California’s Total Government Debt Rises to $1.3 Trillion

california-debtjust released study calculates the total state and local government debt in California as of June 30, 2015, at over $1.3 trillion. Authored by Marc Joffe and Bill Fletcher at the California Policy Center, this updates a similar exercise from three years ago that put the June 30, 2012 total at $1.1 trillion. As a percent of GDP, California’s state and local government debt has held steady at around 54 percent.

For a more detailed analysis of how these debt estimates were calculated, read the studies, but here’s a summary of what California’s governments owe as of 6/30/2015:

(1)  Bonds and loans – state, cities, counties, school districts, community colleges, special districts, agencies and other authorities – $426 billion.

(2)  Unfunded pension obligations (official estimate) – $258 billion.

(3)  Other unfunded post-employment benefits, primarily for retiree health insurance – $148 billion.

This total, $832 billion, ignores the fact that these pension obligations are officially calculated based on a return on investment projection that currently hovers between 7.0 percent and 7.5 percent, depending on which pension system you consider. But CalPERS, the largest of California’s roughly 90 major state and local government worker pension funds, has already determined they will have to lower their rate of return projection to 6.5 percent, an action that when emulated by other pension systems will immediately raise the unfunded calculation from $258 billion to $390 billion.

Our estimate, which uses the assumptions municipal credit analysts for Moody’s now use when evaluating the credit-worthiness of cities and counties, uses a rate of return projection of 4.4 percent. That rate is based on the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. This rate is far more “risk free” than 6.5 percent, much less 7.5 percent, and when you apply this rate to calculate the present value of the future pension obligations facing California’s state and local governments, the unfunded liability soars to $713 billion, bringing the total of bonds, OPEB and unfunded pensions to $1.29 trillion.

This $1.29 trillion does not include deferred maintenance and upgrades to California’s infrastructure, nor does it include California’s share of federal debt. More on that later.

For the moment, let’s just assume the pension funds manage to earn around 5.5 percent per year. That’s less than the reduction to 6.5 percent they’re already acknowledging, but it’s more than the 4.5 percent that professional credit analysts are already using when reporting credit ratings for government agencies. That 5.5 percent assumption would put California’s total state and local debt right around a $1.0 trillion. How much would it cost to pay off a cool trillion in 30 years at a rate of interest of 5.5 percent?

Seventy billion dollars. That’s over $5,000 per year for every household in California. Just to make payments on debt. That’s before any payments for ongoing services.

It gets worse.

As noted in the study, if one allocates federal debt according to state GDP, the share affecting Californians adds another $1.8 trillion to their debt burden. Again, using rough numbers, we’re now talking about $15,000 per year, per household, just to make payments on local, state and federal government debt.

Nobody knows how this will unwind. If interest rates rise, debt service will rise proportionately. To spark inflation to whittle away the impact of debt payments may be the most benign scenario, but only if inflation affects wages and not just assets. Most scenarios aren’t pretty.

The study concludes:

“Combining California’s debt with publicly held federal debt, we estimate a total debt-to-GDP ratio of 125 percent (or 153 percent using the broader definition of federal debt). This level places California distressingly close to peripheral Eurozone countries that faced financial crises in 2011 and 2012. Portugal’s 2015 debt-to-GDP ratio was 129 percent and Italy’s was 133 percent.”

While recommendations were beyond the scope of this study, here are three:

(1) Reform pensions and compensation for government workers so they experience the same financial challenges and opportunities as the citizens they serve. Cap pension benefits at twice the maximum Social Security benefit (around $62,000 per year). At a minimum, enact these reforms for all future work performed, both by new and existing public sector employees.

(2) Invest a significant percentage of California’s pension fund assets in infrastructure projects here in California. By using a lower rate-of-return projection, pension funds can compete with bond financing. They will earn a risk-free rate of return, California will rebuild its infrastructure, and millions of citizens will be put to work.

(3) Reverse the extreme environmentalist agenda that controls California’s state Legislature. Enact reasonable reforms to enable development of land, water and energy to lower the cost-of-living and encourage business growth. Private sector unions should be aggressively leading the charge on this.

There are a lot of good reasons why California is probably not destined to endure the financial paroxysms that already grip nations such as Italy and Portugal. Our innovative spirit and creative culture still attracts the finest talent from around the world. But California’s political leadership will have to admit there’s a problem, and make some hard choices. Hopefully when they finally do this, they will be thinking about the citizens they serve.

Ed Ring is the vice president of policy research at the California Policy Center.

San Francisco grapples with growing crime, blight after years of liberal policies

As reported by Fox News:

San Francisco is earning a growing reputation for more than just its unmatched tech sector – for critics, the city stands as a profound example of the damage ultra-liberal policies can do.

