California Dems Push Pension Funds to Divest from Guns, Oil Pipeline

PensionsSACRAMENTO – California’s two major pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), control more than $500 billion in total assets, making them two of Wall Street’s most influential investors. They also are government entities, and some California leaders want to use their investment muscle to achieve public-policy outcomes.

This often comes in the form of divestment, by which the funds are encouraged – or even required – to sell their assets in industries that are viewed negatively by the people who push these efforts. These efforts tend to work against the goals of the funds’ professional investment staff, which are charged with getting high investment returns to fund pensions for the systems’ retirees. Both funds have a fiduciary responsibility to maximize their return on taxpayer dollars.

Yet estimates from a consulting firm suggest that CalPERS has lost approximately $8 billion in returns because of previous efforts to divest from coal-related and tobacco industries. That’s become a particularly contentious issue as funding levels have fallen to 68 percent for CalPERS and 64 percent for CalSTRS. That means they have only around two-thirds of the assets needed to make good on all the current and future pension promises made to government retirees.

Despite the troubling numbers, there’s a new push for divestment from some politicians. Following the October massacre in Las Vegas, by which a gunman murdered 59 people at a country music concert, state Treasurer John Chiang has called for the teachers’ fund to sell its assets in weapons firms and sporting-goods companies that sell any guns that are illegal in California.

“Neither taxpayer funds nor the pension contributions of any of the teachers we represent, including the three California teachers slain in Las Vegas should be invested in the purveyors of military-style assault weapons,” said Chiang, a 2018 candidate for governor and member of both pension boards. Chiang also told the Sacramento Bee that he plans on making a similar request to the CalPERS board.

The newspaper also noted that both funds “this year have faced calls to divest from companies that do business with the controversial Dakota Access Pipeline,” which would transport oil underground from North Dakota oilfields to Illinois. It has prompted protests from a variety of environmental and Native American activists.

Critics of these proposals say they are largely symbolic and would do little to influence gun sales or the pipelines. Divestment from these relatively small industries wouldn’t have much impact on the massive funds’ financial returns, either.

On Oct. 30, 12 members of California’s Democratic congressional delegation sent a letter to CalPERS chief executive officer Marcie Frost urging the pension fund to divest from a fund that has acquired a hotel owned by Donald Trump’s organization. This move is more directly political than many divestment efforts, which tend to focus on the social implications of investing in the pipeline, weapons manufacturers, coal-related industries and tobacco companies.

Divestment advocates sometimes argue that these controversial products may be poor long-term investments. For instance, the Public Divestiture of Thermal Coal Companies Act of 2015 and similar efforts by the state insurance commissioner were based in part on the notion that these coal-related companies may face diminishing values as the world shifts away from carbon-based fuels – a point rebutted by those who note that the current price of the stocks already reflects that risk.

But the Trump-related divestment call, led by U.S. Rep. Ted Lieu of Torrance, is designed to target the president. The members of Congress expressed their disappointment that CalPERS “has not divested its interest” in that fund “nor has taken any actions to ensure that its fees are not being transferred to President Trump,” according to their letter. They criticized CalPERS for taking a “wait-and-see” approach toward the matter.

These members of Congress claim that this CalPERS investment could be in violation of the Domestic Emoluments Clause of the U.S. Constitution, which states that “no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.” This would be an unusual interpretation of an arcane clause.

Meanwhile, the pension funds have been expanding other divestment and socially motivated investment efforts. Last December, the CalPERS investment staff “recommended that the board remove its 16-year ban on tobacco investments in light of an increasing demand to improve investment returns and pay benefits,” according to a Reuters report. But instead of removing the ban, the board “voted to remain divested and to expand the ban to externally managed portfolios and affiliated funds.”

And last year CalPERS adopted a five year Environmental, Social and Governance plan that focuses on socially responsible investing. The fund has long used its financial clout to push companies it invests in to promote, for instance, board diversity and other social goals.

