Ed Ring is the executive director of the California Policy Center.
PensionTsunami's primary focus is on California's public employee pension crisis, but we also monitor news in other states, keep an eye on the world of corporate pensions, and follow developments in Social Security since it is taxpayers who will ultimately be responsible for making up deficits incurred by any of these retirement plans. We also try to monitor international trends. The editor of PensionTsunami.com is Jack Dean (JackDean-at-PensionTsunami-dot-com).
Ed Ring is the executive director of the California Policy Center.
David Brown, a core member of the Marin County reform group Citizens for Sustainable Pension Plans, is using an online grassroots approach to raise funds for his lawsuit against the County of Marin — the crowdsourcing website GoFundMe.com. He plans to sue the county for its failure to follow California Code 7507 when granting pension increases to its public employees in 2001-2006.
In 2015, the Marin County Grand Jury did an in-depth report on these enhancements and declared them to be illegal. Because some of the people currently serving on the Board of Supervisors were also serving during that time frame, CSPP asked that they recuse themselves from participating in the response to the Grand Jury. They declined.
“There appears to be no recourse other than addressing this through the judicial system,” said Jody Morales, head of the very active CSPP group.
A detailed explanation of Brown’s lawsuit can be found on the CSPP website.
Below is the letter Brown sent to the CSPP membership.
To the members and supporters of Citizens for Sustainable Pension Plans:
Today, acting independently of CSPP, I am launching a website dedicated to raising money to hire an attorney with expertise in public pension law to bring a properly structured legal action against Marin County regarding its failures to comply with California Government Code Section 7507.
The link to my fundraising statement and website is: www.gofundme.com/pensionfairness.
As you all know, section 7507, passed in 1977, requires government bodies to follow specific procedures before increasing pension benefits for employees. The purpose of section 7507 was and is to inform members of the public of the financial pension commitments being made on their behalf before they become irrevocable. The 2014/2015 Marin County Grand Jury found that in numerous cases The County (and three other public entities in Marin) failed to follow the law.
My lawsuit will ask 1) that the court declare that Section 7507 is mandatory and 2) that failure to comply with it has an invalidating affect on the pension grants in question. (This suit is different from my previous lawsuit which was about how the Board of Supervisors addressed the Grand Jury report. Because I didn’t have money to hire an attorney, that lawsuit was poorly conceived and failed.)
I ask all of you to support my efforts. The pension increases granted in violation of Section 7507 are unsustainable. They are crowding out needed basic government services while causing increases in fees and taxes.
David C. Brown
By Ed Ring | If anyone is looking for evidence that government unions use their immense influence to support the growth of an authoritarian state, look no further than their unequivocal support for global warming â€œmitigation,â€ and all attendant agencies and laws to support that goal.
In 2006 Californiaâ€™s union-controlled legislature passed AB32, the â€œGlobal Warming Solutions Act,â€ a measure that was touted as a trailblazing breakthrough in the dire challenge to avoid catastrophic climate change. The premise behind AB32 is that CO2 is a dangerous pollutant, and that eliminating CO2 emissions is necessary to prevent the planetâ€™s climate from overheating, with all the apocalyptic consequences; rising oceans inundating coastal regions, epic droughts cascading through the worldâ€™s fragile forests and killing them, extreme storms, acidic oceans, collapsing agriculture â€“ the end of life as we know it.
Maybe thatâ€™s true â€“ and maybe not â€“ but how itâ€™s being managed is a corrupt, misanthropic, epic scam.
If anyone is looking for evidence that government unions and crony capitalists work together â€“ contrary to the conventional wisdom that presents the appearance that they are in conflict â€“ again look no further than their shared support for global warming mitigation, expressed in the legislative mandate to reduce CO2 emissions. AB 32 implements this by forcing industrial entities to purchase permits to emit progressively smaller quantities of CO2, via an auction process that is expected to raise $20 billion per year to finance renewable energy investments.