After 20 years of envelope-pushing changes to grow government and ease law enforcement, the once-shining City by the Bay has turned into a place where:

“There’s a very tolerant attitude, you can very much do anything on the streets you want,” said Marc Joffe, director of research at the California Policy Center think tank. “As members of a civilized society, there are things you should not accept. But we have ignored that … and there is nobody on the other side setting limits.”

San Francisco’s lax attitude is nothing new and has served as a beacon for the American counter-culture dating back to the Beat Generation. But the city’s embrace decades ago of free love and drugs has morphed into something else. …

Click here to read the full article

Association of Pension Funds Blacklists Reform Organizations

pensionIn an press release from the National Conference on Public Employee Retirement Systems dated December 19, 2016, the California Policy Center, and its spinoff online publication, UnionWatch, were both chosen, for the 2nd year in a row, as one of only 28 “policy and research organizations” that NCPERS has deemed to be “Think Tanks that Undercut Pensions.” Ponder the significance of this excerpt from that same press release: “Under the Code of Conduct, NCPERS urges its corporate members to disclose whether they contribute to these organizations.”

What exactly were the transgressions of the California Policy Center, and UnionWatch, that earned them a place on this list of undesirables? That earned them an admonition from NCPERS to its corporate members to boycott us, or else? Here is their list of criteria – and, briefly, our response:

How to be a think tank that gets blacklisted by NCPERS:

(1) Advocate or advance the claim that public defined-benefit plans are unsustainable.

Guilty. Public pension funds cannot possibly withstand the next market downturn. Unaltered, they will either bankrupt public institutions or cause taxes to be raised to punitive levels.

(2) Advocate for a defined-contribution plan to replace a public defined-benefit plan.

Not guilty. Our organization does recognize, however, that defined-contribution plans may be the only recourse, if significant changes are not made to restore financial sustainability to defined-benefit plans.

(3) Advocate for a poorly designed cash-balance plan to replace a defined-benefit plan.

Not guilty. We have not invested our resources in serious review of this policy option.

(4) Advocate for a poorly designed combination plan to replace the public defined-benefit plan.

Guilty, except that, of course, we believe a well designed combination plan could work. An example of this, fruitlessly advocated by California Governor Brown, is the “three legged stool” solution: A modest, sustainable pension, participation in Social Security, and a 401K savings plan with a modest employer contribution.

(5) Link school performance evaluations to whether a defined-benefit plan is available to teachers and school employees.

Not guilty. While it is probably true that providing teachers with the golden handcuffs of back-loaded pension benefit formulas guarantee the poor performers will stay on the job while those with talent will be more likely to pursue other employment options, we have not done any investigative work in this area. We applaud those who have.

More to the point, we applaud any corporate interest with the courage to stand up to American’s government union controlled pension systems by supporting pension reform organizations. They have a lot to lose.

Anyone who needs evidence to back up our assertion that government pension systems are joined with powerful financial special interests should consider the relationships between NCPERS – the “National Conference On Public Employee Retirement Systems” – and their “corporate membership.” NCPERS describes itself as “the principal trade association working to promote and protect pensions by focusing on Advocacy, Research and Education for the benefit of public sector pension stakeholders.”

NCPERS helpfully discloses those 36 corporations who have purchased the “enhanced level of corporate membership,” and it includes some of the most powerful financial firms on earth. To name a few: Acadian Asset Management, BNY Mellon, Evanston Capital Management, J.P. Morgan, Milliman, NASDAQ, Nikko Asset Management Americas, Northern Trust, Prudential Insurance Company, State Street Corporation and Ziegler Capital Management.

One would think corporate members with this much clout would mean the tail wags the dog, but NCPERS is a very big dog. As the political voice for nearly all major state and local public employee pension systems across the entire U.S., their lobbying muscle is backed up by nearly $4 trillion in invested assets. At one of their recent conferences, Chevron was a “platinum sponsor.”

Will Chevron ever oppose the lobbying agenda of NCPERS? Probably not. According to Yahoo Finance, BNY Mellon owns 1.34 percent of Chevron’s stock, Northern Trust owns 1.35 percent, and State Street Corporation owns 4.7 percent. That’s just the holdings of the NCPERS “enhanced members.” Moreover, pension systems don’t just invest through intermediaries such as BNY Mellon, they invest directly in these corporations. There is no financial special interest purchasing publicly traded U.S. stocks that is bigger than the pension fund members of NCPERS, and there is no client to the financial firms on Wall Street bigger than the pension fund members of NCPERS. Nothing comes even close.

No report on NCPERS would be complete without documenting just how thoroughly it is dominated by public sector and union operatives. Their president “served 3 terms on the Chicago Fire Fighters Union Local 2 executive board, resulting in two decades of union leadership.” Their first vice president, a retired police officer, “served as the first woman president of her union, FOP Queen City Lodge No. 69, from 2005 through 2015.” Their second vice president “is currently the statewide president of AFSCME Council 67, representing well over 30,000 members in 21 separate political jurisdictions.” Their secretary “has more than 30 years of service as a Tulsa public employee.” Their treasurer “served as a firefighter for 41 years. During his career, he held offices on the board of the IAFF Local 58.” Their immediate past president “is the treasurer of the United Federation of Teachers (UFT), Local 2, American Federation of Teachers (AFT).”