Whatever their chances for approval, the latest efforts are not out of the ordinary. But they will rekindle the long-running debate between political and financial goals, and whether the former imperils the latter given both funds’ large unfunded liabilities.

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

This article was originally published by CalWatchdog.com

Study confirms the California pension crisis is hitting now

Debates about California’s pension crisis almost always focus on the big numbers – the hundreds of billions of dollars (and, by some estimates, more than $1 trillion) in unfunded liabilities that plague the public-pension funds. For instance, the California Public Employees’ Retirement System is only 68 percent funded – meaning it only has about two-thirds of the money needed to pay for the pension promises made to current and future retirees.

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

CalPERS and its union backers insist that there’s nothing to worry about, that future bull markets will provide enough returns to cover this taxpayer-backed debt. Pension reformers warn that cities will go bankrupt as pension payments consume larger chunks of municipal budgets. They also warn that pensioners are at risk if the shortfalls become too great. The fears are serious, but they mainly involve predictions about what will happen a decade or more into the future.

What about the here and now? California municipalities and school districts are facing larger bills from CalPERS and from the California State Teachers’ Retirement System (CalSTRS) to pay for sharply rising retirement costs. Most of them can come up with the money right now, but that money is coming directly out of their operating budgets. That means that California taxpayers are paying more to fund the pension system, and getting fewer services in return.

The “bankruptcy” word garners attention. This column recently reported on Oroville, where the city’s finance director warned about possible bankruptcy during a recent hearing in Sacramento. The Salinas mayor also has been waving the bankruptcy flag. The b-word understandably gets news headlines, especially after the cities of Stockton, Vallejo and San Bernardino emerged from bankruptcies caused in large part by their pension situation.

But there’s a huge, current problem even for the bulk of California cities that are unlikely to face actual insolvency. They are instead facing something called “service insolvency.” It means they have enough money to pay their bills, but are not able to provide an adequate level of public service. Even the most financially fit cities are dealing with service cutbacks, layoffs and reductions in salaries to make up for the growing costs for retirees.

A new study from Stanford University’s prestigious Institute for Economic Policy Research has detailed the depth of this ongoing problem. For instance, the institute found that over the past 15 years, employer pension contributions have increased an incredible 400 percent. Over the same time, operating expenditures have grown by only 46 percent – and pensions now consume more than 11 percent of those budgets. That’s a tripling of pension costs since 2002. Contributions are expected to continue their dramatic increases.

“As pension funding amounts have increased, governments have reduced social, welfare and educational services, as well as ‘softer’ services, including libraries, recreation and community services,” according to the study, “Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030” by former Democratic Assemblyman Joe Nation. In addition, “governments have reduced total salaries paid, which likely includes personnel reductions.”

These are not future projections but real-world consequences. The problem is particularly pronounced because “many state and local expenditures are mandated, protected by statute, or reflect essential services,” thus “leaving few options other than reductions in services that have traditionally been considered part of government’s core mission.” Many jurisdictions have raised taxes – although they never are referred to as “pension taxes” – to help make ends meet, but localities have a limited ability to grab revenue from residents.

The report’s case studies are particularly shocking. The Democratic-controlled Legislature and Gov. Jerry Brown often talk about the need to help the state’s poorest citizens.Yet, the Stanford report makes the following point regarding Alameda County (home of Oakland): Pension costs now consume 13.4 percent of the county’s operating budget, up from 5.1 percent 15 years ago. These increases have “shifted up to $214 million in 2017-18 funds from other county expenditures to pensions,” which “has come mostly at the expense of public assistance, which declined from a 33.6 percent share of expenditures in 2002-03 to a 27 percent share in 2017-18.”

The problems are even more stark in Los Angeles County. As the study noted, pension costs have shifted approximately $1 billion from public-assistance programs including “in-home support services, cash assistance for immigrants, foster care, children and family services, workforce development and military and veterans’ affairs.”

