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
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).
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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.
Several subscribers emailed me to ask why there were so few headlines posted each day over the past two weeks and why there were no mailings. Well, 2015 was a grueling year for me, so I decided to take a public-employee-style holiday break this year.
The model I used was my own City of Fullerton. Our City Hall was closed from December 24 through January 5. It re-opens today.
It was closed on â€‹December 28, 29 and 30 even though those days did not appear on the city website’s page which lists closure dates and holidays.
I was curious about this and emailed City Manager Joe Felz to inquire as to whether the City Council had voted for these closure dates or this was an executive decision. This was his explanation:
City Hall closure dates were enacted by City Council Resolution 9197 (October 17, 2000). The Resolution provides that specifically designated City offices close annually for the period of December 24 through January 1st. The closure does not apply to Police and Fire Departments or to certain community facilities (Community Center, parks, Museum, Indy Park, etc.) and for building inspections.
Employees must use accrued leave time (typically vacation time) to be paid for these days or they may take unpaid leave.
I’ve been monitoring the public pension crisis for nearly 12 years without a vacation, so I decided it was time to relax a wee bit — hence the minimal number of headlines posted.
Thanks for bearing with me.
— Jack Dean, Editor
By Ed Ring | Earlier this week, noted pension reformer John Moore published â€œThe Mechanics of Pension Reform,â€ listing specific principles of pension reform. Mooreâ€™s article focuses on state policy; he intends to focus on local pension reform policies in a later article. The list he has produced for state legislators is quite detailed; hereâ€™s is a partial summary of highlights:
1 â€“ Change control of public employee pension boards to politically neutral private institutions. Currently, government union operatives exert nearly absolute control over Californiaâ€™s 81 state and local government employee pension systems.
2 â€“ Limit the total annual pension contribution by any government entity to a fixed percentage of pension eligible salary.
3 â€“ Differentiate between annual salary and pension eligible salary to lower overall contributions. Stop counting annual wage increases as pension eligible.
4 â€“ Eliminate collective bargaining for government workers.
5 â€“ Prohibit legislative bodies from granting vested contract rights to pensions.
6 â€“ Require agency in-house counsel to advocate exclusively for the broader public interests of the legislative body, rather than for the staff and unions.
7 â€“ Prohibit any agency to link their salary increases to that of other agencies.
8 â€“ Require the chief financial officer of any agency to report directly to the legislative body, autonomous of the agency manager.
9 â€“ Start practicing accrual based accounting in conformity with virtually all other economic entities.
10 â€“ Investigate post-employment disability claims with a goal of eliminating abuses.
11 â€“ Lower the exit fees required for agencies to leave pension systems. The liability calculations employed typically assume rates-of-return less than half rate used for official actuarial calculations.
12 â€“ Remove automatic indemnification of agency officers from gross financial negligence, so they are subject to the same rules that apply to private sector executives.
How many politicians in California would pledge to fight for these pension reform policies?
Mooreâ€™s experiences as a bankruptcy attorney, and now as a retiree living in Pacific Grove, have made him an expert eyewitness to what pension abuse is doing to California. Read Mooreâ€™s two earlier series of articles on the topic, one published in 2014 â€œThe Fall of Pacific Grove,â€ and a more recent update published this year â€œThe Final Chapter â€“ The Fall of Pacific Grove,â€ for an account of how that city faces financial calamity because of out-of-control pension promises.
Californiaâ€™s government unions, along with their partners in the financial community, have spent millions to defend the pension system as it is. The uncertainty inherent in any financial projections that attempt to frame the issue make it hard for reformers effectively communicate the urgency of their position, even if they did have sufficient financial backing to mount a serious campaign for reform. Moore understands this, and has based his prescriptions for reform on a fundamental assumption: Change will come when elected politicians â€“ who have the courage to play hardball with government unions â€“ hold governing majorities in Californiaâ€™s cities and counties. Wherever that occurs, Mooreâ€™s prescriptions are viable.
For example, Moore, along with many other legal experts, does not believe that pension reform efforts in court have been exhausted. In particular, he repeatedly cites cases where cities and counties violated due process when approving pension benefit enhancements. All of these improperly adopted enhancements can be challenged in court. Moore also points out â€“ more of this will appear in his next article â€“ that cities and counties may not have the authority to revise â€œvestedâ€ pension benefits, but they can cut current benefits and cut staffing. If necessary, Moore recommends cities and counties engage in draconian cuts in the areas of personnel management where they have latitude, because if they have the courage to do this, in response the unions will be forced to accept reasonable modifications to their pension benefits.
How many politicians in California would be willing to be this tough?
One of the biggest misconceptions spread by government unions is that all pension reformers want to eliminate the defined benefit. This is false. The problem with government pensions is that they are not financially sustainable or fair to taxpayers. In California that began with Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, followed by SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of Californiaâ€™s state and local government workers.
If Prop. 21 and SB 400 had not passed, or, for that matter, if Californiaâ€™s government worker pension systems merely had to conform to ERISA, which sets responsible limits on the financial behavior of private sector pension funds, Californiaâ€™s government pension systems would be financially sustainable.
We are going to take advantage of the four-day Thanksgiving weekend to take a break from the never-ending, ever-growing Pension Tsunami. But never fear! . . . weâ€™ll be back covering the latest depressing pension news on Monday.
By Ed Ring | Californiaâ€™s largest state/local government employee pension system, CalPERS, has posted a page on their website called â€œMyths vs. Facts.â€ Included among their many rather debatable â€œfactsâ€ is the following assertion, â€œPension costs represent about 3.4 percent of total state spending.â€
This depends, of course, on what year youâ€™re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of Californiaâ€™s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the â€œview CalPERS employersâ€ page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.
In a study earlier this year, â€œCalifornia City Pension Burdens,â€ the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for Californiaâ€™s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.
UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesaâ€™s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.
To view a chart of Costa Mesa’s total contribution to CalPERS, CLICK HERE
Costa Mesaâ€™s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. Californiaâ€™s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.
For every dollar they pay their employees in salary, should Californiaâ€™s cities be sending, year after year, $.50 cents or more to CalPERS? Thatâ€™s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes theyâ€™ve got the demographic projections correct this time, and wonâ€™t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.
And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under Californiaâ€™s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions â€“ with a ceiling of 8% for regular employees, and 12% for public safety employees.
If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason â€“ it is absolutely impossible for a private company to afford this in a competitive economy.
Returning to the Myths vs. Facts page posted by CalPERS, they also assert that â€œThe average CalPERS pension is about $31,500 per year.â€ This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the â€œaverage pension,â€ because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.
If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.
One can debate forever regarding how much of a premium public employees should receive over private sector workers because theyâ€™re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.
The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.
CalPERS and Californiaâ€™s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that Californiaâ€™s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do â€“ not only to the beleaguered taxpayers, but to their own members.
PensionTsunami editor Jack Dean is taking a few rare sick days, but will be posting key headlines until he can resume full daily coverage of the pension crisis. Thank you for your understanding.
I’m flying to the East Coast today, so depending on whether or not the plane has WiFi I may not be posting any more headlines until tomorrow.
— Jack Dean, Editor
By Jack Dean | Full-career retirees from Orange County municipalities received an average CalPERS pension 54 percent greater than the average salary of area residents, according to just-released 2014 pension payout data from TransparentCalifornia.com. Full-career police and fire retirees took home pensions worth nearly double the average salary.
The over 600,000 records â€” obtained through a series of public records requests to the California Public Employeesâ€™ Retirement System (CalPERS) Ââ€” reveals an average full-career pension of $81,372 for miscellaneous, which includes all non-safety retirees, and $99,366 for safety retirees of all Orange County cities enrolled in CalPERS.
By contrast, the average annual salary in Orange County was $53,010 last year, according to the Bureau of Labor and Statistics.
The 3 largest CalPERS payouts to Orange County retirees went to:
1. David N Ream, former Santa Ana City manager: $277,194,
2. John J Schatz, former Santa Margarita Water District general manager: $270,613, and
3. Thomas J Wood, former Anaheim City manager: $248,914.
â€œAverage full-career pensions that significantly exceed the wages of most full-time workers shatters the myth that CalPERS only provides a modest level of retirement income,â€ said Robert Fellner research director for Transparent California.
Fellner says that such exorbitant benefits are the reason pension contributions are skyrocketing, adding that, â€œRetirement costs are directly related to the generosity of the benefits promised and, unfortunately, taxpayers are now being required to pay an equally exorbitant sum to help fund them.â€
To view a chart of average full-career CalPERS pensions for Orange County cities, CLICK HERE
Fellner noted that the median contribution rate for Orange County cities â€” 25 percent for miscellaneous and 42 percent for safety employees â€” is significantly higher than the 6.3 percent that private employers pay for their employeesâ€™ retirement benefits, according to the Bureau of Labor and Statistics.
Fellner warned that, â€œAs high as the current rates are, CalPERS is projecting significant rate hikes over the next few years, which threatens to break already cash-strapped municipalities. Whatâ€™s worse, weakening market conditions means rates will rise even further than anticipated.â€
The 2014 report contained 19,728 recipients with a monthly allowance of $8,333.34 or more â€” representing an annualized benefit of at least $100,000 â€” a nearly 35% increase from 2012â€™s report.
The average pension for full-career miscellaneous and safety CalPERS retirees was $65,148 and $85,724, respectively.
The top three 2014 CalPERS pension payouts went to:
The top 10 CalPERS agencies with the highest average pensions reveals retirement income that can more than double the earnings of full-time, working residents:
To view a chart of the 10 largest average full-career non-safety CalPERS pensions by employer, CLICK HERE
To view a chart of the 10 largest average full-career safety CalPERS pensions by employer, CLICK HERE
A full-career for miscellaneous retirees is defined as at least 35 years of service, the minimum required to qualify for Social Security benefits without penalty, while a full-career for safety employees is defined as 30 years or more.
Despite accounting for only 11 percent of service retirees, it is necessary to look at full-career pensions to accurately gauge the system, according to Fellner.
â€œJust as one assumes a 40-hour work week when comparing salaries, any discussion of pensions implicitly assumes a full-career.
â€œFurthermore, the disproportionally greater pensions for those who work a full-career reveal an inequity within CalPERS. Part of the generosity of the full-career benefits comes at the expense of partial-career retirees, who receive disproportionally smaller benefits.â€
Fellner concluded,â€œWith retirement costs expanding to as much as ten times what private employers are paying, maintaining the status quo is extremely irresponsible. Itâ€™s particularly indefensible to force taxpayers to bear the entire cost for the recklessness of union-backed officials who gambled on sky-high investment returns, lost, and now expect taxpayers to bail them out.â€
To view the entire dataset in a searchable and downloadable format, visit TransparentCalifornia.com.
Robert Fellner is director of research for Transparent California — Californiaâ€™s largest and most comprehensive database of public sector compensation It is a project the Nevada Policy Research Institute, a nonpartisan, free-market think tank. Email Robert.
By Ed Ring | Last month an article entitled â€œPensions as Economic Stimulusâ€ was posted to Fox & Hounds Daily. The author, Charles Beckwith, is a former CalPERS senior financial manager. Beckwithâ€™s article, while thoughtful, invites a response. Because Californiaâ€™s pension systems may stimulate the economy in some ways, but equally significant ways, they are killing the economy.
Beckwithâ€™s primary argument is this: Californiaâ€™s pension systems pay out over $3.0 billion per month to retired state and local government workers, who go out and spend this money, â€œat auto repair shops, home improvement centers, tuition for grandchildren, hair salons, rent, and at a thousand other small and large businesses.â€
The problem with this reasoning rests on a fundamental assumption Beckwith makes, which is that all the money taken from taxpayers to fund these pension investments would not have created a similar economic stimulus if they had been free to spend it themselves. Mr. Beckwith goes on to extol the virtues of professional financial managers placing pension fund investments around the world, then pouring the returns back into Californiaâ€™s economy, but when he does this, he ignores the actual cash flows in and out of Californiaâ€™s state and local pension systems.
To dive deeper into the cash flows of Californiaâ€™s pension systems, unfortunately we must rely on the scandalously outdated, yet most recent available consolidated financial report for Californiaâ€™s pension systems, the Public Retirement Systems Annual Report for the fiscal year ended 6-30-2011, released over two years ago. But the proportions have probably not changed all that much in the last four years. And as can be seen on page xxii, figures 12 and 13, during that fiscal year taxpayers contributed $27.6 billion to Californiaâ€™s state and local government pension funds, and retirees collected $36.2 billion. This is a net benefit of $8.6 billion per year â€“ IF you assume 100% of retirees still live in California.
A May 2015 analysis conducted by the Sacramento Bee on CalPERS retiree payments showed that 15% of their participants live outside California â€“ if we assume that percentage is true for all Californiaâ€™s state and local government retirees, then that $36.2 billion shrinks to an in-state total of $30.8 billion. This more likely net benefit, $3.2 billion per year, represents a mere 0.14% of Californiaâ€™s $2.3 trillion economy.
Thatâ€™s nothing, Mr. Beckwith. In the most recent year for which we have consolidated numbers, pension funds took $27.6 billion from taxpayers, then gave 30.8 billion back to retired government workers living in California. Thatâ€™s $3.2 billion, net, that trickled down to private sector participants in an economy over 700 times larger.
With benefits come costs, and in this area, Beckwith, along with virtually every other defender of state and local government pensions, skirts the unpleasant realities. A California Policy Center study completed earlier this year, â€œCalifornia City Pension Burdensâ€ used State Controller data to compile the employer pension contributions as a percent of total revenue from taxes and fees for every city in California. It estimated that pension fund contributions in 2015 for all Californiaâ€™s cities would amount to 6.9% of ALL revenue into those cities â€“ including cities who run their own utilities â€“ water, power, waste management. Equally significant, using figures provided by the pension systems, it showed that on average, these pension contributions would increase by 50% between now and 2020, to eventually constitute 10.3% of all revenues to Californiaâ€™s cities. These estimates do not take into account the current and projected funding for retirement healthcare, certain to add additional costs. Nor do they take into account the inadequate funded status of CalSTRS, or the many independent pension systems serving Californiaâ€™s counties, which are also supported by taxpayers in those cities.
In many cities, of course, pension burdens cost far more than 6.9% of all revenues. In San Jose, the total is 13.9% of all revenue. San Diego, 9.3%. And the already announced 50% increase to these employer pension contributions depends on a perilously weak assumption; that markets will continue to deliver 7.5% average annual returns on investment for the next several decades. Good luck with that.
At what percent of total revenue will everyone agree that funding public employee retirement benefits are â€œcrowding outâ€ other services and constitute the hidden agenda behind ALL proposed increases to taxes and fees? 10%? Weâ€™re already there. 20%? Thatâ€™s reality already in many cities and counties. 30%? Thatâ€™s where weâ€™re headed.
Mr. Beckwith goes on to defend the defined benefit, writing that â€œthe structure and strategy of a defined benefit plan cannot be debunked. It is a social benefit that should be available to all Americans in both private and public employment to assure a stronger American economy and social stability.â€ But he doesnâ€™t explain what he means by â€œstructure and strategy,â€ providing yet another frustrating example of why most reformers have given up on the defined benefit and almost universally advocate moving state and local workers onto individual 401K plans.
Constructive solutions to Californiaâ€™s state and local government worker defined benefit plans would include a â€œstructureâ€ that permits reductions to benefits â€“ such as a suspension of retiree cost-of-living increases, or a reduction in rates of future annual benefit accruals â€“ when market returns fail to meet expectations. And they might include a â€œstrategyâ€ that would return to the financially sustainable system that existed prior to Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, and before SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of Californiaâ€™s state and local government workers.
In an otherwise nuanced article, Beckwithâ€™s one foray into demagogy was when he characterized investment setbacks as the result of the â€œWall Street induced economic recession.â€ Because ever since Prop. 21 passed over 30 years ago, pension funds and â€œWall Streetâ€ have been joined at the hip. When youâ€™ve got nearly $4.0 trillion in state and local government pension funds chasing 7.5% annual returns, with no consequences other than to cut services and increase taxes to cover your shortfalls, you are indelibly part of the problem with financial special interests in America.
Pensions as they are today, Mr. Beckwith, are an economic burden to everyone in California who doesnâ€™t have one, but has to pay for it anyway.
Ed Ring is the executive director of the California Policy Center.