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New Accounting Rules Will Double CalSTRS Reported Unfunded Liability

It’s been said that after Al Capone was sentenced to prison for tax evasion in 1931, his chief financial and legal advisor, Jake “Greasy Thumb” Guzik, told other mobsters how to avoid Big Al’s fate. They must keep two sets of books. One set, that could be made public, would show “honest income” from a legitimate business and would be maintained to satisfy the IRS and other government types. The other? Well, that would show the real income.

This story comes to mind now that new, strict Government Accounting Standards Board requirements have forced the revelation that the unfunded liability being carried by the California State Teachers Retirement Fund is more than double what was previously disclosed. The GASB rules compel state and local governments to stop hiding their pension costs in their financials and to report more realistic rates of return on investments.

What had been presented to the public as a $71 billion liability has been newly calculated to show that the teachers retirement fund’s net pension liability is $166.9 billion. No one is suggesting CalSTRS is involved in criminal activity, but like numerous other agencies, it has engaged in an effort to downplay the extent of its debt. The impact of the implementation of the GASB requirements is similar to the IRS finding a mobster’s second set of books, the one that reveals actual income, only in the case of these government agencies, what is being exposed is actual debt.

This is important for several reasons. First, it has been revealed by respected reporter Ed Mendel in Calpensions that if CalSTRS “Net Pension” liability is distributed among school districts, the share of debt for a typical smaller district might jump from $21 million to $49 million, and for a larger district it could go from about $280 million to $728 million. To investors, this increased liability implies risk and would make it more expensive to sell school bonds. Ultimately, this higher cost is borne by property tax payers.

Second, CalSTRS has already been projected to run out of money in 30 years. While the retirement fund may go broke, the obligation to retirees will continue and taxpayers will be on the hook for the full amount.

Expect much more bad news like this in the coming year as other government entities are forced to come clean. Cities expect to be shown in serious financial trouble include San Francisco, San Jose, Los Angeles, Azusa and Inglewood, and cities already declared bankrupt, like Stockton and San Bernardino, will be exposed as being even deeper in the hole.

When the full amount of the unfunded liability — a debt that taxpayers will be forced to cover — is revealed by the new, more honest accounting standards, expect voters to demand the heads of the politicians and government officials who created this crisis by approving unsustainably high pensions for government workers. Unfortunately, many of those responsible for these past decisions are themselves now enjoying these rich benefits themselves in luxurious retirement settings.

Such is politics in the People’s Republic of California.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Accounting Standards, Not Elections or Litigation, Will Finally Enable Reform

“Apres moi le deluge”
Louis XV

If accounting standards were peasants with pitchforks, then this quote from the last King of France to die with a head on his shoulders might well describe what lies before us. Because history may remember 2013 as the last year that public entities could hide their debts and deceive their taxpaying peasantry, so their unionized workforces might continue to live the lifestyles of French aristocrats.

Earlier this week the California Public Policy Center released a study that calculates California’s total unfunded pension liability using the new criteria proposed by Moody’s Investor Services for adoption in 2014. Since Moody’s is the largest bond credit rating service in the world, using their guidelines is not a mere academic exercise, at least not if California’s municipal governments hope to continue to issue bonds to cover their ongoing budget deficits.

The relevance of these calculations is compounded by the fact that GASB, the Government Accounting Standards Board, plans to require municipalities to include unfunded pension liabilities on their balance sheets starting in 2014. Moody’s and GASB: Unlikely sparks to fire a revolution.

How many billions are we talking about?

Using the data from a March 20, 2012 report from the California State Controller entitled “Public Retirement Systems Annual Report for the fiscal year ended June 30, 2010,” the CPPC study revalued the official unfunded pension fund liability – for all state and local government pension funds – exactly according to Moody’s proposed guidelines.

The result was dramatic. Instead of California’s total public employee pension plans being underfunded by $128.3 billion, which is the state controller’s official estimate, the amount of underfunding nearly tripled, to 328.6 billion.

In a UnionWatch editorial posted earlier this year “How Big Is California’s Wall of Debt,” we estimated the total debt facing California’s taxpayers at $872 billion, which equates to something like $87,000 for every household in the state. In that number we included $360 billion for the total unfunded pension AND retirement healthcare liability. This more recent and more comprehensive study merely confirms those numbers; if anything, they are still on the low side.

Skeptics are invited to read the study, entitled “How Lower Earnings Will Impact California’s Total Unfunded Pension Liability,” in its entirety. They are invited to download the spreadsheet made available so they may themselves replicate and validate the numbers. Pension finance may require a bit of browbeating, but it isn’t rocket science. Get informed, or get out of the way.

What is happening instead? Everywhere in California, unions are relentlessly pushing back against even modest reforms to pension benefits. With unlimited money and manpower, implacable resolve, and perpetual energy, they will prevail again and again – until the tsunami of financial reality finally hits the shore.

