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CalSTRS CEO Jack Ehnes Recommends 50% Increase to CalSTRS Retirement Income

Author’s Note: The original title of this post was “CalSTRS CEO Jack Ehnes Recommends 50% Increase to CalSTRS Pension Benefits.” That was inaccurate. What Ehne’s specifically recommended per the quote immediately below this note was “income replacement of 80 percent to 90 percent to maintain a similar lifestyle in retirement,” in reference to his assertion that presently “the median CalSTRS pension replaced less than 60 percent of final salary for the members who retired last year.” To be perfectly accurate, Ehnes’ is recommending a 50% increase in CalSTRS participant retirement income. While he does not specifically recommend increasing their pension benefit by 50%, in order for teachers to achieve a 50% increase in their retirement income, either some other employer paid form of compensation would have to increase – for example, supplemental 401Ks, fed by either greater teacher salaries or greater employer matching, or both, or something else – or teachers would have to live more frugally in order to save more retirement funds on their own without an increase to compensation. Which is it? While this note constitutes a retraction of the original title, and the author apologizes for the misconceptions that resulted, it is still necessary to wonder why pension fund executives are suggesting that 60% income replacement for a public servant is inadequate, when private citizens may consider themselves extraordinarily lucky to secure a retirement income anywhere close to that amount.

“The median CalSTRS pension replaced less than 60 percent of final salary for the members who retired last year. CalSTRS recommends income replacement of 80 percent to 90 percent to maintain a similar lifestyle in retirement. Public educators do not receive Social Security benefits for their CalSTRS service.”
– Jack Ehnes, Chief Executive Officer, CalSTRS, Introduction to CalSTRS Comprehensive Annual Financial Report 2014, page 11)

Here we go again – a recommendation for another 50% pension benefit increase. Will it be retroactive this time? That went well last time. Remember SB 400, quietly passed for CHP officers during a robust bull market in 1999, and by 2005 rolled out to nearly every state/local agency in California? No consequences whatsoever.

And, here we go again – somehow getting a CalSTRS pension instead of Social Security is a monstrous sacrifice!

Social Security recipients making roughly what veteran teachers make can expect to receive a benefit at age 68 that is roughly equivalent to 25% of their final year’s earnings. Twenty-five percent. The average teacher receives 2.5 times that much each year via their pension, starting about seven years earlier. Mr. Ehnes thinks that’s not enough. He ought to know better. If every Californian retiree got a pension equivalent to what a CalSTRS recipient currently gets, it would cost over $600 billion per year. Where’s that money going to come from, Mr. Ehnes?

There’s a lot to chew on for anyone trying to wade through CalSTRS most recent publicly available annual financial report. This additional gem, also coming from Mr. Ehnes himself, illustrates just how out of touch the pension bureaucrats have become:

“The funding approach in AB 1469 is predicated on the actuarial assumption that CalSTRS will earn a 7.5 percent annual rate of return throughout the life of the plan.” (CalSTRS 2014 CAFR, page 8)

Jack Ehnes is referring to California Assembly Bill 1469, passed in May 2014, which will phase in massive contribution rate increases over the next several years, mostly from taxpayers, so that CalSTRS will be fully funded by around 2047. That is, in exchange for even higher contributions from taxpayers, CalSTRS will get its financial house in order “in about 32 years.”

But what if “throughout the life of the plan,” CalSTRS is unable to earn a 7.5 percent annual rate of return? Does it matter at all that recently reported gains were logged during this latest bull market that’s running out of steam? Will even more massive contribution rate increases be the solution? According to the most recent data available, CalPERS is currently $73 billion in the hole, or only 67% funded. (CalSTRS 2014 CAFR, page 158)

The problem with seasoned financial professionals like Jack Ehnes fostering expectations like this – bull market returns of 7.5% for the next 32 years, and pensions for teachers that need to elevate from the current 60% of salary to “80 per cent to 90 percent” of salary, is that people who aren’t financial professionals actually believe them.

From professional government union supported PR firms, to the rank-and-file workers they assist to prepare op-eds, unrealistic expectations from people like Jack Ehnes are packaged into propaganda designed to destroy public support for pension reform.

For an example of this, look no further than the August 22 guest op-ed in the Sacramento Bee, “Another View: State pension funds are recovering,” purportedly written by Lydia Petitjean, a public school secretary and CSEA union official. Pettijean’s lead sentence is pure propaganda:

“Perhaps an oil slick is clouding the crystal ball of Stephen Eide of the Koch brothers-funded Manhattan Institute when he suggests that the effort to undermine the retirement security of millions of Californians – disguised as ‘pension reform’ – is gaining steam.”