Think about how government unions will benefit from all this money:
Think about how crony corporations and corrupt financial special interests benefit from this money:
Even if CO2 is a threat to life on earth, there is an alternative that merits discussion:
Instead of investing in â€œgreenâ€ energy infrastructure and embedded surveillance systems to micro-manage energy consumption, California should be investing in natural gas and 5th generation nuclear power stations, desalination plants along the coast, liquid natural gas terminals, efficiency upgrades to existing high-voltage transmission lines, run-off harvesting and aquifer storage systems, upgraded aqueducts, comprehensive waste-water treatment and aquifer recharge, offshore drilling for oil and gas, widened roads and freeways, more airport runways, and buses for mass transit. These steps will result in energy, water and transportation costing everyone in California less. This will benefit businesses and consumers, and make California a magnet for investors and entrepreneurs all over the world.
And even if CO2 is a threat to life on earth, vigorous debate on that topic should be encouraged, not outlawed.
If you are an informed skeptic â€“ something the axis of government unions and powerful financial special interests are trying to outlaw â€“ it becomes tiresome to recite the litany of legitimate reasons that debate regarding the actual impact of anthropogenic CO2 is of critical importance. The primacy of solar cycles, the multi-decadal oscillations of ocean currents, the dubious role of water vapor as a positive feedback mechanism, the improbability of positive climate feedback in general, the uncertain role (and diversity) of aerosols, the poorly understood impact of land use changes, the failure of the ice caps to melt on schedule, the failure of climate models to account for an actual cooling of the troposphere, the fact that just the annual fluctuations in natural sources of CO2 emissions eclipse estimated human CO2 emissions by an order of magnitude. And letâ€™s not forget â€“ California only is responsible for 1.7% of global anthropogenic CO2 emissions. Does any of this matter to the California Air Resources Board?
Apparently not. Nor does it matter to Californiaâ€™s legislature, which recently stopped just short of passing Senate Bill 1161, the Orwellian California Climate Science Truth and Accountability Act of 2016. SB 1161 would have authorized prosecutors to sue fossil fuel companies, think tanks and others that have â€œdeceived or misled the public on the risks of climate change.â€
What Californiaâ€™s legislature ran up against, of course, was the U.S. Constitution. Perhaps they believe time is on their side. After all, even the Scalia court ruled in 2007 that CO2 is pollution, in one of the most frightening inversions of reality in U.S. history. Imagine what a court packed with Clinton appointees will come up with.
The failure to deploy clean fossil fuel solutions in the developing world, much less here in California, condemns billions of humans to further decades of poverty, misery, and unchecked population growth. Cheap energy equals prosperity equals population stabilization. Until a few years ago that hopeful process was inexorable. But in recent years, somewhere on the shores of Africa, cost-effective industrial development ran into global warmingâ€™s global mafia and was stopped in its tracks.
The consolidation of power inherent in government suppression of energy development and micromanagement of energy consumption is not only a recipe for a corporate union police state in America. It is a recipe for systemic oppression of emerging societies across the world. At the very least, the debate must continue.
Ed Ring is the president of the California Policy Center.
By Ed Ring | 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?
Itâ€™s distressingly easy for politicians to dismiss both of these premises, but since for the moment weâ€™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 wonâ€™t be there.
How will public safety unions use their political power to address this challenge?
If the present is any indication, the solutions wonâ€™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. Thatâ€™s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when thereâ€™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, shouldnâ€™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 weâ€™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 â€œWall Street.â€ But in reality, they will share the blame, because they didnâ€™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 isnâ€™t related to public safety, raise taxes, and support â€œfeesâ€ 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 todayâ€™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 â€“ the corporate and financial elites â€“ 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 membersâ€™ 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 isnâ€™t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.
Americaâ€™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.
Ed Ring is president of the California Policy Center.
By Ed Ring | Remember Bell, California? Back in 2010 the Los Angeles Times reported that Bell city officials were receiving unusually large salaries, perhaps the highest in the United States. For example, Robert Rizzo, the City manager, had received $787,637. By September of that year, as reported on CNN, the California Attorney General filed charges against eight former and current city officials. The public was outraged.
Not generally known however was the process whereby the City of Bell employees managed to pay themselves so much money. Earlier that summer the Los Angeles Times covered this part of the story, reporting â€œThe highly paid members of the Bell City Council were able to exempt themselves from state salary limits by placing a city charter on the ballot in a little-noticed special election that attracted fewer than 400 voters.â€
This use of barely legal maneuvers to extract ridiculously generous salaries and benefits from taxpayers is not restricted to Bell, however. The Bell Syndrome existed before any of us had ever heard of Bell, and even now, in this sanitizing age of transparency, it lingers, continuing to infect our public institutions.