Spokespersons for public employee unions supposedly abhor the manipulations and machinations of finance capitalists. Pointing to examples ranging from Enron to Goldman Sachs, they claim the workers are fleeced and the rich get richer. But their own house is dirty. The public institutions they control, the cities and counties of California, indulge in financial chicanery in order to create an illusion of solvency. They fail to recognize unfunded pension and retirement health care liabilities on their balance sheets. They refuse to disclose total outstanding state and local government debt. They issue “capital appreciation bonds,” deferred payment scams that should be illegal. They mislead voters into believing government workers are undercompensated, when in fact they now earn total pay and benefits that are well over twice the average for the private sector workers they supposedly serve. They pretend budgets are balanced by offloading entire sections of government into “special districts,” playing a shell game of deception. They campaign for tax increases to “save our schools,” then instead give the money to their partners in oppression, the insatiable pension bankers.

A fair minded reader might protest that government workers should not be compared to the aristocracy of France in 1788. Fair enough. But the average pension for someone who works a full career in California’s state or local government is now nearly $70,000 per year. For a retiree to collect that much, risk free, in the private sector, requires millions (plural) in assets. And those multi-millionaires are precisely the people our public servants, through their unions, urge us to resent, to tax, to occupy, to overthrow. The language of revolt is theirs, not ours.

Filtered through the humble green eyeshades of proper accounting standards, shimmering in the Sacramento sunset, one does not see a skyline of government buildings staffed by benign bureaucrats. Rather one may see a Bastille, a Palace of Versailles, a Hall of Mirrors, the ornate furniture of an aristocracy ruled by the union noblesse.

2014 is going to be an interesting year.

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UnionWatch.org is edited by Ed Ring, who can be reached at editor@unionwatch.org

How Much Could California’s Government Pensions Cost Taxpayers?

This week both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago when salaries and pension benefit formulas were much lower, and it includes people who may have only worked a few years for the government. Since we will be multiplying this average pension by the number of full time state and local government workers in California, we have to assume a full career when calculating the average pension, since for every worker who only worked 10 years, for example, two additional retirees will also be in the system who have themselves also only worked 10 years. To calculate the cost of a full-career pension, you have to add all three of these part-career retirees together. Here is what these pensions really average, based on CalPERS Annual Report FYE 6-30-11 (page 153), and CalSTRS Annual Report FYE 6-30-11, (page 149):

CalPERS average final salary for 30 years work, retiring 2010: $82,884
CalPERS average pension for 30 years work, retiring 2010: $60,894  –
Pension equals 73% of final salary (average of 25-30 year and 30+ year stats)

CalSTRS average final salary for 30 years work, retiring 2010: $88,164
CalSTRS average pension for 30 years work, retiring 2010: $59,580  –
Pension equals 68% of final salary (average of 25-30 year and 30-35 year stats)

If one extrapolates the CalPERS and CalSTRS data to the many independent pension funds serving local agencies – many of these are quite large, such as the one for Los Angeles County employees – it is probably conservative to peg the average pension going forward for full-career government workers in California at at least $60,000 per year, and at least 70% of final salary.

The next step in figuring out how much state and local government worker pensions could cost California’s taxpayers in the future is to establish the sensitivity of pension contribution rates to changes in the rate of return of pension funds. UnionWatch has explored this question repeatedly, with a good summary in the July 2011 post entitled “What Payroll Contribution Will Keep Pensions Solvent?” Using the same financial assumptions as were used in that analysis, here is how the required pension contribution rates – expressed as a percent of payroll – change in response to lower earning rates for the pension funds. This is based on pensions averaging 70% of final salary, and assumes 30 years working, 25 years retired, and salary (in real dollars) eventually doubling between hire date and retirement date:

If the pension fund’s return is 7.75%, the contribution rate is 22% of payroll.
If the pension fund’s return is 6.75%, the contribution rate is 28% of payroll.
If the pension fund’s return is 5.75%, the contribution rate is 37% of payroll.
If the pension fund’s return is 4.75%, the contribution rate is 48% of payroll.
If the pension fund’s return is 3.75%, the contribution rate is 63% of payroll.

What the above figures quickly indicate is not only that the required payroll contributions go up sharply when projected rates of investment return come down, but that the lower the rate of return goes, the more sharply the required contribution rises.

To complete this analysis, one only needs to multiply the number of full time state and local government employees in California by the average payroll for these employees, and multiply that result by the various required contribution rates. Using 2010 U.S. Census data for California’s State Employees and for California’s Local Government Employees, one can quickly determine that there are 339,430 state workers earning on average $68,880 in base annual salary, and there are 1,185,935 local government workers earning on average $69,399 in base annual salary.

