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Red Flags: New Study Offers Grim Warning for California Pension Funds

For Immediate Release
July 12, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

Stock market overvaluation will lead to ‘major correction,’ trigger benefits cuts and tax hikes

SACRAMENTO, Calif. – There are more red flags for public-sector pension funds that rely on stock investments for most of their income, a new California Policy Center study finds.

Read the entire study here.

“Three key market indicators show that publicly traded U.S. stocks are overvalued by about 50 percent, suggesting that pension funds are headed for a tough correction,” says CPC President Ed Ring, author of “How a Major Market Correction Will Affect Pension Systems, and How to Cope.”

Ring says the likely downturn will have grave implications for all Californians – not just those who depend upon the pension funds for retirement income. Lower returns on their investments will force pension funds to cut payments to government retirees or require California governments to act dramatically to cover the revenue shortfall.

Using a long-range cash flow model that simulates pension fund performance, Ring calculated the impact on California’s state and local government employee pension funds based on a market slide of 50% in 2017, followed by annual returns of 5% per year. In this case, with no changes to retirement benefits, the required annual contribution from governments would rise to 80% of payroll, costing an additional $50 billion per year. In another case, with post-crash returns projected at only 4% per year, the model estimated annual payments to rise to a staggering 113% of payroll, costing an additional $86 billion per year. Currently, California’s pension funds collect from state and local agencies an amount equivalent to about 33% of their payroll.

The study also provides several specific estimates of how much pension benefits would have to be cut (retirement age, annual multiplier, and COLA) after a severe market correction in order to keep the annual contributions from state and local agencies level at 33% of payroll.

The CPC study includes a link to download Ring’s spreadsheet so that anyone can test a variety of pension-fund assumptions.

You can download the spreadsheet here.

Ring’s prediction of an impending correction cites three key stock market ratios:

  • Price/earnings, now at one of the market’s historic highs
  • Price/sales, now at a 50-year high
  • Stocks/GDP, now near its 60-year high

Ring predicts he’ll have many critics.

“It is easy enough to step back and claim that the rules have changed, that these unusually high stock-market multiples can be sustained for additional decades, and that productivity improvements will enable the U.S. economy to support both massive debt and an aging population,” Ring writes. “Those who argue this position are betting that the U.S. economy will remain a stable refuge for wealth fleeing far more tumultuous economies elsewhere in the world. Staking the future of pension fund systems on this argument is a dangerous gamble.”

Ring’s study appears even as officials at California Public Employees Retirement System, the nation’s largest retirement system, prepare Californians for a poor earnings report next week.

Analyst Ed Ring is available for media interviews. Direct press inquiries to:

Ed Ring
President, California Policy Center
Ed@CalPolicyCenter.org
(916) 524-7534

Or

Will Swaim
Vice President, California Policy Center
Will@CalPolicyCenter.org
(714) 573-2231

ABOUT THE AUTHOR
Ed Ring is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

 

Transparency organization wins 'total victory' in Lynwood records case

For Immediate Release
April 26, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(949) 274-1911

SACRAMENTO  – The city of Lynwood will pay $22,000, part of a judge’s decision that city officials failed to disclose to the California Policy Center the names and salaries of Lynwood public employees.

You can read the April 22 judgment here.

CPC President Ed Ring declared the Los Angeles Superior Court judgment “a total victory for government transparency and the First Amendment.”

“In the back of every Californian’s mind is – or should be – the specter of Vallejo, Stockton and San Bernardino, cities driven into bankruptcy by reckless spending and excessive public-employee compensation,” said Ring. “The broader message in our legal win in is that vigilance alone isn’t enough. Without the threat of litigation, it seems, organizations like CPC and ordinary citizen watchdogs often haven’t got a prayer of seeing their city’s finances.”

CPC attorney Chad D. Morgan agreed, saying, “Unfortunately, the city refused to comply with the Public Records Act until CPC filed a lawsuit.”

The legal battle began in October 2014 when the public records were first requested. Nearly two months later, on December 2, Lynwood responded with a 2013 report that included job titles and compensation data but not employee names. The city dug in, refusing to release employee names.

In April 2015, CPC asked the superior court to step in. Months later, following a volley of demands and refusals for employee names and their compensation, Lynwood handed over two files. One of those was “a PDF file containing 146 pages listing 165 employee names, positions and information about each employee’s gross pay and benefits.” But the second file cast doubts on the first: it included compensation data for 250 positions – without names.

In his response to the release, Morgan pointed out the disparity and noted that “certain ‘lower-level’ positions” were missing from the second file. More alarming, the documents did not include the names of several executives and managers – including the city manager, council members, mayor, deputy city clerk, public information officer, and interim city manager.

Morgan wondered why the city spent so much time and money refusing to produce documents it was required to produce.

“The city’s refusal to provide the documents and subsequent delays caused us to incur $22,000 in legal fees to enforce the Public Records Act,” Morgan said. “This is in addition to whatever they paid their own outside counsel in defense of their frivolous attempt to conceal public records.”

McCune & Harber represented Lynwood.