Two cases of the Bell Syndrome are featured in an investigative report just published on UnionWatch entitled â€œThe Pension Scandals in Sonoma and Marin Counties,â€ written by John Moore, a retired attorney living in Pacific Grove.
Back in the period between 2002 and 2008, Sonoma and Marin counties were, just like virtually every other city and county in California, in the process of granting pension benefit enhancements to their employees. But did they follow due process? Moore writes:
This article deals with pension abuses by two separate CERL agencies, the counties of Sonoma and Marin. Each has its own retirement board. In each county, the civil grand jury found serious procedural violations that were preconditions to the adoption of retirement increases:
Each grand jury report documented the grant of pension increases from 2002 through 2008 without providing the board of supervisors and citizens mandated actuarial reports estimating the â€œannualâ€ cost of each enhancement.
There are 21 counties in California with independent pension systems. In all, taking into account cities with their own pension systems, along with CalPERS and CalSTRS, there are 81 independent state and local government worker pension systems in California. And most if not all of them adopted pension enhancements between 1999 and 2008, awarding the benefit enhancements retroactively.
Anyone who thinks there arenâ€™t legal grounds on which to question the retroactive pension benefit enhancements that have mired Californiaâ€™s public sector in a swamp of overwhelming debt should carefully read Mooreâ€™s article. Improper notice. Poor estimates of â€œannual costs.â€ Lack of independent financial review. But the consequences of these improprieties are plain to see.
In Marin County the most recent financial report shows their pension system, as of June 30, 2015, was funded at a ratio of 84.3%. If we were at the bottom of the market instead of on the plateau of a market that has roared for the past seven years, that would be reassuring. But weâ€™re not. Since June 30, 2015, the S&P 500 has risen from 2076 to 2091. Thatâ€™s less than one percent during a ten month period when â€“ at 7.25% per year â€“ this index should have gained 6.0%. The DJIA for the same period? Up 1.5%. The NASDAQ? Down 2.4%.
On page 27 of Marin Countyâ€™s most recent pension fund financial report is a table entitled â€œSensitivity of the net pension liability to changes in the discount rate.â€ That table shows the system, as noted, 84.3% funded when assuming â€“ as they do â€“ a â€œrisk-freeâ€ rate of return, year after year, of 7.25%. On the same table, the lowest assumption they calculate is at a return of 6.25%, which lowers the funded ratio to 74.4%.
Itâ€™s too bad this is all abstruse gobbledygook to most voters and most politicians, because this is real money. Also shown on page 27 of Marin Countyâ€™s 6/30/2015 financial report is the amount of the unfunded liability for Marin Countyâ€™s pension system. If those investments keep on earning 7.25% per year, that liability is $387 million. If those investments only earn 6.25% per year, the liability nearly doubles, to $717 million.
Along with asking questions as to the legality of shoving these pension benefit enhancements through county boards of supervisors and city councils with minimal due process or quality independent financial analysis, one may ask how these pension systems get away with claiming 7.25%, or 6.25% for that matter, is a â€œrisk freeâ€ rate of return. When is the last time you went to a bank and bought a CD, or went to a brokerage and bought a treasury bill, and saw a return north of 3.0%? So how much would Marin Countyâ€™s pension liability be if their investments only earned 3.0% per year?
Using formulas developed by Moodyâ€™s Investor Services for this purpose, as explained in the California Policy Center study â€œA Method to Estimate the Pension Contribution and Pension Liability for Your City or County,â€ if Marin Countyâ€™s pension system were to earn a risk free 3.0% return per year, their unfunded pension liability â€“ thatâ€™s â€œdebt to taxpayersâ€ in plain English â€“ would be $2.1 billion.
Two-point-one-billion. Billion with a â€œBâ€.
When pension benefits were enhanced by one local government after another between 1999 and 2008, the means by which they were approved were barely legal, if they were legal at all. The chicanery and insider-dealings that constituted these decision making processes rival the scandal in the City of Bell. The syndrome is the same â€“ financial corruption that enriches the government while disenfranchising and diminishing private citizens. But the sheer scale of the financial consequences of these retroactive pension enhancements, the literally hundreds of billions of debt that these shady machinations imposed on Californiaâ€™s taxpayers â€“ that dwarfs the scandal in Bell like a whale dwarfs a minnow.