To sum this up, there are currently 1,525,365 full time (not “full-time equivalent,” which would be an even higher number, but those part-time employees may or may not have pension benefits) state and local government employees in California. They earn, on average, $69,284 per year in base pay. Here is how much pensions will cost for these workers each year based on various rates of return:

If the pension fund’s return is 7.75%, the state pays $23 billion to pension funds each year.
If the pension fund’s return is 6.75%, the state pays $29 billion to pension funds each year.
If the pension fund’s return is 5.75%, the state pays $39 billion to pension funds each year.
If the pension fund’s return is 4.75%, the state pays $51 billion to pension funds each year.
If the pension fund’s return is 3.75%, the state pays $66 billion to pension funds each year.

It is interesting to note that both CalPERS and CalSTRS failed to even achieve a 3.75% return in calendar year 2011, the lowest amount used in these examples and the lowest amount that can even keep pace with inflation.

When one takes into account the fact that only about five million households in California pay net taxes, the impact of the pension con job Wall Street brokerages have enlisted the support of public sector unions to foist onto taxpayers is even more dramatic. Because if, during the great deleveraging that likely will consume this economy for at least another decade, California’s pension funds only deliver 3.75% per year, instead of 7.75% per year, that will translate into $8,600 per year in new taxes for each and every taxpaying California household.

State Sponsored Thievery Continues in Plain Sight

Teachers and other public employees use “air time” to pick your pocket. The California State Teachers Retirement System tries calming words. David Crane tells the truth and loses yet another job.

Saying that the state teachers’ retirement system is underfunded is the understatement of this or any year and now, CalSTRS is giving us specifics. On December 27th, it said,

“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.”

In fact, saying that the shortfall has to be “managed” is like saying that World War II had to be managed. No, the reality is that there has to be major destruction and rebuilding, no matter how unpopular this will be with the beneficiaries of the theft, their unions and their kick-the-can-down-the-road buddies in Sacramento who are occasionally known as legislators. Tinkering around the edges and “managing” the problem will do little.

But even before we start dealing with the restructuring, we must stop the rampant gaming-the-system that continues to make a horrible situation even worse. We’ve all heard stories of public employees who retire, collect a big disability pension, but take another job at full pay displaying no signs of their disability. Even a healthy teacher can retire, still continue to work and collect $31,200 a year while receiving a full pension.

But there is one abuse that has received very little attention: purchasing service credit or “air time.”

Air time fleeces taxpayers in 21 states including California. It means very simply that public employees can plunk down some cash and purchase “years on the job” which can add a significant amount of money to their pension. In fact, pensions can be boosted up to 25% using this scam. Dan Pellissier, a adviser to California’s previous governor, Arnold Schwarzenegger, paid $75,000 in 2004 for five years of work credit. When he turns 55 in 2015, he will get a pension of $61,536 a year — almost $13,000 more than if he hadn’t bought air time. That’s $320,000 extra by the time he is 80.

For teachers, the results can also be dramatic. The CalSTRS website does a bang up job letting teachers know how best to game the system and screw the taxpayer…er, I mean, the website does an excellent job of explaining teachers’ “air time” rights. In a simple two page document, they explain just how it works for “Rick.”

“This year, if Rick purchases one year of service credit when he is 32 and his highest annual earnable compensation for the last three years is $35,000, his $100 extra a month will cost $5,950.”

So if Rick retires at 55, he will get a $100 extra a month for the rest of his life. The $5,950 he paid to buy air time will be recouped after just five years of retirement. So beginning at age 60, the taxpayer begins to pay Rick that extra $100 a month. If Rick lives to be 80, the taxpayer will be on the hook for an extra $24,000. Keep in mind that there are 755, 000 potential and actual abusers in CalSTRS and another 1.6 million in the California Public Employee Retirement System (CalPERS), where air time is also a reality. Hence while that $24,000 might not seem like an outlandish figure, there are over 2.35 million people in CA with the ability to take advantage of this state sponsored thievery. If just 10 percent of the states’ workers do what Rick does, the taxpayer is dinged for another $5.65 billion.

That the pension mess in California is spinning out of control is a given, but if you are in a position of power and dare to talk about it, be prepared to lose your job. David Crane, a Democrat, was appointed to the CalSTRS board by Arnold Schwarzenegger, but was denied confirmation in 2006 after repeatedly questioning the solvency of the system. He was told that the job of trustees is “only to protect members’ benefits,” not to worry about the long-term effects of the benefits on the state budget.

The nerve of Crane!

Then, a year ago, Crane was appointed as a University of California Regent but was just excused from that position because of his incorrect thoughts on the importance of curtailing some collective bargaining “rights” for public employees.

David Crane is a latter day Paul Revere. But if the American Revolution took place in modern Sacramento, he’d be tarred and feathered for essentially not minding his own business. Never mind the looming fiscal disaster that is around the corner for all of us in California. Let’s just not talk about it.

About the author: Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues.