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
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).
You are currently browsing the PensionTsunami Blog weblog archives.
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 — obtained through a series of public records requests to the California Public Employees’ Retirement System (CalPERS) — 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.
“Average 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,” said Robert Fellner research director for Transparent California.
Fellner says that such exorbitant benefits are the reason pension contributions are skyrocketing, adding that, “Retirement 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.”
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 — 25 percent for miscellaneous and 42 percent for safety employees — is significantly higher than the 6.3 percent that private employers pay for their employees’ retirement benefits, according to the Bureau of Labor and Statistics.
Fellner warned that, “As 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. What’s worse, weakening market conditions means rates will rise even further than anticipated.”
The 2014 report contained 19,728 recipients with a monthly allowance of $8,333.34 or more — representing an annualized benefit of at least $100,000 — a nearly 35% increase from 2012’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.
“Just as one assumes a 40-hour work week when comparing salaries, any discussion of pensions implicitly assumes a full-career.
“Furthermore, 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.”
Fellner concluded,“With retirement costs expanding to as much as ten times what private employers are paying, maintaining the status quo is extremely irresponsible. It’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.”
To view the entire dataset in a searchable and downloadable format, visit TransparentCalifornia.com.
Robert Fellner is director of research for Transparent California — California’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 “Pensions as Economic Stimulus” was posted to Fox & Hounds Daily. The author, Charles Beckwith, is a former CalPERS senior financial manager. Beckwith’s article, while thoughtful, invites a response. Because California’s pension systems may stimulate the economy in some ways, but equally significant ways, they are killing the economy.
Beckwith’s primary argument is this: California’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, “at auto repair shops, home improvement centers, tuition for grandchildren, hair salons, rent, and at a thousand other small and large businesses.”
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 California’s economy, but when he does this, he ignores the actual cash flows in and out of California’s state and local pension systems.
To dive deeper into the cash flows of California’s pension systems, unfortunately we must rely on the scandalously outdated, yet most recent available consolidated financial report for California’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 California’s state and local government pension funds, and retirees collected $36.2 billion. This is a net benefit of $8.6 billion per year – 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 – if we assume that percentage is true for all California’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 California’s $2.3 trillion economy.
That’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. That’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, “California City Pension Burdens” 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 California’s cities would amount to 6.9% of ALL revenue into those cities – including cities who run their own utilities – 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 California’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 California’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 “crowding out” other services and constitute the hidden agenda behind ALL proposed increases to taxes and fees? 10%? We’re already there. 20%? That’s reality already in many cities and counties. 30%? That’s where we’re headed.
Mr. Beckwith goes on to defend the defined benefit, writing that “the 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.” But he doesn’t explain what he means by “structure and strategy,” 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 California’s state and local government worker defined benefit plans would include a “structure” that permits reductions to benefits – such as a suspension of retiree cost-of-living increases, or a reduction in rates of future annual benefit accruals – when market returns fail to meet expectations. And they might include a “strategy” 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 California’s state and local government workers.
In an otherwise nuanced article, Beckwith’s one foray into demagogy was when he characterized investment setbacks as the result of the “Wall Street induced economic recession.” Because ever since Prop. 21 passed over 30 years ago, pension funds and “Wall Street” have been joined at the hip. When you’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 doesn’t have one, but has to pay for it anyway.
Ed Ring is the executive director of the California Policy Center.
David Crane continues to expose CalPERS’ deceptiveness in this email message to media:
Further to this discussion, an organization named “PensionFacts” (PF) today provided a very helpful example.
In this Twitter item, PF reports that CalPERS averaged a 7.5% annual return for the 20 years comprising 1993-2013:
To view the Twitter post, CLICK HERE
However, PF didn’t include a chart showing change in liabilities or funded ratio over that same period. For that, first visit this CalPERS Comprehensive Annual Financial Report (CAFR). On the top of page 48, you will see that, in 1993, the Unfunded Accrued Actuarial Liability (UAAL) was $2.720 billion and the funded ratio was 96%. By 2013, as you can see on page 121 of this CAFR, the UAAL was $93 billion and the funded ratio was 75%.
In other words, despite averaging an investment return of 7.5% per annum for 20 years, the UAAL grew $90 billion and the funded ratio declined 21 percentage points.
This year tens of billions of dollars will be diverted from local, school district, special district and state services in order to fund UAAL’s related to pension promises hidden by deceptive accounting. More new promises deceptively accounted for are being made every day. As I said in a speech earlier this summer at NYU Law School, deceptive accounting is theft. The people who sign off on that accounting should be held accountable for those thefts.