By Ed Ring | If someone told you that they were going to invest their money, but if that money didnâ€™t earn enough interest, they were going to take your money to make up the difference, would you think that was fair?
When it comes to pensions for local government workers, thatâ€™s whatâ€™s happening all over California. San Joseâ€™s story provides a particularly lurid example. Back in 2007 the San Jose Police and Fire Department Retirement plan was 97.8% funded (SJPF CAFR 2006-07, page 37). Back then, the annual contribution to the pension fund was $62.7 million, with the employees themselves contributing $16.1 million through payroll withholding, and the city contributing not quite three times as much, $46.6 million (SJPF CAFR 2006-07, page 40).
Last year, the San Jose Police and Fire Department Retirement plan was 79.3% funded (SJPF CAFR 2014-15, page 119). The annual contribution to the pension fund had ballooned up to $150.0 million, with the employees themselves contributing $20.7 million through payroll withholding, and the city contributing over six times as much, $129.3 million (SJPF CAFR 2014-15, page 73).
No wonder the City of San Jose put Measure B on the ballot in 2012, and no wonder voters passed it by a margin of 69% to 31%. But that wasnâ€™t the end of it.
The unions embarked on a multi-year campaign in court. As reported here in August 2015 in the post â€œSan Jose City Council Capitulates to Police Union Power,â€ the relentless union counter-attack eventually exhausted the will of the City Council. Facing an uphill battle against judges who themselves receive government pensions, they decided not to appeal the courtâ€™s overturning of a key part of the voter approved reform â€“ one that would have allowed reductions to pension benefit accruals for future work.
Never forget that these are the same pensions that the unions lobbied politicians to enhance retroactively back in the late 1990â€™s and early 2000â€™s.
Earlier this month, in a final ruling that is almost anti-climactic, Santa Clara County Superior Court Judge Beth McGowen denied a legal attempt to stop the city from completely repealing the pension reform initiative voters approved in 2012.
Politicians come and go. Government unions, by contrast, have continuity of leadership, a massive and uninterrupted source of cash from taxpayer funded government worker paychecks, and unwavering resolve. This not only allows them to negotiate from a position of almost unassailable strength, and fight an endless war of attrition in the courts, but it also allows them to control the narrative. The narrative that the public safety unions used in their fight with pension reformers in San Jose was aggressive, to say the least.
From the start they demonized San Jose mayor Chuck Reed, who spearheaded reform efforts, accusing him of being more interested in his political future than the safety of the citizens. It wasnâ€™t unusual back then, or in the years thereafter, to see bumper stickers with a simple message, â€œChuck Reed is a bad person.â€
The union also claimed they were unable to recruit because San Joseâ€™s pay and benefit package was not competitive with other cities. But according to a report by NBCâ€™s Bay Area affiliate, police union representatives told recruits to â€œtake advantage of the academy, then find jobs elsewhere.â€
But how underpaid and uncompetitive is San Joseâ€™s pay and benefit package for their public safety employees? If you view the 2014 pay and benefits for San Joseâ€™s city employees on Transparent California, you will see that 76 of the top 100 paid positions are either police or fire; they are 160 of the top 200 paid positions. What about averages and medians?
Using State Controller data, and not even screening out positions such as â€œaccountant II,â€ or â€œAnalyst II,â€ within the police and fire departments, the median total pay and benefits in 2014 for San Joseâ€™s full-time firefighters was $214,669, and for full-time police it was $233,070. Properly fund their pensions and their retirement health benefits, and their median pay is easily over a quarter-million per year. And what about those pensions? How much are they?
Once again, Transparent California data for the San Jose Police and Fire Retirement Plan shows just how high these pensions can get. They estimate the full-career pension (30 years service or more) at $112,425 per year â€“ NOT including health insurance benefits. That is corroborated by the â€œAverage Benefit Payment Amountsâ€ from the retirement planâ€™s CAFR (SJPF CAFR 2006-07, page 152) which shows the average 2014 pension benefit for retirees with 26-30 years service at $107,280, and for 30+ years at $115,884. If you review the Transparent California pension data for San Joseâ€™s public safety retirees by name, you will find 758 of them are collecting pensions â€“ not including retirement health insurance benefits â€“ in excess of $100,000 per year.
Which brings up another noteworthy topic â€“ disability pensions. Of the 2,215 San Jose public safety retirees and beneficiaries as of June 30, 2015, 894 of them have retired under a â€œService Connected Disabilityâ€ (SJPF CAFR 2006-07, page 150). Once you adjust for beneficiaries (codes 5, 6, and 8 on table), this represents 49.8% of the retirees. Is it actually possible that half of all police and fire retirees are disabled from on the job injuries? How is this being verified? What are the criteria? The IRS grants significant tax benefits to public safety retirees with service disability pensions.
The financial condition of San Joseâ€™s police and fire retirement system is dramatically worse today than it was ten years ago. The combined assets of their pension fund and their retirement health (OPEB) fund are now $3.1 billion, against liabilities of $4.6 billion â€“ a funded ratio of 67%. And the unions who call the shots are making it abundantly clear that when the money runs short, youâ€™re going to pay.
Ed Ring is president of the California Policy Center.
â€œThe creation of the mortgage bond market, a decade earlier, had extended Wall Street into a place it had never before been: the debts of ordinary Americans.â€ â€“ Jared Vennett (played by Ryan Gosling), The Big Short (2015)
By Ed Ring | Along with another superbly authentic movie Margin Call (2011), The Big Short provides a vivid look into the rigged, Darwinian, ruthlessly exploitative circus popularly known as â€œWall Street.â€ For decades, ever since the great depression, this industry slumbered along, sedately providing financial services to Americans. As always, it also was a venue for legalized gambling, but the number of players were limited, the winnings were relatively meager, and the opportunities for corrupt manipulations had not yet been multiplied by new trading technologies. Back then, the seedier aspects of Wall Street were overshadowed by the many vital services the industry provided. All of that changed starting around 1980.
In 1985, the financial sector earned less than 16% of domestic corporate profits. Today, itâ€™s over 40%. These profits are made on the backs of American consumers who pay usurious rates for student loans and credit card debt, yet cannot earn more than one or two percent on their savings accounts. Americaâ€™s financial sector is grotesquely overbuilt. It has become a predatory force in the lives of most Americans, and the legitimate services as intermediaries that they actually provide â€“ especially given the gains in information technology over the past 30 years â€“ could easily be delivered for a fraction of the costs. Who benefits?
The Big Short offers insights that will hopefully resonate with viewers, because when the protagonists in the film prepared to capitalize on their belief the housing bubble was about to collapse, they identified all the culprits. It wasnâ€™t just the sellers who prepared mortgage debt securities who were to blame. It was the buyers as well. And the biggest buyers of all were the pension funds, because of their insatiable desire for high returns.
Americaâ€™s housing bubble may have collapsed, but the pension funds are still with us, bigger than ever, still insatiably seeing high returns. And where do these predators go for their high returns? Along with their high risk investments in hedge funds and private equity â€“ where we have minimal transparency â€“ they invest in housing, once again inflated to unaffordable levels thanks to over-regulation and low interest rates. They invest in public utilities, who collect guaranteed fixed profits on overpriced services thanks again to over-regulation. They invest internationally, and they invest in domestic stocks.
In every case, the interests of these powerful pension funds, Wall Streetâ€™s biggest players, is to rack up another year of high returns. And to do this they need corporate profits, financial sector profits, rising home prices, rising utility rates â€“ they need asset inflation fueled by debt accumulation. This is economically unsustainable, because as America is slowly turned into a debtors prison, eventually there will be nobody left to pay the interest.
The National Conference On Public Employee Retirement Systems, â€œThe Voice for Public Pensions,â€ is arguably at the apex of the unsustainability lobby. This powerful trade association is ran by public sector union executives from across the nation. Their president is also the treasurer of the American Federation of Teachers. Their first vice president is a 30-year member of the Chicago Fire Fighters Union, IAFF Local 2. Their second vice president was union president of Fraternal Order of Police Queen City Lodge #69. And so it goes, officers of government unions populate their executive board officers and their executive board. Government unions run this organization.