That’s everyone. The entire management team of NCPERS. A government union controlled financial juggernaut, marching in lockstep with the most powerful players on Wall Street. The consequences are grim for the rest of us.

Public employee pension funds are aggressively attempting to invest nearly $4 trillion in assets to get a return of 7.0 percent per year. Collectively, they are underfunded – according to their own estimates which use this high rate of return – by at least $1 trillion. And by nearly all conventional economic indicators, today we are confronting a bubble in bonds, a bubble in housing, and a bubble in stocks. The alliance of financial special interests who don’t want this party to end, and government union leaders who don’t want to lose retirement benefits that are literally triple (or more) what private sector taxpayers can expect, is complicit in policies that have allowed these asset bubbles to inflate. When the bubbles pop, they will share the blame.

In the meantime, they blacklist those of us who call attention to their folly.

Ed Ring is the vice president for policy research at the California Policy Center.

How to Identify a “Good” Bond

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

On November 8th, Californians approved Prop. 51, authorizing $9.0 billion in new borrowing for construction and upgrades of public schools. Also on November 8th, Californians approved 171 local bond measures, authorizing over $22 billion in additional financing for construction and upgrades of public schools.

This new borrowing is only to construct and upgrade K-12 and community college campuses. Total K-12 enrollment in California has been stable at around 6.3 million students for over a decade. Community college enrollment in California is about 2.1 million students. This means that this latest round of borrowing equates to $3,735 per student. And similar sums are thrown at California’s K-12 schools and community colleges for construction and upgrades every two years. What gives?

One of the most obvious problems with voter approved bonds in California is the preference given school bonds. Proposition 39, passed in Nov. 2000, reduced the supermajority needed to pass a bond issue ballot question from 66% to 55%. Meanwhile, all other public construction bonds still need the 66% supermajority. Inevitably, this law has resulted in abundant money flowing into school construction, while neglecting roads and other public infrastructure.

We asked State Senator John Moorlach, the only licensed CPC to hold office in California’s state legislature, and one of the most financially savvy individuals in Sacramento, to comment on what might constitute a “good” bond. Here is his checklist:

(1) Plan: A detailed plan that itemizes what projects will be funded with the bond proceeds is essential. How will bonds be issued and proceeds spent? Most bond measures fall short of providing itemized budgets that clearly explain the use of funds, which magnifies the opportunities for wasteful spending.

(2) Oversight: How will the implementation of the projects funded by a bond be monitored. Who will sit on the oversight board and how will people with conflicts of interest be screened out. What authority will the citizen board have if they uncover misuse of funds? Will they be able to stop work on a project?

(3) Terms: The devil is in the details. A fairly written bond contract will have a ratio of total principal and interest payments to principal of between two-to-one and three-to-one. But bonds still slip through, avoiding informed scrutiny by a financial expert, that can have ratios of total payments to principal amount as high as ten-to-one. Costs of issuance are another area where abuse occurs. A fairly written bond contract will award the underwriters between one and two percent. A small bond, say, under $10 million, may command a fee of around three percent. More than that is unfair to taxpayers.

(4) Reserves: How much cash will be set aside so that district won’t return with more requests for money? Many school districts have new bond measures on the ballot every two years. But the payments on these each of these bonds, not subject to any Prop. 13 restrictions, increase property tax assessments for thirty years or more. With school enrollment in California stable for over ten years, where is this money going?

(5) Maintenance: It is common to see the term “deferred maintenance” listed as one the uses of proceeds for a proposed bond. When new construction is financed with a bond, how much cash will be set aside to maintain these facilities? Equally pertinent, why can’t this maintenance be funded out of operating budgets?

(6) Promotional Funding: Is the campaign supporting a bond paid for by the people who’ll benefit from the bond? There is a clear conflict of interests when the most active participants in the paid political debate over whether or not voters should support a new bond proposal are the underwriters who will collect fees, the construction firms who will do the work, and the teachers unions who will always favor more facilities on their campuses.

(7) Project Labor Agreements: If the bond doesn’t explicitly prohibit cost-boosting Project Labor Agreements, then it is likely they will be incorporated. By excluding non-union shops from the bidding process, project costs are inflated by between 10% and 40%, all of which is borned by taxpayers.

A California Policy Center study released in 2015, “For the Kids” – Comprehensive Review of California School Bonds,” estimated that between 2000 and 2014, California’s voters approved, on average, $10 billion per year on new school bonds. Since then, through November 8th, voters have approved at least another $40 billion of new school bonds. Not including the interest on bonds still outstanding that were issued before 2000, the interest and principal payments on this $180 billion in school bond borrowing costs taxpayers at least $11.7 billion per year.