ABOUT CHAD D. MORGAN
Chad Morgan represents the California Policy Center in matters related to the Public Records Act. As a public records attorney, Morgan has represented clients in litigation in courts throughout California. While still in law school, he served as chief of staff for a member of the state Legislature. Morgan is a graduate of Western State University College of Law and received his undergraduate degree in Business Administration from California State University, Fullerton.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

The Unions’ Assault on Truth

The teachers unions continue to mislead its members and everyone else.

In the latest issue of the California Federation of Teachers quarterly newsletter, CFT president Josh Pechthalt writes “The lawsuits that educators and unions must defeat,” which is referred to as a “special report” – special because it is especially filled with half-truths, omissions and lies.

Pechthalt starts his piece with, “Education unions and public sector unions are facing legal attacks designed to destroy our ability to represent our members. Not surprisingly, these cases are supported by the usual anti-union law firms and wealthy backers. What follows is a snapshot of the cases CFT and other unions are now fighting.”

He then delves into four lawsuits he claims are an “attack on union treasury driven by wealthy education ‘reformers.’”

The first lawsuit on Pechthalt’s hit list is the Friedrichs case which, if successful, would make paying dues to a public employee union voluntary. The union boss skirts the essence of the suit and instead focuses on a secondary aspect. He writes, “While a complete elimination of agency fee is unlikely, the Supreme Court could make it more difficult to collect agency fee payments, which would have a serious financial impact on unions, weakening our ability to advocate for our members and be engaged in politics.” First, if his scenario is correct, dues collection could be more difficult, but only for teachers who don’t want to join the union. And he doesn’t mention the benefit to the taxpayer who, at least for the latter group, could be out of the dues collection business. Secondly, the ability to be “engaged in politics” is rather humorous. What Pechthalt doesn’t mention is that their spending goes to only leftist causes and many donations go to groups that have nothing to do with education whatsoever. A brief look at the union’s parent organization’s latest labor department filing shows that teachers’ dues money went to organizations like The National Newspapers Publishers Association and the Greater Cincinnati Coalition for the Homeless. And what teacher isn’t going to be thrilled that the union donated $250,000 to the Clinton Global Initiative and another $250,000 to the Bill, Hillary & Chelsea Clinton Foundation? (Only about 13 percent of money given to the latter winds up as charitable grants for those in need. The rest is spent on salaries, benefits, travel and fund-raising.)

Pechthalt’s next hit is on the Students Matter or Vergara case, which he uncleverly dubs “Students Don’t Matter.” In this well-publicized case, the judge struck down the tenure, seniority and dismissal statutes in California’s constitution. Pechthalt claims that these statutes “protect teachers’ ability to teach free of coercion and favoritism.” Baloney. No one in the private sector is entitled to have a job for life and gets to keep their position over a more talented colleague thanks to nothing more than an earlier hiring date; why should public employees merit such extraordinary privilege? All these statutes do is guarantee that mediocre and worse teachers are on equal footing with the good and great ones. And our poorest children have paid the price for decades.

The union president then rolls into Doe v Antioch, litigated by Gibson, Dunn & Crutcher, the same firm that was responsible for Vergara’s success. This suit is based on a 2012 ruling in which Sacramento-based nonprofit EdVoice correctly maintained that teacher evaluations require, in part, the use of standardized test scores and the judge promptly ordered their inclusion. However, in a report released earlier this year that sampled 26 districts’ compliance with the decision, EdVoice found that half of them were ignoring the court-ordered requirement to use the test scores. Pechthalt claims that, “While a 1999 law amended the 1971 Stull Act to broadly include the use of test scores, the advocates for education unions contend districts were given latitude to negotiate language relevant to their needs.” Fine. But the law says that student test scores still must be used as some part of a teacher’s evaluation. “Latitude” doesn’t mean “none.”

Pechthalt’s last broadside is saved for Bain v CTA, which he subtitles, “I-want-it-all-for-free.” This is a lie, plain and simple. The plaintiffs in this case want to belong to the union, are willing to pay dues, but don’t want to support the union’s political agenda. Maybe they don’t feel like supporting the Clintons. Or maybe they’d like to decide for themselves if their hard-earned money should be given to the Greater Cincinnati Coalition for the Homeless. Or maybe they are actually in favor of the reforms that teachers unions regularly fight against in Sacramento.

Sad to say, Pechthalt is not unique. Distorting the truth is very common with union bosses. AFT president Randi Weingarten has proclaimed, “If somebody shouldn’t teach – if somebody can’t teach – they shouldn’t be there.” Nice words, but she doesn’t mean a word of it. During her reign as head of the New York City teachers union, just 88 out of 80,000 teachers lost their jobs for poor performance over a three year period.

The AFT also got caught in a whopper when it claimed in 2014 it had no agency fee payers – teachers who still have to pay money to the union but have exempted themselves from paying for the union’s political agenda – even as AFT locals reported that thousands have gone the agency fee route. In 2015, the union reported exactly one agency fee payer. One.

It’s not only teachers unions that have a loose relationship with facts. UnionWatch’s Ed Ring has given us a primer in Deceptive and Misleading Claims – How Government Unions Fool the Public. It is up to teachers, citizens and journalists to learn the truth and start calling unions on their BS. Maybe then their lies will stop, or at least slow down a bit. Maybe.

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 and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.