The unsustainable pension benefit enhancements and unsustainable modifications to investment guidelines that were sold to politicians and the public werenâ€™t pushed by government unions all by themselves. Their partners in the financial community recognized and implemented what has to be one of the biggest scams in American history, the ability to pour taxpayers money into high-risk pension funds for government workers, collecting fees every step of the way, combined with the ability to raise taxes to bail out these funds whenever their returns didnâ€™t meet expectations. And to make sure elected officials played ball, they had the government unions provide the political muscle. Compared to this setup, Bernard Madoff was a piker.
The National Conference On Public Employee Retirement Systems has thoughtfully created a list of â€œfoundations, think tanks, and other nonprofit entities [that] engage in ideologically, politically, or donor driven activities to undermine public pensions.â€ The California Policy Center and UnionWatch are both on that list. But because our organization does not advocate eliminating the defined benefit, we actually only fulfill one of their criteria for this list, â€œadvocates or advances the claim that public defined benefit plans are unsustainable.â€
By Ed Ring | The successes of anti-establishment presidential candidates are a powerful reminder that mainstream politicians are not managing Americaâ€™s political economy or cultural evolution in a way that satisfies most of the electorate. Thatâ€™s no surprise â€“ itâ€™s a tough job these days, with few historical precedents to offer guidance.
Earlier this week an essay published in the Asia Times, â€œA Millennial conundrum: Communism and youth,â€ offered a concise set of reasons why so many millennials are supporting democratic socialist candidate Bernie Sanders. The author, Chan Akya, didnâ€™t chastise these youth for their selfish naivete, caused by receiving too many participation trophies during their sheltered childhoods. Instead he gave the following reasons:
(1) Sharing economy: Technology has propelled sharing into new markets, from cars and vacation homes after opening up personal space on platforms such as Facebook, Twitter and Instagram. For people with itinerant lifestyles driven by mobility in jobs, such a sharing economy may end up shaking the very foundations of property rights â€“ everyone is essentially a tenant at prevailing market rates for everything, and everyone is a target for advertisers based on their data profiles. The sense of oneâ€™s privacy and private property diminishes as a result of these technologies.
(2) Inflated asset values: Incipient asset bubbles across most markets have driven affordability to absurd heights on the back of concerted and global central bank easing. It used to be something of an expectation that one earned and saved money while in their twenties, and got married and bought a house in their thirties. Youth who do not have such expectations are likely to see themselves as tenants for life, driving the sharing economy whilst despising the property owning classes.
(3) Lack of jobs: it appears that there are now only two types of jobs. The first kind is entrepreneurial, Silicon Valley type jobs with low wages and high equity payoffs in the event that oneâ€™s company gets â€˜fundedâ€™. Then there is the second type of job which offers low wages and no equity upside at all â€“ this would be otherwise referred to as â€˜flipping burgersâ€™. All the other jobs, be it in services such as banking or government or manufacturing such as in assembly and production, have simply evaporated from Western societies.
(4) Student loans: The core issue is that a social â€˜contractâ€™ of sorts has been broken â€“ you go to college and end up with a nice job whereas now you go to college and are addled with debt but no job with which to pay it off.
(5) No prosecution: The lack of prosecutions for bad behaviour at banks, mortgage advisors and investment funds has only helped to create broader appeal for anti-establishment candidates.
Clearly some of these reasons for dissent are legitimate. And herein lies an educational opportunity. Because neither of the anti-establishment candidates have secured a political endorsement from any major public sector union. Nearly all of those unions back Hillary Clinton. And while Sanders, and even Trump, have had some support from private sector unions, it is arguable that if those private unions made endorsements that reflected the sentiments of their members, Sanders and Trump would get them all.
This political season of disaffection presents an opportunity to explain differences between public and private unions that go beyond the obvious ones â€“ that public unions elect their own bosses, that public unions donâ€™t rely on the profitability of a company to get funding, that public unions operate the machinery of government and can use it to intimidate their opponents. The less obvious but more profound difference between public and private unions is that public union power is enhanced when more people are destitute, divided, and dependent on government, and when more activities are criminalized. Private unions have no such perverse incentives.
If you review Chan Akyaâ€™s five reasons for Americaâ€™s disaffected, anti-establishment youth, the worst and most credible have the fingerprints of public union interests all over them. The most glaring example of this are the inflated asset values which have made home ownership almost impossible, especially in California. Using low interest rates to create an â€œasset economyâ€ is unsustainable. But in the meantime it shores up public employee pension funds, increases property tax revenues to local governments, and of course, wealthy individuals watch their well-hedged portfolios yield excellent returns, while the average American has no chance to earn a decent risk free return on their savings. Who else benefits? Unionized public university faculty, whose pay and benefits skyrocketed on the backs of student loans. As for job creation â€“ once prices for land, utilities and regulatory compliance became too expensive, business who could took their work offshore. But public unions prospered.
If you step back and examine everything the average private sector American worker has to pay for â€“ along with their overpriced homes and exorbitant college tuition â€“ itâ€™s pretty easy to see why politicians like Sanders and Trump are popular. The American taxpayer doesnâ€™t just pay for a bloated, overpaid, inefficient and totally self-interested unionized pubic sector. They pay for global military security, medical and pharmaceutical research and development, and bleeding edge environmental mitigation and clean energy technologies. As a percentage of GDP, no other nation imposes nearly such a burden onto their citizens in these three areas. On top of that, Americans are now being asked to turn their nation into a â€œmulticulturalâ€ petri dish, so that internally as well as externally, this country will midwife the emergence of a global civilization. Much of this is inspiring. But itâ€™s a lot to ask.
Millennials in particular, and Americans in general, need to understand that unionized government is the enabling heart and soul of the â€œestablishmentâ€ that has let them down, and that an honest search for solutions to the challenges of this age will only begin when government workers get the same deal as the citizens they serve.
Ed Ring is the president of the California Policy Center and editor of UnionWatch where this article originally appeared.
Due to circumstances beyond our control, PensionTsunami.com will be offline until at least next Monday.
I’m fairly certain that the public pension crisis won’t end before then.
— Jack Dean, Editor & Pubisher
“For the first time in the pension fundâ€™s history, we paid out more in retirement benefits than we took in contributions.â€
â€“ Anne Stausboll, Chief Executive Officer, CalPERS, 2014-2015 Comprehensive Annual Financial Report
By Ed Ring | There are few examples of a seemingly innocuous statement with more significance than Stausbollâ€™s admission, buried within her â€œCEOâ€™s Letter of Transmittal,â€ summarizing the performance of CalPERS, the largest public employee retirement system in the United States. Because whatâ€™s happening at CalPERS â€“ they now pay more in benefits than they collect in contributions â€“ is happening everywhere.
For the first time in history, Americaâ€™s public employee pension funds, managing well over $4.0 trillion in assets, are becoming net sellers, not buyers. And as any attentive student of economics will tell you, when there are more sellers than buyers, prices drop. Behind this mega economic trend is a mega demographic trend â€“ across the developed world, certainly including the United States, a relentlessly increasing percentage of the population is retired. The result? An increasing proportion of people who are retired and slowly liquidating their lifetime savings â€“ also driving down asset values and investment returns.
Last weekâ€™s sell-off in the markets has immediate causes that get most of the attention. Turmoil in the middle east. A long overdue slowdown to Chinaâ€™s overheated economy. Depressed energy prices. But there are two long-term trends that will keep investment returns down. Demographics is one of them: The more retirees, the more sellers in the market. The other mega-trend, equally troubling to investors, is that debt accumulation, which stimulates spending, has reached its limit. We are at the end of a long-term, decades long credit cycle. The next three charts will illustrate the relationship between interest rates, debt formation, and the stock market during two critical periods â€“ the first one following the stock market peak in December 1999, and the second following the stock market peak in September 2007.
The first chart shows the federal funds rate over the past 30 years. As can be seen, when the stock market peaked in December 1999, the federal funds rate was 6.5%. Within three years, in order to stimulate borrowing which would put cash into the economy, that rate was dropped to 1.0%. Similarly, once the stock market recovered, the rate went back up to 4.25% until the stock market peaked again in the summer of 2007. Then as the market declined precipitously for the next 18 months through February of 2009, the federal funds rate was lowered to 0.15% and has stayed near that low ever since. The point? As the stock market recovered since February of 2009 to the present, unlike during the earlier recoveries, the federal funds rate was never raised. This time, thereâ€™s no elbow room left.