This is sophomoric trash talk. It is vacuous, cynical drivel. The Manhattan Institute is a respected organization, Stephen Eide is a policy analyst with unimpeachable integrity and proven financial acumen, the Koch Bros have little if anything to do with the Manhattan Institute, and “oil slicks” is an image calculated to elicit disgust, but has nothing to do with pension reform. Nothing.

Anti-reformers like Lydia Petitjean base much of their rhetoric on a false premise – that big moneyed “Wall Street” special interests would like get their hands on all that pension money. This is patently false. As it is, the finance industry benefits immensely from government pension funds, because they have an enormous amount of money already invested on Wall Street – $4.0 trillion in assets nationwide. The pension funds relentlessly advocate, and then manage, benefit plans so generous that they are forced to invest in high-risk, high-return financial instruments that the financial industry is all to happy to invent and sell to them. Even better, when they don’t hit their numbers, the taxpayers bail them out. And even if every government worker’s defined benefit plan was converted to a 401K tomorrow, the same pension systems, CalSTRS and CalPERS and all the rest, would still be the administrators.

There’s nothing there, Ms. Petitjean. Not even “oil slicks.”

The reality is maybe pension reformers just want to prevent the pension systems and their government union allies from running every city and county in California into the ground.

Sooner or later, if public employees hope to keep their defined benefit pensions, they will have to accept lower benefit formulas. When the next market downturn hits, and it will, people like Jack Ehnes will have a lot of explaining to do, and people like Lydia Petitjean will have to make a tough decision:

Do they want to become oppressors of the private sector taxpayer in partnership with some of the most aggressive financial predators in the world, so they can enjoy retirement benefits several times better than Social Security recipients? Or do they want to share the same economic challenges as the people they supposedly serve, and work towards feasible solutions to retirement security in America for everyone?

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

CALIFORNIA POLICY CENTER PENSION STUDIES

California City Pension Burdens, February 2015

Estimating America’s Total Unfunded State and Local Government Pension Liability, September 2014

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 2014

Evaluating Public Safety Pensions in California, April 25, 2014

How Much Do CalSTRS Retirees Really Make?, March 2014

Comparing CalSTRS Pensions to Social Security Retirement Benefits, February 27, 2014

How Much Do CalPERS Retirees Really Make?, February 2014

Sonoma County’s Pension Crisis – Analysis and Recommendations, January 2014

Are Annual Contributions Into CalSTRS Adequate?, November 2013

Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate?, August 2013

A Method to Estimate the Pension Contribution and Pension Liability for Your City or County, July 2013

Moody’s Final Adopted Adjustments of Government Pension Data, June 2013

How Lower Earnings Will Impact California’s Total Unfunded Pension Liability, February 2013

The Impact of Moody’s Proposed Changes in Analyzing Government Pension Data, January 2013

A Pension Analysis Tool for Everyone, April 2012

CalSTRS Admits Annual Pension Funding Must Increase

California’s unionized public employees, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.

They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayers to cover public employee pension fund returns. That is, whenever government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for unionized government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.

Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.

On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the next 30 years. Here is what he wrote:

“Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion.

Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.”

Despite the supposedly reassuring phrase “achieving adequate funding can occur several ways that would be phased in over time,” the fact that even the CalSTRS CEO is himself acknowledging this degree of funding shortfall should belie any thoughts that the number is overstated.

Putting aside for the moment the probability that this $3.8 billion per year is nowhere near the actual additional amount that will be necessary to adequately fund CalSTRS, how much does this latest salvo – pursuant to the contract on California taxpayers – cost per household?

First remember that of 12 million households in California, 47% of them pay no taxes. Also remember that at least another 10% of these households have a state or local government worker living in them. This means that 57% of California’s households are exempt from the contract on California, leaving 43%, or 5.2 million households to cover these new payments.

Second, remember that similar shortfalls exist within all unionized government worker pension funds in California, and CalSTRS only covers teachers, which at most only comprise about 40% of California’s state and local government workforce. This means the $3.8 billion per year CalSTRS shortfall, applied to all state and local government worker pension funds, would expand to $9.5 billion per year.

Anyone who thinks CalPERS or the LA County pension fund, or any other local government worker pension funds in California are in any better financial shape than CalSTRS is welcome to dismiss this logic. Otherwise, according to their own spokespersons, we now are looking for another $9.5 billion per year of additional taxes to keep our government worker pension funds in California solvent.

This equates to nearly $2,000 per year in additional taxes on those 5.2 million households in California who actually pay taxes. That’s just additional taxes, that’s just for pensions, and that is based on what is almost certainly the minimum amount it is going to take to establish financially sound pensions for California’s unionized state and local government workers.

The unionized government worker’s “contract on California” must make everyone who crows about the inviolability of contracts quite proud.