Pensions: The high cost of ‘socially responsible’ investment policy

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

SACRAMENTO – A newly released report from the California Public Employees’ Retirement System confirms that, fulfilling the Legislature’s directive to divest from coal-related investments, the pension fund has now largely exited from coal stocks. But as news reports this week suggest, this “socially responsible” investment policy has come at a price, as coal stocks soar under the Trump administration’s fossil-fuel-oriented energy policy.

The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

The article was originally published by CalWatchdog.com

More CalPERS retirees are getting $100,000 pensions

As reported by the Press-Enterprise:

The number of retired public employees in the CalPERS system with annual pensions of $100,000 or more grew 63 percent since 2012, according to a report released Wednesday, Aug. 9.

Riverside County, Long Beach, Anaheim, Torrance and Riverside made the list of the 25 public agencies with the most pensioners receiving six-figure retirement pay, Transparent California reported. Almost 23,000 CalPERS retirees collected pensions of at least $100,000 in 2016, the government watchdog group found.

The rise in $100,000 pensions underscores the importance of making public employee pension data public, Robert Fellner, Transparent California’s research director, said in a news release.

Transparent California is an offshoot of the Nevada Policy Research Institute, which describes itself as a “nonpartisan, non-profit think tank that promotes policy ideas consistent with the principles of limited government, individual liberty and free markets.”

A spokesman for Californians for Retirement Security, a coalition of unions and other groups representing public employee retirees, took aim at Transparent California. …

Click here to read the full story

California’s Pension Crisis in a Nutshell

PensionsThe town of Loyalton, CA is a short scenic drive north of Truckee and, seemingly, a world away from the financial strain facing CalPERS. It is the equivalent of a gnat on an elephant’s back.

Yet, the town’s pension woes provide insight to the overwhelming crisis facing other – and much larger – municipalities whose employees are participants in CalPERS.

An article in the Los Angeles Times reads like a case study in the dangers of unsustainable promises.

In summary, the last of the town’s covered employees retired; there are four retirees with a vested full retirement benefit. Loyalton’s City Council elected to pull out of CalPERS when the fourth one retired.

Calpers smacked the town with a $1.7M termination fee.

Why?

Because the long-term liability associated with future pension benefits was grossly underfunded. The article does not say that, but it is the primary underlying reason.  You see, if the town’s plan had been properly funded, there would have been sufficient assets to cover the four until the day they died, plus spousal benefits to the extent they existed.

Loyalton does not have anywhere close to that kind of money lying around, so pensions will be slashed by 60%.

The retirees are screaming foul. After all, they were promised a sum-certain benefit for life.

To be fair, the employees, council and mayor should have done the math a long time ago. The town itself was not managed well, but you can say that about many municipalities, including Los Angeles. (L.A. does not participate in CalPERS. Nevertheless, it faces the same fundamental problem within its own retirement plans.)

What CalPERS is doing is financially and technically justifiable, but it demonstrates just how deluded many beneficiaries have become. The promise of guaranteed pensions for life is only as good as the assets backing them.

Loyalton could have weathered the crisis had it stayed in CalPERS. What that points out, though, is the weakness in the assumptions underlying the entire retirement fund. It depends too heavily on contributions from current employees to cover past service. It is a Ponzi scheme, in that respect.

But it does not have to be. A defined benefit plan can work … if contribution levels are sufficient. I accounted for several small defined benefit plans back in the day when I was just out of college. We used conservative assumptions and were straightforward in our projections to the employers and employees.

Employees throughout the state need to contribute more of their own money to close the funding gap. It is unfair to charge the taxpayers for the state’s years of over-promising more than it could afford.

The good news is that higher contributions can be spread over many years. The pain would be no worse than felt by private sector employees who do the math and decide to increase their 401-K payroll deductions.

If employees want a guaranteed benefit, they must pay a premium for the protection. That’s no different than when we choose lower-yielding investments in return for less risk.