To see the chart “Effective Federal Funds Rate â€“ 1985 to 2015” CLICK HERE
To put these low interest rates in context requires the next chart which shows total U.S. credit market debt as a percent of GDP over the past 30 years. Consumer debt, commercial debt, financial debt, state and federal debt (not including unfunded liabilities, by the way), is now estimated at 340% of U.S. GDP. The last time it was this high was 1929, and we know how that ended. As it is, even though interest rates have stayed at nearly zero for just over seven years, total debt accumulation topped out at 366.5% of GDP in February of 2009 and has slightly declined since then. The point here? Low interest rates, this time at or near zero, no longer stimulate a net increase in total borrowing, which in turn puts cash into the economy.
To see the chart “Total U.S. Credit Market Debt â€“ 1985 to 2015” CLICK HERE
Which brings us to the Dow Jones Industrial Average, a stock index that tracks nearly in lockstep with the S&P 500 and the Nasdaq, and is therefore an accurate representation of the historical performance of U.S. equities over the past 30 years. As can be seen from this graph and the preceding graphs, the market downturn between December 1999 and September of 2002 was countered by lowering the federal funds rate from 6.5% to 1.0%. Later in the aughts, the market downturn between September 2007 to February 2009 was countered by lowering the federal funds rate from 5.25% to 0.15%. But during the sustained market rise for the seven years since then, the federal funds lending rate has remained at near zero, and total market debt as a percent of GDP has actually declined slightly.
To see the chart “Dow Jones Industrial Average â€“ 1985 to 2015” CLICK HERE
It doesnâ€™t take a trained economist to understand that the investment landscape has fundamentally changed. The trend is clear. Over the past thirty years debt as a percent of GDP has doubled from 150% to over 350%, then remained flat for the past seven years. At the same time, over the past thirty years the federal lending rate has dropped from high single digits in the 1980â€™s to pretty much zero by early 2009, and has remained there ever since. The conclusion? Interest rates can no longer be used as a tool to stimulate the economy or the stock market, and the capacity of the American economy to grow through debt accumulation has reached its limit.
For these reasons, achieving annual investment returns of 7.5%, or even 6.5%, for the next several years or more, is much harder, if not impossible. Conditions that stock market growth has relied on over the past 30 years no longer apply. Public employee pension funds, starting with CalPERS, need to face this new reality. Debt and demographics create headwinds that have changed the big picture.
In the case of CalPERS, of course, it isnâ€™t mere demographics that has turned them into a net seller in a market thatâ€™s just given up two years of appreciation. Itâ€™s the fact that their retiree population is increasingly comprised of people who are retiring with benefits that have been enhanced in the past 10-15 years. This fact accelerates and augments the demographically driven disparity between collections and disbursements. Take a look at the past three years of CalPERS collections and disbursements:
To see the chart “CalPERS Cash Flow (not including investment returns) 2013 to 2015 ($=Billions), CLICK HERE
These figures, drawn from CalPERS 6-30-2015 CAFR (page 26) and CalPERS 6-30-2014 CAFR (page 24), show the system to be a net seller at a rate of about $5.0 billion per year for the past three years. Interestingly, during that time, employee contributions to CalPERS have actually declined by 4.6%, at the same time as the employer, or taxpayer, contributions have risen by 24.1%.
The idea that CalPERS cannot lobby for equitably reduced pension benefits is a fallacy. Because the financial problems with pensions began when Prop. 21 was narrowly passed in 1984, deleting constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems. The financial problems got worse when Californiaâ€™s legislature passed SB 400 in 1999, which set the precedent for retroactive pension benefit increases. And in both cases, CalPERS was there, lobbying for passage of what were ultimately ruinous decisions.
Now that an aging population delivers millions of sellers into a market already challenged by epic deleveraging, CalPERS can do the right thing, and lobby for meaningful pension reform. They can start by supporting policies that reverse the impact of Prop. 21 and SB 400. If they do this sooner rather than later, they may be able to save the defined benefit. Anne Stausboll, are you prepared to stand up to your union controlled board of directors, and tell them the hard truth?
Ed Ring is the executive director of the California Policy Center and editor of the website UnionWatch.