Adopting these seven criteria to evaluate bonds will go a long way towards ensuring that bond debt is approved by informed voters, and that the proceeds serve the people, especially the students, instead of special interests.

Ed Ring is the vice president of research policy for the California Policy Center.

Californians Approve $5 Billion per Year in New Taxes

For the last few years, using data provided by the watchdog organization CalTax, we have summarized the results of local bond and tax proposals appearing on the California ballot. Nearly all of them are approved by voters, and this past November was no exception.

With only a couple of measures still too close to call, as can be seen, 94 percent of the 193 proposed local bonds passed, and 71 percent of the proposed local taxes passed. Two years ago, 81 percent of the local bond proposals passed, and 68 percent of the local tax proposals passed. No encouraging trend there.

Outcome of Local Bond and Tax Proposals – November 2016

outcome-of-local-bond-and-tax-proposals-november-2016

A simple extrapolation will provide the following estimate: Californians just increased their local tax burden by roughly $4 billion, in the form of $1.9 billion more in annual interest payments on new bond debt, and $2.1 billion more in annual interest on new local taxes. But that’s not even half the story.

California’s voters also supported state ballot initiatives to issue new bond debt and impose new taxes. Prop. 51 was approved, authorizing the issuance of $9 billion in new bonds for school construction. Prop. 55 extended until 2030 the “temporary” tax increase on personal incomes over $250,000 per year, and Prop. 56 increased the cigarette tax by $2 per pack. The cost to taxpayers to service the annual payments on $9 billion in new bond debt? Another $585 million per year. Even leaving “rich people” and smokers out of the equation, California voters saddled themselves with nearly $5 billion in new annual taxes.

But as they say on the late-night infomercials, there’s more, much more, because California’s state legislators don’t have to ask us anymore if they want to raise taxes. November 2016 will be remembered as the election when a precarious 1/3 minority held by GOP lawmakers was broken. California’s democratic lawmakers, nearly all of them controlled by public sector unions, now hold a two-thirds majority in both the state Assembly and the state Senate. This means they can raise taxes without asking for consent from the voters. If necessary, they can even override a gubernatorial veto.

And they will. Here’s why:

There are three unsustainable policies that are considered sacrosanct by California’s state lawmakers and the government unions who benefit from them. (1) They are proud to have California serve as a magnet for undocumented immigrants and welfare recipients. (2) They are determined to continue to overcompensate state and local government workers, especially with pensions that pay several times what private workers can expect from Social Security. (3) They have adopted an uncritical and extreme approach to resolving environmental challenges that has created artificial scarcity of land, energy and water, an asset bubble, and a neglected infrastructure that lacks the resiliency to withstand large scale natural disasters or civil emergencies.

All three of these policies are extremely expensive. “Urban geographer” Joel Kotkin, writing in the Orange County Register shortly after the Nov. 8 election, had this to say about these financially unsustainable policies:

“This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Despite the increase in consumer confidence since the surprising victory of Donald Trump in the U.S. presidential election, the stock and asset bubble that has been engineered through thirty years of expanding credit and lowering rates of interest is going to pop. The following graphic, using data from Bloomberg, explains just how differently our economy is structured today compared to 1980 when this credit expansion began.

1980-vs-2016

As can be easily seen from their price/earnings ratios today, publicly traded stocks are grossly overvalued. Equally obvious is that interest rates have fallen as low as they can go. For more discussion on how this is going to affect the economy, refer to recent California Policy Center studies “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” and “The Coming Public Pension Apocalypse, and What to Do About It.” Despite healthy new national optimism since Nov. 8th, the economic fundamentals have not changed.

California’s democratic supermajority legislators, and the government unions who control them, are going to have a lot of explaining to do when the bubble bursts. For decades they have successfully fed their unsustainable world view to the media and academia and the entertainment industry. For over a generation they have brainwashed California’s K-12 and college students into militantly endorsing their unsustainable world view. This year they conned California’s taxpayers into approving another $5 billion in new annual taxes. But the entire edifice exists on borrowed time.

Ed Ring is the vice president of research policy at the California Policy Center.

Nov. Election Sees More than $34 Billion in Local Borrowing and Local Tax Increases

Money

New local taxes and new local borrowing are a regular phenomenon in California elections, but this year our government union-controlled politicians have outdone themselves. Let’s compare:

November 2014 – $11 billion in new borrowing proposed via 118 local bond measures, 81 percent passed. Of the 117 local proposals for new taxes, 68 percent passed.

June 2016 – $6.2 billion in new borrowing proposed via 48 local bond measures, an estimated 93 percent passed. Of the 42 local proposals for new taxes, an estimated 66 percent passed.

