stockton bankruptcy case, judge Christopher Klein’s ruling left pensions untouched, but at least the judge was openly disgusted with CalPERS, stating “CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw.” (ref. San Jose Mercury Editorial, February 18, 2015)

Much has been made of the CalPERS’ “glass jaw,” referring to Klein’s contention that cities do have the legal right in bankruptcy to reduce pensions – even though he did not allow pension benefit reductions in this case. But there is another “glass jaw” facing CalPERS and all pension funds, the biggest “glass jaw” of all. They rely on annual returns of 7.5% per year to stay solvent, and as a result, sooner or later, the investment markets are going to deliver these funds a knockout punch.

Professional investors claim they can always beat returns of 7.5% per year, and many of them can. But public sector pension funds control over $4.0 trillion in assets, which makes them too big to beat the market. And the idea, courtesy of pension fund managers, that the investment market can deliver a long-term average return of 7.5% per year implies that 7.5% per year is a “risk free” rate.

For a quick reality check, here are the “risk free” rates of return currently available to investors in the United States:

Even in the cases where cities failed to make some of their annual pension payments, the financial impact was trivial compared to the primary cause of insolvency, which is that pension funds are not required to make “risk free” investments that are actually risk free. Because if they did, they would project low single digit annual rates of return instead of high single digit annual rates of return. It’s that simple.

A little over one year ago, the California Policy Center released a study “Are Annual Contributions Into CalSTRS Adequate?,” which utilized formulas provided by Moody’s investor services for that purpose. Using those formulas, the following table shows how lower rates of return impact CalSTRS:

Impact of Lower Rates of Return on CalSTRS
Based on 6-30-2012 Financial Statements, $ = Billions

20150224-UW_Ring-CalSTRS

Just in case this is all merely abstruse gobbledegook that savvy political consultants recommend politicians avoid since nobody understands it anyway, pay particular attention to the columns on the far left and far right. The left column’s top row shows the official rate of return used by CalSTRS, 7.5%, and the right column’s top row shows how much they should contribute each year based on that official rate of return. Never mind that CalSTRS, like nearly all pension systems, uses creative accounting to avoid making an adequate payment to reduce their unfunded liability. In FYE 6-30-2012, for example, CalSTRS only made an unfunded contribution of $1.1 billion, not $7.0 billion (column five, top row) which would have represented a responsible payment against their unfunded liability.

It’s worth noting that for CalPERS, we can’t even get data on how they break out their normal contributions and their unfunded contributions because doing so would require sifting through the financials of every one of their participating entities. But there is nothing uniquely troubling about CalSTRS. As calculated in a more recent California Policy Center study, released last week “California City Pension Burdens,” in 2014 all state and local government pension funds in California, on average, were only 75% funded.

Imagine what would happen if CalSTRS had to pay $25 billion per year (column six, row five), instead of what they actually paid in 2012, $5.8 billion? Replicate these methods with nearly any pension fund in California, and you will almost always get similar results. And anyone who thinks a rate of return of 3.5% (column one, row five) is overly pessimistic should refer to the actual “risk free” rates of return shown in the previous bullet points. Better yet, consider this:  The federal funds lending rate today, the amount the federal reserve charges to banks, is 0.25% – that’s one-quarter of one percent. This is free money. That money is essentially being given to banks rates to turn around and loan at very low rates to corporations and consumers who use the cheap credit to buy things which, temporarily, stimulates the economy which causes asset values to rise – we are repeating 2008 all over again.

Pension funds depend on continuously expanding debt fueled asset bubbles for solvency. That is how they earn high returns that are anything but “risk free.” That is their glass jaw. Hopefully, when the bubbles pop and the glass jaws shatter, as an “arm of the state,” with “police powers,” CalPERS, CalSTRS, and every other pension fund in California won’t seize every municipal asset we’ve got and impose genuinely punitive taxes, so they can keep on paying those benefits.

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

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Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Add ALL Public Workers to Social Security, March 25, 2014

Pension Funds and the “Asset” Economy, February 18, 2014

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Adjustable Pension Plans, April 16, 2013