It is also essential to educate the participants in CalPERS about what a promise really is.

No sense in trying to teach that to our legislators, though.  They have been in bed with the public union leaders for way too long.

Paul Hatfield is a CPA and serves as President of the Valley Village Homeowners Association. He blogs at Village to Village and contributes to CityWatch. The views presented are those of Mr. Hatfield and his alone and do not represent the opinions of Valley Village Homeowners Association or CityWatch. 

This article was originally published by CityWatchLA.com

CalPERS touts investment gains while ignoring long-term problems

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

Last week’s announcement by the California Public Employees’ Retirement System that it had strong 11.2 percent returns on its investment portfolio in 2016-2017 after terrible returns the two preceding years prompted ebullience from the pension giant’s supporters.

Sacramento Democratic insider Steve Maviglio and the Californians for Retirement Security – a union-backed group that opposes any effort to change public employee pensions – shared a Twitter post about how the news “should quiet pension bashers.”

But credit ratings agencies, actuaries and investment experts aren’t likely to see the news as reason to change their grim view of CalPERS’ medium- and long-term prospects. Even with the strong year, CalPERS still only has 68 percent of funds in hand to cover its pension obligations – a roughly $100 billion shortfall – and that’s based on a forecast of 7 percent annual returns that CalPERS’ own consultant said should be reduced to 6.2 percent.

Meanwhile, local governments around the state are in no mood for happy talk about the nation’s largest public pension agency. Their required CalPERS’ pension payments are soaring and appear likely to keep increasing for years to come – even if CalPERS achieves its 7 percent return goal. Aging public agency work forces are swelling the ranks of retirees and “smoothing” practices that phased in CalPERS rate increases over the last 15 years no longer offer much of a cushion to governments’ bottom lines.

Modesto official: CalPERS status quo will collapse

In May, Joe Lopez, Modesto’s acting city manager, said the city eventually wouldn’t be able to afford its CalPERS bill, which will nearly double over the next eight years.

“Ultimately there is going to have to be a substantial change made to the way the pension system is run,” Lopez told a City Council budget committee hearing, according to the Modesto Bee. “We can’t continue to rely, CalPERS can’t continue to rely, on revenue [from cities and its other public sector members to meet its pension obligations]. There is going to have to be substantial changes to the actual benefit packages if these are ever going to be sustainable.”

There are similar worries in many small cities around the state.

Last month, Chico Councilman Randall Stone – a financial planner – predicted CalPERS would eventually collapse as the benefits it paid out exceeded the money it was taking in.

The grim assessment was triggered by a report showing the city’s CalPERS bill will go up about $370,000 in 2018-19, $803,000 in 2019-20 and nearly $2 million in 2020-21 alone.

“I think generally speaking, the community doesn’t understand what a time bomb this is,” Stone told the Chico Enterprise-Record. “You should be screaming with your hair on fire from the rooftops.”

In May, the Bay Area News Group reported that three small East Bay towns – Pittsburg, Walnut Creek and Martinez – had to cut several agencies’ budgets for 2017-18 to pay their CalPERS bills. And these cuts are even before the large pending CalPERS hikes.

In March, the Ventura County Star reported on how local cities were reeling because of the CalPERS hikes. Tiny Port Hueneme’s pension bill went from $774,000 in 2014-15 to $1.3 million in 2017-18 and will reach $3.2 million in 2022-23 – more than quadrupling over an eight-year span.

SEIU leader: Pension shortfall like drought

But union officials have not expressed sympathy with struggling local governments. In a June 26 op-ed for the Sacramento Bee, Yvonne Walker, president of the Service Employees International Union Local 1000, mocked “doomsday predictions about California’s public worker pension funds.” She likened the recent poor CalPERS returns to the state’s drought, which came to an abrupt end this winter.

This analogy – and Walker’s long-term optimism – prompted a tart response from David Crane, a financial expert and former aide to Gov. Arnold Schwarzenegger.

“No financial expert can present any real evidence showing that CalPERS can grow its way back from its current 63 percent funded ratio to anywhere close to 100 percent,” Crane wrote on the Medium website.

The 63 percent funded figure went up to 68 percent after CalPERS’ good returns were noted, but Crane stands by his dismissal of any optimism about CalPERS recovering from its current woes.

This article was originally published by CalWatchdog.com

California Cuts Services, Staff to Pay Pension Costs

POLICY – Across California, many local governments have raised taxes while cutting services. Local officials desperate for union support have made irresponsible deals with public employee unions, creating staggering employee costs. Taxpayer money meant to provide essential services to the least well-off instead goes directly to higher salaries and benefits.

In Santa Barbara County, the 2017-2018 budget calls for laying off nearly 70 employees while dipping into reserve funds. The biggest cuts are to the Department of Social Services, which works to aid low-income families and senior citizens. Meanwhile, $546 million of needed infrastructure improvements go unfunded as Santa Barbara County struggles to pay off $700 million in unfunded pension liabilities. County officials estimate that increasing pension costs may cause hundreds of future layoffs.

Unfortunately, Santa Barbara County is far from alone. Tuolumne County is issuing layoffs in the face of rising labor and pension costs from previous agreements. In Kern County, a budget shortfall spurred by increased pension costs has led to public safety layoffs, teacher shortages, budget cuts, and the elimination of the Parks and Recreation department, even as Kern County’s unfunded pension liability surpasses $2 billion. In the Santa Ana Unified School District, nearly 300 teachers have been laid off after years of receiving pay raises that made them unaffordable, including a 10% raise in 2015.

In Riverside County, non-union county employees took the blow for the county’s irresponsible pension deals, as all but one of the 32 employees the county laid off this June were non-union members. This came after contract negotiations granted union employees hundreds of millions of dollars in raises. The Riverside County DA said these raises caused public safety cuts. In addition, Riverside County imposed an extra 1% sales tax to pay for these benefits. Across California, citizens suffer as local governments give away their money while cutting their services.

Government projections continually underestimate pension costs. According to a new study by the Hoover Institution, pension liabilities are understated by trillions of dollars. This happens because governments assume unrealistic rates of return on pension investments. The California Public Employees’ Retirement System, the agency managing pension and health benefits for most California employees, will assume a rate of return of 7% starting in 2020 (the current assumption is 7.5%), however, last year, CalPERS earned a return of 0.6%. California’s defined benefit system for public employees means that governments must pay their employees a fixed amount regardless of how pension plans perform. Rosy estimates for future pension performance make government obligations look smaller than they are.

Unrealistic projections also allow government officials to award big pensions, as officials argue that the big future returns they have assumed can pay off the costs. When reality hits and pension returns fall short, taxpayers are left footing the bill. This year, Californians paid $5.4 billion because of this baseless confidence, more than the state spent on environmental protection, drought response, and fighting wildfires combined. Short-sighted government optimism has real consequences for citizens forced to live in the real world.

The future of government finance throughout California looks bleak due to government mismanagement of taxpayer funds. Local representatives grant unions generous terms, and those unions in turn donate to re-election campaigns. This vicious cycle costs Californians essential services. Agreements between government officials and union bosses allies harm taxpayers, service beneficiaries and even some union workers, who find their representatives complicit in laying them off.

Government does not exist to give taxpayer money to the politically connected. Because of their twisted incentives, California’s elected officials are directly responsible for the state having the highest poverty rate in the country, and the second most unfree economy. Instead of working to fix California’s challenges, many local officials create them by refusing to serve their constituents and instead forcing citizens serve the government. If public servants are serious about real improvements, they need to push for changes to the public pension system and for limitations in every interaction between lawmakers and public employee unions.

David Schwartzman is a Policy Research Fellow at the California Policy Center.  He is a rising senior studying economics, mathematics, and finance at Hillsdale College.

This article was originally published by CityWatchLA.com

Here’s what San Francisco’s highest-paid workers make

As reported by the San Francisco Chronicle:

The City of San Francisco employed 39,634 people in 2016 (including part-time and construction workers), and the total spent on their salaries and benefits in 2016 was $4,262,344,675, according to the Office of the Controller.

That’s about the same amount as the budget for the state of Delaware, which has a population of 945,000 (100,000 more than San Francisco’s).

Salaries have increased 18.5 percent since 2012, and benefits have gone up 18.6 percent.

A deal announced by Supervisor Jane Kim and Mayor Ed Lee today will make San Francisco the first city in the nation to make community college free to all city residents.

The average salary (excluding benefits) per city employee is $83,227.14. A recent study found you need an estimated $110,357 salary to live comfortably in San Francisco. …

Click here to read the full story

Union Continues Misinformation Campaign on Pension Crisis

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

Just as the moment appeared that the media attention devoted to California’s pension crisis had begun to reach a fever pitch regarding the state’s pension crisis, a key state public employee union doubled down on its misinformation campaign regarding the state’s pension crisis.

Yvonne Walker, president of the Service Employees International Union Local 1000, wrote a recent op-ed for the Sacramento Bee titled “Let’s not be as shortsighted on pensions as on drought.”

The title of the piece actually makes it seem like it might hint at a reality check on pensions, but if you read the piece there is scarcely a single point that cannot be refuted with substantial evidence and facts.

The piece begins by drawing a flawed parallel to the state’s drought, which recently ended due to record rainfall.

The piece states that a “group of self-styled experts has grabbed the media megaphone with doomsday predictions about California’s public worker pension funds.  They are repeating the same mistake, taking a short snapshot and concluding that it will extend forever,” state’s the Bee op-ed.

So the position the SEIU 1000 president is taking is that there will somehow be some great market correction between now and 2047, similar to the record rainfall this past winter, that will magically wipe away the $160 billion in unfunded liabilities that have accrued at the California State Public Employees’ Retirement Fund (CalPERS) since 2000.

This comparison may sound intriguing to Joe Public, or some state workers looking for some consolation in the increasingly abysmal prospects that their full pension will be there when they retire.  But it simply does not match with the facts and evidence, of which few are presented to back up her arguments.

First off, this is about math, pure and simple.  And for any expert, apart from the politically motivated state-funded UC Berkeley study cited in the piece, who has taken an honest look at the figures—things are not good.

In short, no financial expert can present any real evidence showing that CalPERS can grow its way back from its current 63% funded ratio to anywhere close to 100%.

Perhaps the best source is CalPERS own actuaries, Wilshire Associates, which has stated that they project the fund to achieve an average return of 6.1% over the next several years—nearly a whole percentage point below their current 7% assumed rate of return that doesn’t fully kick in until three years from now.

David G. Crane, a Democrat who was Governor Schwarzenegger’s’ point person on pension reform, is a former investment banker and wizard with the actual numbers.

Crane continues to publish a series of financial analyses of CalPER’s own figures, which prove that the fund is insolvent absent major policy changes and major changes in the assumed rates of return.

And if you don’t trust those folks, how about take a listen to a growing list of local administrators and public officials in local government who say that CalPERS recent rate increases are eating local government budgets alive and likely to push many to the brink of bankruptcy in the coming years.

Here is a great recent piece by a Beverly Hills City Councilman called “Pension Pomperipossa: Destroying California’s Cities,” while many more local and state accounts can be found on the Pension Tsunami website.

I doubt the Los Angeles Times, KQED, CALmatters.com, and famed editorial writer Dan Walters would devote a whole series to the state’s pension crisis if it were not for real.  These folks are not a group of “self-styled experts,” quite the contrary, these are the real experts—some of the best analysts in California politics.

Furthermore, even if CalPERS gets a 20% return on their portfolio in 2018, which is not even possible, they would still only recoup a fraction of their unfunded liabilities.

CalPERS and the state’s insolvent pension system is not subject to natural weather conditions, it’s a man-made disaster, resulting from years of mismanagement and making assumptions that deny the most basic of prudent actuarial and investment principals.

Unfortunately, SEIU President Walker and the rest of her union counterparts refuse to acknowledge what is so clear to everyone else—absent major policy changes CalPERS will go belly up and likely take a number of localities and public retirees down with it in the form of bankruptcy and lost government pensions.

That’s the reality.  And while union officials may believe they are gaining some kind of twisted political leverage or temporary windfall for their members by denying this reality, it will not change the underlying math, which is so very clear to everyone else.  In fact, the numbers are staggering, and undeniable to someone like me, and the many other experts listed above.

The state’s public employee unions are supposedly advocates for government and government employees, but by denying the most basic realities about the state’s pension crisis they are demonstrating that they care far more about their own self-interests than about a truly thriving public sector, and even the basic well-being of their own members.

After all, how will the state afford to pay for any current government programs if it is spending 4/5 of all new tax dollars on retired government employees?  I’m still not quite sure exactly how that policy result is defined as “progress.”

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

This piece was originally published by Fox and Hounds Daily

Jerry Brown Leveraging Payroll in Scheme that Bankrupted Orange County

May Revise 2017Gov. Jerry Brown and State Treasurer John Chiang plan to tap California’s government payroll accounts to make long-term subsidized loans to the state’s public pension plan in a scheme that hasn’t been tried since it bankrupted Orange County in 1994.

Breitbart News recently reported that although Gov. Brown’s 2017-2018 May Budget Revision trumpeted that California will collect an extra $2.5 billion in capital gains taxes, the same data revealed that sales taxes, which are considered the best measure of the health of the state’s economy, “were revised down by $1.2 billion, reflecting weak cash receipts.”

Deep in the 91-page budget report, Brown also revealed that last year’s 22 percent jump to $279 billion for the retiree pension and lifetime healthcare liabilities will force the state’s annual pension plan contributions to almost double from $5.8 billion this year to $9.2 billion by FY 2023-24.

Brown warned that deteriorating tax trends and mushrooming pension payments put California at risk of suffering a catastrophic $20 billion deficit in a “moderate recession.”

But according to the Los Angeles Times, Brown apparently has convinced State Treasurer and fellow Democrat John Chiang to bail out a big piece of the state’s rising pension costs for the next 12 years by making a $6 billion loan at a highly-subsidized interest rate from the Treasury’s $76.5 Billion “Pooled Money Investment Account” (PMIA).

The PMIA has traditionally served as a money-market fund for the state’s general fund, agencies, counties, and cities to invest short-term cash, including payroll accounts. According to the PMIA’s September 2016 audit, the fund earns only a 0.88 percent current yield, because it provides overnight cash liquidity to depositors by investing in U.S. Treasurys and agencies, plus high-quality repurchase agreements, certificates of deposit, and commercial paper with an average maturity of 185 days (about 6 months).

The last time a state or local treasurer running a government money market fund participated in this type of “borrowing short and lending long” scheme was Orange County’s Bob Citron.

The OC Treasurer was celebrated as a genius by local political leaders for making almost $1.3 billion in excess profits over an 9-year period by investing $7 billion of county and local government short term and payroll cash in longer term 5-year U.S. Treasury Bonds. Unfortunately, Citron’s fund suffered a $2.3 billion loss in 1994 and “the OC” filed the largest Chapter 9 municipal bankruptcy in history.

The resulting scandal and huge loss of taxpayers’ funds caused the Securities & Exchange Commission to adopt Rule 33-7320, which severely restricts money-market mutual funds from leveraging principal risk by “borrowing short and lending long.”

But under U.S. constitutional state sovereignty, the SEC has no jurisdiction over any funds managed by the Treasurer of the State of California.

Treasurer Chiang claims he supports the pension loan, because the CalPERS pension plan will pay his PMIA the more favorable yield of a 2-year Treasury Note, currently yielding 1.21 percent. But that means the PMIA is being asked to make a highly subsidized loan, since the current yield on an equivalent 12-year California General Obligation bond is 2.23 percent, or about 85 percent higher.

This piece was originally published by Breitbart.com/California

Jerry Brown Embraces Pension Shell Game

Jerry Brown budgetLOOMING PENSION PAIN–The Jerry Brown administration last week released its revised May budget and, lo and behold, it has finally decided to (kind of, sort of) tackle the state’s massive and growing level of unfunded liabilities – i.e., the hundreds of billions of dollars in taxpayer-backed debt to fund retirement promises made to the state’s government employees.

It’s best to curb our enthusiasm, however. The governor didn’t have much of a choice. This was the first state budget that is compliant with new accounting standards established by the Governmental Accounting Standards Board that requires states to more properly account for retiree medical and benefits beyond pensions.

Because of those new standards and low investment returns, the state’s unfunded liabilities (including the University of California retirement system) soared by an astounding 22 percent since last year. But even this new estimate of $279 billion in liabilities is on the optimistic side. Some credible estimates pin California state and local governments’ pension liabilities at nearly $1 trillion, based on more realistic rate-of-return predictions.

The pension system invites eyes-glazing-over debates about the size of the liability. That’s because debts are calculated on guesswork about future investment earnings. The California Public Employees’ Retirement System (CalPERS) recently voted to lower its predicted rates from 7.5 percent a year to 7 percent. The lower the predicted rate, the higher the liabilities, which is why CalPERS and the state’s unions are so bullish on Wall Street.

CalPERS’ latest investment returns were below 1 percent, but the agency insists there’s nothing to worry about and no need to do the unthinkable (reduce future benefit accruals for current employees.) That’s the same CalPERS, of course, that in 1999 assured the Legislature that a 50-percent retroactive pension increase wouldn’t cost taxpayers a dime.  I suppose CalPERS was right. It didn’t cost a dime, although it did cost many billions of dollars. Their returns were then yielding 13.5 percent a year, and CalPERS figured the heyday would go on forever.

The other reason to be skeptical of the Brown administration’s commitment to solving the problem can be found in the May revise itself. The budget “includes a one‑time $6 billion supplemental payment” to CalPERS, according to the Finance Department. “This action effectively doubles the state’s annual payment and will mitigate the impact of increasing pension contributions due to the state’s large unfunded liabilities.”

Where is the extra $6 billion coming from in a budget that supposedly is so pinched that the governor recently signed a law raising annual transportation taxes by $5.2 billion?

Simple. The state is borrowing the money to pre-pay some of its debt. “The additional $6 billion pension payment will be funded through a loan from the Surplus Money Investment Fund,” according to the budget summary. “Although the loan will incur interest costs (approximately $1 billion over the life of the loan,) actuarial calculations indicate that the additional pension payment will yield net savings of $11 billion over the next 20 years.”

In other words, the state will be borrowing the money at fairly low interest rates and then investing the money and earning, it hopes, higher rates. The difference will help pay down some of those retirement debts. Even the well-known pension reformer, Sen. John Moorlach, R-Costa Mesa, lauded the administration for embracing that idea.

But it’s something of a shell game. It should work out well, provided the markets do as well as the state expects. In doing this, however, the state is taking out new debt that will need to be repaid. There’s no free money here. A number of localities have embraced a similar strategy with pension-obligation bonds, which are a form of arbitrage, in which the government is borrowing money and betting on future market returns.

This gimmick is similar to the one people will embrace in their personal lives. Are those credit-card debts crushing the family budget? Then borrow money from the home-equity line of credit at 5 percent and use it to pay down the 10-percent credit card loans. It makes sense, but it doesn’t deal with the real problem of excessive consumer spending.

“This is the Band-Aid,” said Dan Pellissier, a former aide to Gov. Arnold Schwarzenegger and well-known state pension reformer. “The surgery everyone is trying to avoid is on the California Rule – changing the benefits public employees receive in the future.”

When it comes to pensions, everything comes back to that “rule,” which isn’t a rule but a series of court precedents going back to the 1950s. In the private sector, companies may reduce pension benefits for their employees in the future. An employee can be told that, starting tomorrow, she will accrue pension benefits at a lower rate. The California Rule mandates that public employees, by contrast, can never have their benefit levels reduced.

That limits options for reform. In 2012, Gov. Brown signed into a law the Public Employees’ Pension Reform Act (PEPRA), which promised to address the pension-debt problem by primarily reducing benefits for newly hired employees. A reform that affects new hires will reduce contribution rates but won’t make an enormous difference until they start retiring.

“Gov. Jerry Brown’s attempt at pension reform has failed,” opined Dan Borenstein, in a recent East Bay Times column. The reason: the rapidly growing pension debt. “The shortfall for California’s three statewide retirement systems has increased about 36 percent. Add in local pension systems and the total debt has reached at least $374 billion. That works out to about $29,000 per household.”

CalPERS rebutted Borenstein by arguing that he “greatly oversimplifies and needlessly discounts the real impact that Governor Brown’s pension reform has had since it took effect in January 2013.” The pension fund insists, “PEPRA already is bending the pension cost curve – and will keep doing so with greater impact every year going forward.”

Yet the growing liabilities and the administration’s latest budget plan suggest that whatever minimal cost savings PEPRA is achieving aren’t nearly enough. Of course, union-controlled CalPERS’ goal isn’t protecting taxpayers or the state general fund – it is to enhance the benefits of the state workers whose pensions it manages.

As Calpensions explained, that $6 billion of borrowed money doubles the amount of general-fund dollars that the state is paying to deal with pension obligations. Meanwhile, as the state borrows money to pay that tab, it raises taxes to fund transportation. If Brown and the Legislature had trimmed pension costs, it would not have needed to raise gas taxes and the vehicle license fee. And the problem reverberates for local governments, too.

The May revise also showcased the same old issue with the administration’s priorities. Los Angeles Times columnist George Skelton noted that “Brown’s entertaining rhetoric itself made him sound, as usual, like a skinflint, a penny-pinching scold. But the introductory document could have been written by Bernie Sanders, if not Depression-era Socialist Upton Sinclair, the losing 1934 Democratic candidate for governor who ran on the slogan ‘End Poverty in California.’”

The budget championed myriad big-spending programs, including higher pay for public employees. So the state has been spending like crazy, but can’t manage to deal with its pension problem – at least not without borrowing money to temporarily paper over its growing debt.

All these games are about avoiding dealing with the obvious fact that California’s public-employee pensions are absurdly generous, filled with costly and anger-inducing features (spiking, double-dipping, liberal disability retirements, etc.) and unsustainable.

In 2011, the state’s official watchdog agency, the Little Hoover Commission, argued to the governor that “Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.” Six years later, the governor is still just chipping away at the edges by embracing gimmicks.

Steven Greenhut is a contributing editor to the California Policy Center, on whose website this piece originally appeared. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Prepped for CityWatch by Linda Abrams.

Questions for Someone Who Supports Superior Benefits for Government Workers

“Without disputing the figures, Monique Morrissey, an economist with the Economic Policy Institute in Washington, D.C., said the findings are misleading because they do not compare specific classes of employees or account for differences in education levels and total hours worked.”
California Is Golden State For Public Employees, by Michael Carroll, AMI Newswire, Jan. 31, 2017

Ms. Morrissey has a point, even though there was no intent to “mislead.” While our recent study “California’s Public Sector Compensation Trends,” found that full-time public sector workers in California earn pay and benefits that average at least twice as high as their counterparts in the private sector, going into comparisons by specific class of employee was beyond the scope of that particular study. But Ms. Morrissey is missing the forest for the trees.

First of all, as acknowledged in Carroll’s article where Morrissey is quoted, the study found that California’s public employees earn pay and benefits that average 39 percent higher than their public sector counterparts in the rest of the U.S. So especially in California, we conclude there are two classes of workers – public sector workers, whose 2015 pay and benefits averaged $139,691 for full-time work (if you properly fund their pensions), and private sector workers, who, very best case, earned pay and benefits that averaged $62,475.

Everybody knows that public sector workers have, on average, higher levels of education than private sector workers. Should this translate into average (and median, by the way) total earnings that are twice what all private sector workers receive? It challenges credulity.

Ms. Morrissey’s biography states, “She is active in coalition efforts to reform our private retirement system to ensure an adequate, secure,and affordable retirement for all workers.” Bravo. That is a goal we share. And so in the spirit of aligning ourselves with practical, feasible, equitable objectives towards achieving that goal, Ms. Morrissey is invited to answer the following questions:

(1)  Do you think what public sector pensions (ref. CalPERS, the largest) pay to California’s government retirees should be three to five times what Social Security offers private sector retirees?

CalPERS pensions

(2)  The average current retiree pension – not including retirement health benefits – for a state/local government worker with 30 years of service is $67,762 per year (click on any pension system to see average per former employer). There are 10 million Californians over the age of 55, 25 percent of the total population. If all of them received a pension of $67,762 per year, that would cost $677 billion dollars, 32 percent of California’s aggregate personal income of $2.1 trillion. Do you think people who are retired should collect state-funded pensions worth more on average than the earnings of people who work? Do you think this is feasible?

(3) Defenders of unaltered state/local government pension benefits in California argue that pension benefits are primarily paid for via investment returns. But they claim investment returns can average 7.5 percent per year (4.5 percent after adjusting for inflation), “risk free.” Are YOU, Ms. Morrissey, willing to personally guarantee that MY retirement investments will earn this much? Because if you are, I’ll invest every penny I’ve got with you.

(4) Our “apples-to-apples” comparison of California’s new “Secure Choice” pension option for private citizens yielded the following comparisons: (a) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75 percent of final salary. (b) Public sector: Public Safety, 30 years work – pension is 90 percent of final salary. (c) Private sector: “Secure Choice,” 30 years work – pension is 27.6 percent of final salary. Do you think this disparity is fair to private sector workers?

(5) Can you explain why public sector pensions are not subject to the same conservative funding and investing rules as private sector pensions are under ERISA?

(6) Do you support government programs that offer ALL American workers the SAME retirement benefits, subject to the SAME formulas and incentives, or not?

In reference to our recent CPC study, Ms. Morrissey is also on record as saying, “There have been a lot of attacks on public-sector unions because their members have been a stalwart voting block for the Democratic Party, but that doesn’t mean they’re overpaid.” This remark suggests Ms. Morrissey thinks nonpartisan “attacks” on government unions aren’t justifiable and won’t happen. That is incorrect.

Government unions, unlike private sector unions, have the ability to negotiate for financially unsustainable pay and benefits because they control their bosses through campaign contributions, because their bosses are politicians instead of business people, and because these pay and benefit packages are paid for through coercive taxes instead of via allocations of precarious profits.

Government unions have created two tiers of workers in this country. Government workers not only have unaffordable pay and retirement security, but their union leaders have an incentive to support government policies that destabilize and divide this nation, because that will create the need for even more unionized government workers. Government unions, intrinsically, are economically damaging and politically authoritarian.

“Unsustainable” means that sooner or later an end will come. When the money is gone, Morrissey and her gang will have a lot more questions to answer.

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