It’s the same, basic story in all of the counties and cities analyzed by the report. For instance, “the pension share of Sacramento’s operating expenditures has increased over time, from 3.2 percent in 2002-03 to 12.5 percent in the current year.” That percentage has gone from 3 percent to 12 percent in Stockton, and from 3.1 percent to 15.2 percent in Vallejo.

These are current problems, not future projections. But the future isn’t looking any brighter. “The case studies demonstrate a marked increase in both employer pension contributions and unfunded pension liabilities over the past 15 years, and they reveal that in almost all cases that costs will continue to increase at least through 2030, even under the assumptions used by the plans’ governing bodies – assumptions that critics regard as optimistic,” Nation explained.

So, yes, the public-sector unions and pension reformers will continue to argue about when – or even if – the pension crisis will cause a wave of California bankruptcies. But overly generous pension promises are destroying public services and harming the poor right now.

Steven Greenhut is a contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

This piece was originally published by the California Policy Center.

How pension costs reduce government services

A think tank at Stanford University, known for bringing investment earnings forecasts into the public pension debate in California, issued a new study last week that looks at how rising pension costs are reducing government services.

The study found that while pension costs in a large sample of retirement systems increased an average of 400 percent during the last 15 years, the operating expenditures of the government employers only grew 46 percent.

Because of the “crowd out” from soaring pension costs, money for services have been reduced, including some “traditionally regarded part of government’s core mission,” said the study by Joe Nation of the Stanford Institute for Economic Policy Research.

“As pension funding amounts have increased, governments have reduced social, welfare and educational services, as well as ‘softer’ services, including libraries, recreation, and community services,” said the study. “In some cases, governments have reduced total salaries paid, which likely includes personnel reductions.”

The Stanford institute drew national attention in 2010 when graduate students calculated state pension debt was much larger than reported. To discount future pension debt, they used earnings forecasts for “risk-free” bond rates, rather than stock-based investment portfolios.

Nation’s study uses both the actuarial assumptions baseline of the retirement systems and a bond-based alternative to project that pension costs, even without a big stock-market drop, will continue to crowd out funding for government services during the next decade.

“Employer contributions are projected to rise an additional 76% on average from 2017-18 to 2029-30 in the baseline projection and 117%, i.e., more than double, in the alternative projection,” said the study.

There have not been many attempts to show how rising pension costs reduce services. A report last year from a citizens committee appointed by Sonoma County supervisors found $269 million in “excess costs” in the county retirement system between 2006 and 2015.

With $10 million a year, said the committee, Sonoma County could fund 44 more deputy sheriffs or pay for 40 miles of road improvement. Some Sonoma officials said concern about pension costs played a role in voter rejection of a 1/4-cent sales tax for transportation.

A Los Angeles Times story last month said a big part of a tuition increase at the University of California is going for increasingly generous pensions, including $357,000 a year for a former president, Mark Yudof, who worked for UC only seven years.

David Crane, a Stanford lecturer ousted from the CalSTRS board a decade ago for questioning overly optimistic earnings forecasts, showed in April and July reports how rising retirement costs are “shortchanging students and teachers” despite large school revenue gains.

The new Stanford institute study has 14 separate case studies: the state, six local governments in CalPERS including formerly bankrupt Vallejo and Stockton, the independent Los Angeles system, three county systems, and three school districts in CalSTRS.

The study said their “pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03,” and by 2029-30 will consume 14 percent under the baseline, 17.5 percent under the alternative.

In contrast, a survey of the public retirement systems done for former Gov. Arnold Schwarzenegger’s Public Employee Post-Employment Benefits Commission found pension contributions had been stable for more than a decade prior to the report in January 2008:

“Even though State pension contributions have risen in the past decade, they have remained at a relatively stable 3.5% to 4% of total General Fund revenues from the mid-1990s to present. The exception is 1999 to 2002 when contributions were significantly lowered.”

Table - stanford2

The Stanford institute’s case study of state spending on CalPERS and CalSTRS said $6 billion was shifted from other expenditures to pensions this fiscal year, much of the money apparently coming from social services and higher education.

