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SUITABLE FOR QUOTING: Expert Responses to CalPERS' Monday, July 18 Earnings Report

For Immediate Release
July 18, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

California Policy Center Responses to Monday, July 18, 2016 Earnings Report

For reporters and commentary writers, the California Policy Center can make available two public finance experts. We also offer for publication these immediate responses to the CalPERS report:

 

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.

“Current gains in the market are engineered by low interest rates and stock buy-backs. It is an unsustainable bubble.”

“CalPERS claims that infrastructure investments helped their portfolio returns, but they have less than 1% of their assets invested in infrastructure.

“CalPERS claims ‘fixed Income earned a 9.29 percent return’ in their most recent fiscal year. This is impossible to do without extremely high risk. Most fixed income investments today have returns of 3% or less.”

“If CalPERS is truly committed to transparency, they’ll stop investing in private equity, which by its very nature is not transparent.”

“If CalPERS truly believes they can earn 7.5%, or even 6.5%, then they should set a ceiling on the percent of payroll they demand from cities and counties, instead of perpetually increasing it.”

“If CalPERS truly believes they can earn 7.5%, then they’ll use that rate, instead of 3.8%, when calculating how much to charge a city or county that wants out of their system.”

“CalPERS depends on a Fed engineered asset bubble to remain solvent. As such, they are complicit with the Wall Street financial interests that control our national politicians and whom their union board members regularly decry.”

 

MARC JOFFE is a California Policy Center financial analyst and founder of Public Sector Credit Solutions in 2011. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

“This is the second year of returns well below 7.5%. In 2015, CalPERS returned only 2.4%. The cumulative impact will be greater stress on local budgets as cities, counties and special districts will have to increase their pension contributions to make up for the shortfall.”

 

ABOUT THE CALIFORNIA POLICY
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.

Public Safety Unions and the Financial Apocalypse

Imagine for a moment that two premises are beyond serious debate: (1) That there will be another financial crisis within the next five years that will equal or exceed the severity of the one experienced in 2009, and (2) That the political power of public safety unions will prevent local governments from enacting pension reforms sufficient to avert a financial disaster when and if the next financial crisis hits.

What will these public safety unions do?

It’s distressingly easy for politicians to dismiss both of these premises, but since for the moment we’re not, imagine the following: Major European banks have declared insolvency because their debtors have all defaulted on payments, the Chinese stock market has collapsed because their export markets are shrinking instead of growing, and the deflationary contagion reaches American shores. Across the nation, speculative buying is replaced by panic selling. Housing prices fall, defaults accumulate, and the pension funds lose half their value overnight. In a cascading cycle reminiscent of 1929, deflation sweeps the global economy.

Meanwhile, pension reform has been limited to incremental adjustments to the pension benefits for new employees. Millions of retirees and active public safety workers still expect pensions that are roughly equivalent to the amount they made at the peak of their careers. But the money won’t be there.

How will public safety unions use their political power to address this challenge?

If the present is any indication, the solutions won’t be pretty. In San Jose and San Diego, public safety unions lead the charge to roll back local pension reforms enacted by voters. In counties across California, public safety unions lead the charge to undermine in court the reforms enacted by the State Legislature in the Public Employee Retirement Act of 2014. That’s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when there’s no money?

When challenging public safety unions to exercise their political power to advocate on issues other than law and order or their own compensation and benefits, a reasonable response is that public safety unions, like any government union, shouldn’t be involved in politics. The problem with that response is that they already are. Government unions, and their partners in the financial community, are a major cause of the economic bubble we’re experiencing. Their insatiable appetite for high returns, 7% or more, compels the financial engineering that creates unsustainable economic growth. When the crash comes, government unions will blame “Wall Street.” But in reality, they will share the blame, because they didn’t want to admit that their pension benefits relied on unsustainable rates of economic growth.

If there is another economic crash, public safety unions will face a choice. They can use their political power to strip away every remaining service that local government performs that isn’t related to public safety, raise taxes, and support “fees” on everything from green lawns to vehicle miles driven. They can support the creation of an authoritarian, oppressive state, raising revenue through rationing and regulating our water, energy, land use, home improvement, etc., at levels that make today’s annoying excesses seem trivial. They can hide behind environmentalism and egalitarianism to tax the last bits of vitality and freedom out of ordinary productive citizens. They can even hide behind faux libertarian ethics to charge exorbitant fees for rescue services, or profit from draconian applications of asset forfeiture laws. If they do this, it may be enough for them. But the price on society will be hideous.

There is an alternative.

Public safety unions can recognize that sustainable economic growth occurs when people have fewer impediments to running their private businesses. They can recognize that large corporations use regulations to eliminate their smaller competitors, and that excessive regulations of land, energy and water are the reasons that California has such a high cost of living. They can recognize that competitive resource development and cost-effective infrastructure development can only be achieved when the environmentalist lobby and their allies – the corporate and financial elites – are confronted and forced to accept less crippling restrictions.

Better yet, public safety unions can begin to recognize these political precepts NOW, before the financial apocalypse. Along with hopefully accepting more pension reforms instead of always fighting them, these unions can also protect their members’ futures by fighting for economic reform and more rational environmentalist restrictions. The sooner these reforms are adopted at the state and local level, the more resilient our economy will be when the economic implosion occurs. If pension benefit cuts are inevitable, because the money isn’t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.

America’s excessive public employee pension benefits have created a four trillion dollar monster, pension funds ravaging the world in search of high returns during the late stages of a credit expansion that has granted present growth at the expense of future growth. The day of reckoning is coming. Public safety unions can help prepare, for their own sake as well as for the sake of the citizens they are sworn to protect.

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Ed Ring is the president of the California Policy Center.

RELATED POST:
The Coming Public Pension Apocalypse, and What to Do About It

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.