November 2016 – $32.2 billion in new borrowing via 193 local bond measures, and 224 local proposals for new taxes!

Not only do these general and primary and special election tax and bond measures accumulate year after year, but they nearly always pass! The primary source for this information is the California Tax Foundation, who have just produced another excellent guide “Local Tax and Bond Measures 2016.” This time, they have not only compiled a list of all of the proposed local taxes and bonds, but for each of the proposed new local taxes, they have compiled the projected annual collections. The result is stunning.

2016 California Local Tax and Bond Measures

2016-california-local-tax-and-bond-measures

As this table reports, $32.2 billion in new borrowing is being proposed, nearly all of it for schools and colleges. At 5.0 percent annual interest with a 30 year repayment plan, this borrowing will cost property owners another $2.0 billion per year in increased property taxes. If over 90 percent of these bonds are approved by voters, as recent history indicates is likely, California’s taxpayers will suddenly have saddled themselves with nearly $30 billion in new government debt.

Also as reported on the above table, the 224 proposed tax increases are estimated to cost taxpayers at least $2.9 billion per year. “At least,” because CalTax was unable to find revenue projections for 29 of them. And while “sin taxes” on marijuana and soda promise to bring in $58 million and $18 million, respectively, it is sales tax, that everyone pays, that will bring in most of the revenue, over $2.3 billion.

Because local taxes are numerous and dispersed onto hundreds of differing ballots across the state, they don’t get the visibility that state tax increases generate. But collectively they are just as significant. California’s Prop. 30, passed by voters in 2012, generated about $6.0 billion per year. That same tax, which was supposed to be temporary, will be extended through 2030 if voters approve Prop. 55 this year. But if you compare this statewide tax to the proposed local taxes, $2.9 billion per year, along with required payments on the local bonds, $2.1 billion per year, you are adding another $5.0 billion annual burden to taxpayers.

Passing Prop. 30 was a major fight. Similarly, Prop. 55 has huge visibility with voters. But because nearly all of the local measures pass, and because dozens if not hundreds of them appear on the ballot every election, local taxes and bonds matter more. Invisible, ongoing and ever expanding, they are silently elevating the cost-of-living for ordinary Californians as much or more than state taxes.

Where does this money really go? Why is there an insatiable thirst for more taxes and more borrowed funds?

One word: Pensions. One cause: Government unions and their allies in the financial community, who together comprise what is by far the most potent political lobby in California.

May 2016 analysis by the California Policy Center, using the most recent data available from the U.S. Census Bureau, estimated that during 2014, California’s 80+ independent state/local government employee pension systems received $30.1 billion in contributions (ref. table 2-A). Later in that same report, on table 2-C which is displayed below, one can see how much these pension systems actually need to remain financially healthy. At a minimum, they are collecting $8.0 billion per year LESS than they need. And that is if the investments they’ve made yield an annual return of 7.5 percent per year for the next 30 years. At the modest reduction of that projection to 6.5 percent – which even CalPERS has announced they are going to phase in as their new projection for calculating required annual contributions, these pension systems are collecting $22.2 billion per year LESS than they need.

California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI

california-state-and-local-pension-funds-consolidated

If California’s state and local government workers participated in Social Security like the rest of California’s workers, instead of receiving guaranteed defined benefit pensions that on average pay FOUR TIMES what Social Security recipients can expect, there would be no insatiable need for more money for the pension systems. Even if California’s state and local government workers merely received defined benefits that paid, on average, TWICE what Social Security recipients can expect, these pension funds would currently have surpluses. Moreover, there would be money left over in local municipal and school district operating budgets to maintain facilities, instead of having to perpetually borrow.

Six billion dollars per year ala Prop. 30 and Prop. 55. Another $5 billion per year thanks to new proposed local taxes and borrowing just this November. And it’s not even close to enough. California’s state and local government pension systems are going to need somewhere between $50 to $60 billion per year to stay afloat, and currently they’re collecting barely more than half that much.

No wonder there’s the perennial scramble for more. More. MORE.

*   *   *

Ed Ring is the president of the California Policy Center.

Average Costa Mesa Firefighter Makes Nearly $250,000 Per Year. Why? Pensions.

Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. And it even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.

According to payroll and benefit data reported by the city of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.

And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.

We have obtained two innocuous documents recently delivered to the city of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:

Projected Employer Contributions to CalPERS  –  Costa Mesa Police

employer-contributions-to-calpers

Projected Employer Contributions to CalPERS  –  Costa Mesa Firefighters

projected-employer-contributions-to-calpers-costa-mesa-firefighters

In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this:  For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.

Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions … assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized.”

And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2 million in 2017 to $6.8 million in 2022, and for police it is set to increase from $5.8 million in 2017 to $10.1 million in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.

As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.

The following charts, using data downloaded from the CA State Controller, put these costs into perspective:

Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015

average-and-median-employee-compensation-by-department

In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15 percent of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay: $201,330.

Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32 percent of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.

To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.

Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015

average-employer-pension-payment-as-of-regular-pay

As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.

The next chart shows the impact this has on the city of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.

Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015

total-employer-pension-payment-as-of-regular-pay

At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:

Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9 million per year for police pensions, Costa Mesa will pay $15.2 million per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4 million per year for firefighter pensions, Costa Mesa will pay $9.1 million per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.

Wow.

So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.

Average Pensions by Years of Service
Costa Mesa retirees – 2015

average-pensions-by-years-of-service

While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0 percent multiplier times their final salary, they are permitted to claim 25 years of service.

All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5 percent (or even 6.5 percent) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.

Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.

Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?

Ed Ring is the president of the California Policy Center.

If Police Unions Were Abolished and Police Associations Were Restored

Police tapeEarlier this month the New York Times ran an editorial entitled “When Police Unions Impede Justice.” They make the point that collective bargaining agreements for police employees often make it very difficult to hold police officers accountable for misconduct. When you have nearly 1 million sworn police officers in the United States, you’re bound to have a few bad apples. According to the NYT, these collective bargaining agreements discourage citizens from lodging misconduct complaints, micromanage investigations, and minimize disciplinary sanctions.

This isn’t news. It’s one of the reasons collective bargaining agreements for police officers are especially problematic. The other big problem with collective bargaining agreements for members of public safety are the often excessive and unaffordable benefit packages they’ve “negotiated” with the politicians whose careers are made or broken by these same unions. So what if police unions were abolished?

One may argue that abolishing police unions in favor of police associations – which could not engage in collective bargaining – would actually benefit all parties. An immediate benefit would be greater accountability for police officers. Why wouldn’t greater individual accountability be supported by the overwhelming majority of police officers who are conscientious, humane, compassionate members of the communities they serve? In turn, why wouldn’t greater police accountability foster rapprochement in neighborhoods where mistrust has developed between citizens and law enforcement?

With respect to pay and benefits for police officers, the risks of abolishing collective bargaining may be overstated. As it is, rates of base pay for police officers are not excessive by market standards. If they were, it would be easier to hire police officers. The primary economic problem with police compensation is retirement benefits, which in California now easily average over $100,000 per year for officers retiring in their 50’s after 25+ years of service. As the unions defend these excessive pensions, younger officers are left with far less generous benefits. The perpetually escalating contributions the pension funds demand – for all public employees – are behind virtually all tax increases being proposed in California. It can’t go on.

So abolishing collective bargaining for police would lead to several benefits (1) more police accountability and improved community relations, (2) minimal impact on base police pay, and (3) quicker resolution of financial challenges facing pensions, which will increase the probability that the defined benefit will be preserved, and will increase the potential retirement benefit available to the incoming generation of new police officers.

Apart from ending collective bargaining agreements, abolishing police unions in no way abolishes the ability of police officers to organize in voluntary associations to pursue common professional and political objectives. Before we had unionized police forces, police associations were very influential in civic affairs and could be again. And there are broader political objectives that may animate these police associations, beyond protecting bad cops and fighting for financially unsustainable retirement benefits. Police and other public safety employees, whether they are part of a union or part of a voluntary association, should think carefully about where the United States is headed. This is especially true in California.

The most dangerous risk of politically active police unions is the fact that whenever government fails, whenever our common culture is undermined, whenever social programs breed more problems than they solve, we need to hire more police officers. And whenever government expands to regulate and manage more aspects of our lives, we need to hire more police officers. Social upheaval and authoritarian government create jobs for police officers. For a police union that wants more members, a failing society and an authoritarian government suits their agenda.

For this reason, police officers have a choice to make. Do they really want to enforce the laws emanating from the climate fascists, the tolerance fascists, the sensitivity fascists, the equality fascists, the multi-cultural fascists – the entire ostensibly anti-fascist fascist gang of elitists who currently control public policy in California? Do they want to deploy drones to monitor whether or not someone got a permit to install a window in their bathroom, or watered their lawn on the wrong day? Do they want to fine or arrest people who aren’t willing to adhere to speech codes, or who refuse to hire less qualified employees in order to fulfill race and gender quotas? Do they want to police a society that has fragmented irretrievably because we continued to import millions of unskilled, destitute individuals from hostile cultures, than indoctrinated their children in union-ran public schools to falsely believe they live in a racist, sexist society?

It’s a tough choice. Will politically active police organizations redirect some of their resources to support policies that might actually reduce the number of police we need? Abolishing collective bargaining may make the right choice easier, because police will then be less immune to the economic and social havoc the elitists are currently imposing on the rest of us.

Ed Ring is the president of the California Policy Center.