This morning, pension reform advocate David Crane sent this email message to journalists and elected officials rebutting CalPERS’ response to his explanation of their unfunded liability, which continues to grow:
Contrary to the CalPERS headline, my email misses nothing. That’s why the text of the CalPERS statement confirms the principle I expressed in that email. But then CalPERS goes on to raise a separate issue that has to do with what happens when investment earnings are not sufficient to keep an unfunded liability (UAL) from growing. I’m glad they raised that issue.
The answer is that taxpayers must provide more money. That’s why CalPERS concedes in its statement that “liabilities do grow at 7.5% per annum and, if there are no contributions towards the UAL, assets would have to grow faster than 7.5% for there not to be an increase in the UAL. However, at CalPERS, contributions are being made to pay down* the UAL.” (Ital. and bold added.)
In other words, CalPERS is effectively saying, “The reason we didn’t have to earn 9.7% is because taxpayers were forced to contribute more money.” That’s true, and until California joins the ranks of states that requires employees and not just taxpayers to finance UAL’s, citizens will see ever-larger sums diverted from public services even if CalPERS earns its assumed rate of return. That’s why it’s important to compare pension fund returns with more than the assumed return. If you’d like to learn more about how this works, feel free to contact me.
CalPERS’s statement is another sad example of a half-truth issued by an important public agency. Notice how the statement makes no reference to where the additional contributions come from (taxpayers) or what it means for public services when money gets diverted to UAL’s (they get cut). Another recent example of less-than-full-truth disclosure is CalPERS’s unwillingness to provide information about the fees and carried interests being earned by private equity and other capital managers who have been allocated capital by CalPERS. It is not difficult to derive that math. The Texas County & District Retirement System provides it (see page 55 of this document), I and other investors who allocate money to capital managers always know the cost of fees and carried interests, and friends working at private equity and other capital management firms always know how much their pension fund and other clients are generating in fee and carried interest income for their firms because that’s how they justify the highest possible bonuses for themselves. If you would like to learn more about this subject, feel free to contact me.
I recognize that fine people operating under difficult political conditions staff the CalPERS organization. But as public servants, they should commit the organization to full disclosure to citizens. They would gain our highest respect for doing so.
*As an aside, the CalPERS statement is inconsistent in claiming contributions are being made to “pay down” the UAL but later conceding that no pay down of the UAL actually took place (because the additional contribution was not enough to offset the growth of the UAL).
Yesterday, pension reform advocate David Crane sent this email message to journalists and elected officials explaining what CalPERS’ announced return of 2.4% (instead of the 7.5% it needed) really means:
Recently newspapers have reported that CalPERS earned 2.4% over the last twelve months and contrasted that return with its 7.5% assumed rate of return. But what those newspapers have not reported is that CalPERS needs to earn much more than 7.5% per annum for its unfunded liability not to grow.
This is because (i) under US public pension fund accounting, liabilities grow at the assumed rate of return and (ii) currently, liabilities exceed assets. That means assets have to grow faster than the assumed rate of return in order to keep up with liabilities.
As a simplified example, let’s say a public pension fund has a 77% funding ratio, which means that it has assets equal to 77% of liabilities. For greater simplicity, let’s say it has assets of $77 and liabilities of $100, and therefore an unfunded liability of $23 (100-77). Because of item (i) above, liabilities grow 7.5% per annum. That means liabilities that today equal $100 will in one year equal $107.50. For the unfunded liability not to be larger than $23 at that time, that means assets have to grow from $77 to $84.50 (107.50-84.50 = 23). That means that the pension fund needs to earn 9.7% ($77 times 1.097 = 84.50). Anything less and the unfunded liability will grow.
This is why it’s so hard for US public pension funds to catch up once they fall behind. See this relevant article from The Economist.
For six years — from 2004-2010 — he served as a special advisor to Governor Arnold Schwarzenegger, and from 1979-2003 he was a partner at Babcock & Brown, a financial services company.
Crane also serves as a director of the Volcker-Ravitch Task Force on the State Budget Crisis, Building America’s Future, California Common Sense, the Jewish Community Center of San Francisco, the Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, the California High Speed Rail Authority, the California Economic Development Commission, the Djerassi Resident Artists Program, the Environmental Defense Fund, Legal Services for Children and the San Francisco Day School.
You can read past articles he has written on California’s public pension crisis here.
By Joel Fox | Pension reform is headed to the voters via initiative, and if successful, any future pension decisions will remain in the voters’ hands.
The bi-partisan initiative filed by former Democratic San Jose Mayor Chuck Reed and former Republican San Diego City Councilman Carl DeMaio proposes that voters have a say on any changes or increases to public employee pension plans. The proponents hope to mirror the success both had while in office when they each successfully promoted pension reforms in their cities. In both cases, public employee unions sued after the measures passed.
Trusting the voters to make decisions on complicated pension plans carries a risk. If the decision on any reform proposal is made at the ballot box that means political campaigns will emerge to support or defeat the proposals. Those fights could be decidedly one-sided. Public employee unions maintain a war chest for these sorts of fights. Raising money to pass a reform will not be easy when individuals and businesses are faced with opposition from organized groups carrying the banners of police, firefighters and teachers.
However, DeMaio and Reed are counting on the fact that they have been successful in rallying the voters to their cause in their own cities despite the opposition from powerful unions.
Can they repeat that success statewide?
The opposition will be fierce. But voters looking at the numbers could be swayed. Reed makes the argument that, “The cost of public employee pension benefits continues to skyrocket across California, crowding out funding for important services such as police, fire, schools, and road repairs.”
The initiative proponents cite the growth of pension debt from $6.3 billion in 2003 to $198 billion in 2013.
To name a couple of examples, a decade ago the City of Los Angeles set aside 3-percent of its budget to take care of pensions. Today, the figure is closer to 20-percent. That pension liability does put a squeeze on city services.
Part of the recent deal between Gov. Jerry Brown and UC President Janet Napolitano to prevent university tuition increases was for the state to help cover the university’s pension cost with a three-year infusion of over $400-million.
If no fixes are found for exploding pension costs, taxpayers will be on the hook. Given the results of the PPIC poll released yesterday, taxpayers seem in no mood to raise taxes.
The squeeze on services because of pension liabilities is real. Is that issue powerful enough to override the fierce opposition and revenue reserves of those who would fight this initiative reform?
Joel Fox is editor of Fox & Hounds and president of the Small Business Action Committee.
State and local governments across the United States are facing their worst financial crisis in years — a public pension “tsunami” of epic proportions. Some, such as Detroit and Stockton, have already been forced to declare bankruptcy, but others, such as Los Angeles, Chicago, and the State of California, are still rushing toward the fiscal cliff.
How did the public pension crisis begin? What will it take to resolve it?
These are questions that economist Lawrence J. McQuillan answers in his new book, California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, published by the Oakland-based Independent Institute.
“This book provides a blueprint for America on how to measure the true extent of a pension problem, identify the political drivers of a crisis, and make strong fiscal and moral arguments in favor of pension reforms that would permanently fix the problem,” McQuillan writes.
Drawing on the case of California, McQuillan shows that politicians of both parties set the stage for the crisis, by promising more and more retirement benefits to public employees but failing to put aside enough funds to make good on those promises. The result: state, county, and city governments will collectively be able to meet only 51 percent of their total pension obligations, leaving a $576 billion shortfall that has already cut into funding for schools, roads, policing, and other public services throughout the Golden State and will result in higher taxes on future generations.
Similar problems confront Connecticut, Florida, Illinois, New Jersey, New York, Ohio, Pennsylvania, West Virginia and other states, as well as a host of cities and counties.
Fortunately, there is a way out.
McQuillan offers a comprehensive solution that would resolve California’s pension problem in an equitable, responsible, and moral way that would preserve pension benefits already earned, allow governments to provide competitive defined-contribution pensions to employees, and grant governments the flexibility needed to avoid making future generations pay for deals they didn’t make. McQuillan’s solution could be applied anywhere in America facing a similar problem.
Lawrence J. McQuillan, Ph.D., is Senior Fellow and Director of the Center on Entrepreneurial Innovation at the Independent Institute, a non-profit, non-partisan organization that promotes the power of independent thinking to solve society’s most critical social and economic problems.
By Joel Fox | The campaign to change Proposition 13 by the self-styled “Make it Fair” coalition is not about fairness, it is all about more tax money.
The coalition claims business gets tax breaks under the current property tax system. Their favorite example to point to was a deal over a Santa Monica hotel purchase that was engineered in such a way that a property tax increase was avoided when the property was sold. But when a fix to the problem supported by the business community was introduced in the legislature the plan was spiked by pressure from the influential public employee unions because they didn’t want a fix, they wanted a campaign issue to undo Prop 13.
The reason is because it is not about fairness, it’s about the money.
You can bet that fairness in the minds of Prop 13 change promoters doesn’t include either dealing with the pension issue or re-thinking cheaper, more effective ways to deliver services to the citizenry. (Remember Gov. Mario Cuomo’s admonition: It is not government’s role to deliver services but to see that they are delivered.)
If the conversation were truly about fairness there would be talk of reimagining government for the 21st century not financing a 19th century governmental structure with the expensive additions of items like unfettered pensions for government workers paid for by beleaguered taxpayers who don’t enjoy the same privileges.
The Make It Fair coalition is looking for the $9 billion in additional revenue a new USC study says a split roll would bring in — a study commissioned by a member of the coalition. While the report discussed the approximate $9 billion take from a split roll there was no discussion of how that huge tax increase would affect the collection of other taxes. There will be consequences to the job market as businesses compensate for the new taxes including cutting jobs that would affect both income and sales tax collections in the state.
Economic consequences and negative effects on the business climate are an important part of this Prop 13 makeover debate but the USC authors noted their sole purpose was to discover how much a split roll would produce. However, they went out of their way to suggest at the end of both the Introduction and Conclusion of their report that the state needed additional money for certain budget items echoing their sponsors’ political agenda and going beyond the stated academic purpose of the paper.
Not a surprise since it’s not about fairness, it’s about the money.
Is the discontent promoted by a small group of left leaning organizations and public employee unions widespread? How real is the threat presented to Proposition 13 by a coalition made up mostly of old faces who have wanted to dismantle Prop 13 for the longest time?
The question is will big money players like SEIU and teachers unions step up to engage in the multi million dollar battle over a split roll? SEIU is already providing seed money for the so-called grass roots efforts. The teachers unions are weighing their options with an eye on the possibility of extending the Proposition 30 tax increases that may face less opposition than attempting to change Prop 13.
Don’t kid your self — the “make it fair” argument will ultimately cast a wider net. Notice the advocates of the change are talking about corporations AND wealthy landowners. Wealthy landowners as individuals, perhaps? In case no one has noticed, the wealthy in California pay the highest income tax rates in the country. But clearly that is not enough for the tax increase advocates.
Will expensive residential properties be next in line for a property tax increase if a split roll succeeds? Where is the line drawn on who is a wealthy landowner in a state with high housing costs? The word to voters watching this emerging debate on fairness is: Beware.
Because it’s not about fairness, it’s about the money.
Joel Fox is editor of the Fox & Hounds political blog and president of the Small Business Action Committee. He is a past president of the Howard Jarvis Taxpayers Association.
By Stephen Eide | In my recent report “California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services,” I document how rising public pension costs continue to deprive vital public services of funding. There’s only so much room in state and local budgets. When pension costs rise at a rate above revenues, taxpayers can expect less in terms of basic infrastructure maintenance, public safety, education, and quality-of-life services such as parks and libraries.
But it’s not only taxpayers who are getting a raw deal here. The status quo on pensions is not great for public workers, either.
California local government employees’ salaries grew 4.6 percentage points slower than private sector workers’ salaries over the past fifteen years. Same labor market, different takehome pay experiences.
To be sure, a big part of the gap is due to rising health benefit costs, which are also more generous in the public sector. Because of union resistance to shift more costs to deductibles and co-pays, government employers have seen their insurance premium expenses climb much more rapidly than private corporations’.
But, more recently, healthcare cost growth has slowed and pension costs have accelerated. Since 2003, state and local governments nationwide saw their pension costs grow 135 percent, whereas health insurance premiums rose 85 percent and salaries 31 percent.
Public pensions in California are among the richest in the nation. All things being equal, the more generous retirement benefits become, the greater threat they pose to budgets. But, in recent years, costs have risen because of an explosion in pension debt, not benefit enhancements.
It would be one thing if workers’ salaries were being trimmed because government employers decided to fatten their retirement benefits. But that’s not what’s happening for more recent hires. Their benefits have been lowered, thanks to California’s 2012 PEPRA law, and their pay has been growing more slowly, as governments find themselves forced to divert new revenues to backfill pension promises made to prior generations of employees.
Despite constant claims that their cause is anti-worker, pension reformers have made many overtures to public employees. A reformed pension system is one better-positioned to make good on its promises. As workers in Central Falls, Rhode Island, Pritchard, Alabama and Detroit found out, legal guarantees amount to little when there’s no more money left.
California has some of the strongest legal prohibitions against pension changes in the nation. But even if governments can’t touch pensions, they can furlough or lay off employees and reduce their pay. And, indeed, they’ve been doing all these things. It turns out that guaranteeing “retirement security” for some is only possible at a cost of job and wage insecurity for others.
In terms of the public’s hearts and minds, the most persuasive case for pension reform remains the effect on services and government budgets more generally. Perhaps union leadership and members will never come around, but the facts remain. Unchecked growth in pension costs means lower wages for government employees.
Stephen Eide is a Senior Fellow at the Manhattan Institute and author of the recent report “California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services.”
Additionally, a 404 Not Found
The requested URL /blog/wp-content/themes/default/tent.php was not found on this server.