How Government Unions are Hypocrites that Betray the Public

UnionGovernment unions are not unions in any traditional sense of the word. They elect the bosses they “negotiate” with. They are paid through compulsory taxes rather than via a company that has to earn a profit in the competitive market. And they operate the machinery of government which allows them extraordinary latitude to intimidate any business interests who may challenge their agenda.

Among the informed, these assertions are beyond serious debate. Even supporters of government unions acknowledge them – just not on the record. But to inform the public, it is probably too abstract to question the legitimacy of government unions because they “elect their own bosses,” “use taxpayers money instead of earned profits” or “control the bureaucracy.” Perhaps instead it is better to explain how union control of government harms people in their everyday lives.

To that end, here is a partial list of how the actions of government unions contradict their rhetoric, and betray the public they are supposed to serve:

(1) Demonizing “Profits.” From the classroom teacher to the professionally prepared press release, the rhetoric of government unions promotes the idea that “corporate profits” are unjust. The academic focus from primary school through public universities is invariably swayed, thanks to government unions, to challenge the capitalist system. Yet without profits there are no tax revenues. Governments survive financially because corporations make profits. Government unions support legislation that has made California the toughest state in the U.S. to do business. The impact: Brainwashed youth, and fewer successful companies offering fewer good jobs.

(2)  Demonizing “Millionaires and Billionaires.” Government union rhetoric frequently resorts to accusing anyone who wants to expose their destructive hypocrisy as funded by “millionaires and billionaires,” as if that should automatically nullify their arguments. These unions have carefully nurtured a public hostility and resentment towards individual wealth. The problem, however, is that almost anyone who retires after a full career in public service is a millionaire – often many times over. The average full career pension for California’s state and local government workers is over $70,000 per year. The ordinary private sector worker would have to save at least $1.5 million to generate a $70,000 annuity for the rest of their life – with no guarantees. The impact: Higher taxes and reduced services to support government worker pensions that make them all millionaires, leaving the rest of us behind to pay for it.

(3) Defending “Working Families.” That is one of the mantras of the government unions. Fighting for the “working families.” But how does this work in reality? California is one of the hardest states to practice a profession or trade. Certifications and licenses require prohibitive amounts of time and money, excluding the most deserving, aspiring citizens. Workman’s Compensation insurance rates are among the highest in the U.S., making it much harder for small companies to compete and grow their businesses. Crippling regulations. Absurdly time consuming and expensive permitting processes. The impact: Reduced upward mobility, far less opportunities for low income entrepreneurs.

(4) Always “For the Children.” The level of hypocrisy here almost defies description. Government unions have imposed their agenda on education, turning public schools into propaganda mills, indoctrinating students to believe their success or failure in life is primarily determined by whether or not they have “privilege,” and whether or not the state provides sufficient benefits, instead of teaching them the skills they will need to succeed in life on their own. Government unions have defeated any meaningful attempts to hold teachers accountable, or allow principals and superintendents to effectively manage. What they have done to California’s rising generation of students can be accurately characterized as child abuse. The impact: A generation of Californians who are unprepared to assume the responsibilities of adulthood.

(5) Respect for “Contracts.” The selective moral outrage mustered by government unions when it comes to “contracts” is exemplified by their response to pension reformers who want to lower the pension benefit formulas – just for work to be performed in the future. Because back in 1999, these same unions lobbied successfully to raise pension benefit formulas not just from then on, but back to the day each active government worker began their career. According to the same body of California contract law, they claim these retroactive benefit increases were justified, yet they fight – and win – in court whenever anyone tries to decrease these same benefits only from now on. The impact: Taxpayers are condemned to bail out these financially unsustainable pensions.

(6)  Fighting “Big Money in Politics.” The problem with this ersatz fight by government unions is simple: In state and local elections in California, nobody spends as much money as government unions. Just government unions, just in California, collect and spend over $1.0 billion per year in dues. About one-third of that, nearly $700 million every election cycle, is spend explicitly on politics and lobbying. An equal share probably goes to public education campaigns designed to promote the government union agenda. There is no special interest anywhere with the means, much less the desire, to challenge these unions. They are active in every political contest, no matter how small or how big, with access to as much cash as they need. The impact: Unions are the “big money in politics,” and their interests trump the public interest.

(7) Fighting “Big Business.” By now it should be clear enough – “big business” has no interest in challenging government unions. They collude instead, in a partnership where the government unions – who control legislation that will either favor or thwart business interests – are the dominant partner. And why shouldn’t big business partner with government unions? When oppressive regulations drive innovative competitors out of business, the monopolistic established corporations have the financial resources to comply. Why not let excessive government regulations destroy the competition? The impact: Less innovation, fewer new jobs, higher prices to consumers.

(8) Fighting “Wall Street.” This is the most ridiculous claim of all by government unions. Because when government unions successfully negotiate pay, benefit and hiring decisions that cause government deficits, Wall Street firms make billions underwriting new bond issues. And when government unions negotiate pension benefit enhancements, the union controlled pension funds invest even more money with Wall Street firms including hedge funds and private equity funds. Government is Wall Street’s biggest customer. The Wall Street influenced policies that have destroyed the ability of ordinary Americans to save for retirement or buy an affordable home have been a boon to the super rich and the pension funds. The impact: The government union alliance with Wall Street is a major factor in the hollowing out of America’s middle class.

The fact that most Californians still don’t understand the difference between government unions and private sector unions should come as no surprise. Government unions have spent literally billions of dollars over the past decades, hiring the best professional public relations talent in the world, to convince Californians they are on their side. But they’re not. Quite the contrary. Their hypocrisy is only matched by their corrosive impact on our economy, our freedom, and our democracy.

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Ed Ring is the president of the California Policy Center.

Government Unions Benefit from the Asset Bubble that Harms Workers

Earlier this month the California Policy Center released a study that provided additional evidence that the U.S. stock indexes are overvalued by approximately 50 percent, along with calculations showing the impact of a major downward correction on the solvency of California’s state and local government pension systems. Stocks are now at unsustainable bubble valuations.

Not covered in this study, but equally overvalued, are bonds, which pension systems misleadingly categorize as “fixed income” investments in their portfolio disclosures. CalPERS even went so far as to trumpet their success in earning a 9.29 percent return on “fixed income” investments in their most recent press release – a healthy return that offset losses elsewhere and allowed them to earn a marginally positive return of 0.61 percent last year. But “fixed income” investments usually refers to bonds, and bonds are also at unsustainable bubble valuations.

Here’s why bonds are overvalued today: Whenever new bonds are issued at lower fixed rates of interest than the bonds that were issued before them, then those older bonds that pay higher fixed rates of interest can be sold for more money than their original price. This is because on an open market, buyers will price a resold bond at a value calculated to equalize returns. When rates go down for new bonds, the prices for existing bonds go up. The problem is that back in the 1980s, bonds were being issued at rates as high as 16 percent, and today, they’re being issued at rates close to zero. After a 30 year ride, interest rate drops can no longer be used to elevate the value of bond portfolios.

At a macroeconomic level, every possible investment in the world is overvalued today, because central banks have lowered interest rates to zero in a desperate attempt to continue a decades long disease in which they have spent more than they’ve collected. Governments got to borrow money for next to nothing, and assets kept appreciating. But the binge is almost over, and unlike the savvy super-rich, pension funds can’t just take their winnings off the table.

New Bond Issues, Rates by Nation – June 2016 (red = negative)

Bond issue rates
Negative coupon bonds, a desperate experiment that isn’t going to end well.

This is all tedious drivel, however, if you are a unionized public employee in California. Your retirement security is guaranteed by “contract.” It’s the result of deals cut between union “negotiators” and the politicians they make or break. As a government employee in California, if you’ve worked 30 years, the average annual retirement benefit you can expect if you retire this year is worth over $70,000. To honor that expectation, CalPERS is already mid-way through their latest reassessment, a 50 percent increase to their collections from participating agencies. And if there is a 50 percent market correction (“fixed income” and equity), expect them to double or even triple their collections from taxpayers.

If you are a private citizen trying to prepare for retirement today after, say, 45 years of work and saving, good luck. Because there is no safe investment left in the world. And while you are likely to have to cope with, for example, suspended dividend payments on stocks that are down 50 percent, expect your taxes to go up in every imaginable category – sales, property, income, and hidden taxes embedded in your utility bills and phone bills. It will be “for the children” and “for public safety.” And if there’s a vote required to increase the tax, it will usually pass, because most voters don’t pay property tax, or income tax, or if they do, the taxes are indirectly assessed and invisible to them.

This is the oppressive hoax that government unions have perpetrated on the working families they claim they want to protect. They have exempted their own members, government workers, from the consequences of a corrupt financial system where they are leading partners. When governments spend more than they make and have to borrow money, central banks lower interest rates to make it easier to work the payments into the budget. At the same time, lower interest rates goose the value of stocks and bonds, helping the pension funds claim they can earn 7.5 percent per year. And when the house of cards collapses, taxpayers bail out the banks and the government pension funds.

The next time a spokesperson for a government union speaks disparagingly about Wall Street corruption, remember this: They are partners with Wall Street. They support overspending for their own compensation and benefits, creating deficits that have to be covered by taxes and borrowing. Their pension funds demand high returns, and the bankers comply, with rates that encourage borrowing and deny ordinary people the ability to save. Now that interest rates have hit zero and are even going negative in an exercise of monetary chicanery that has no rival in history, the end is near.

Public sector union leaders need to start remembering they represent public servants, not public overlords who are exempt from the reality that you can only spend as much as you earn. As it is, these union leaders are the overpaid mercenaries of capitalism at its most corrupt.

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Ed Ring is the president of the California Policy Center.