The calculation was based on the growing cost of pensions during the last 15 years that, despite an expanding state budget, took 2.1 percent of operating expenditures in 2002-03 and an estimated 7.1 percent of operating expenditures this fiscal year.

The pension share of state operating expenditures in the baseline projection reaches 10.1 percent in 2029-30 and 11.4 percent in the alternative, crowding out an additional $5.2 billion or $7.4 billion.

“This expansion in pension funding requirements could be accommodated with additional 27% reductions in DSS and Higher Education expenditures (or reductions in other agencies and/or departments), or with slightly more than 4% across-the-board budget reductions,” said the study.

In an unrelated coincidence of numbers, the state got a $6 billion low-interest loan from its large cash-flow investment fund this year to double its annual payment to CalPERS, saving an estimated $11 billion over the next two decades by more quickly paying down debt.

The big loan, criticized by some who wanted more study, was bolstered late last month by a state Finance department analysis of the cash management, repayment plan, interest rates, investment earnings, and expected savings.

Annual state payments to CalPERS are expected to average about 2.2 percentage points less over the next two decades. Peak miscellaneous rates would drop from 38.4 percent of pay to 35.7 percent, peak Highway Patrol rates from 69 percent of pay to 63.9 percent.

“It is expected that any deviation from assumed CalPERS returns, or projected U.S. Treasury rates, will still result in significant net savings, and that any issues with funds’ ability to repay its share of the loan can be absorbed by the repayment schedule and effectively resolved,” said the Finance analysis given to the Legislature.

The California Public Employees Retirement System, like many public pensions, has not recovered from huge investment losses in the financial crisis a decade ago. The CalPERS state plans only have 65 percent of the projected assets needed to pay future pensions.

CalPERS estimates the $6 billion extra payment will increase the funding level of the state plans by 3 percentage points. The Finance analysis also said the extra payment would “partially buy down the impact” of a lower CalPERS discount rate.

Last December CalPERS lowered the investment earnings forecast used to discount future pension costs from 7.5 percent to 7 percent, triggering the fourth employer rate increase since 2012.

The annual valuations CalPERS gave local governments this fall reflect a drop of the discount rate from 7.5 percent to 7.35 percent next fiscal year, the first step in a three-year phase in.

number of cities unsuccessfully urged the CalPERS board last month to analyze two ways to cut pension costs: suspend cost-of-living adjustments and give current workers lower pensions for future work.

The Oroville finance director, Ruth Wright, told the CalPERS board: “We have been saying the bankruptcy word.” Salinas Mayor Joe Gunter created a stir by using the “bankruptcy word” at a city council meeting on Sept. 26 while talking about rising salaries and pension costs.

“How do we get this under control? How do we keep this city sustainable so we don’t have to file for bankruptcy?” Gunter asked.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. 

This article was originally published by Calpensions.com.

John Moorlach: What Pension Crisis?

I sit on the Senate Public Employment and Retirement Committee, which held a joint hearing with its Assembly counterpart earlier this year. During the hearing I asked a very difficult question of Dane Hutchings, the legislative representative of the California League of Cities (see MOORLACH UPDATE — 37th in the 37th — August 9, 2017).

In shaping my question, I used the “F” word – “fraud” – and it caught the attention of CalPERS and its administration. This started a dialogue, which has been very helpful. So, I recently sent two letters, addressed to two separate CalPERS Board members, requesting very specific information (see  https://www.calpers.ca.gov/docs/board-agendas/201709/financeadmin/item-6c-02.pdf and https://www.calpers.ca.gov/docs/board-agendas/201709/financeadmin/item-6c-01.pdf).

Instead of writing back with an affirmative response and attaching the requested data, the matter was put on the agenda of this month’s CalPERS Finance and Administrative Committee meeting (see MOORLACH UPDATE — OC’s Newest Landmark Plaque — September 20, 2017).

The entire segment of the Committee meeting related to my requests is an amazing watch. To have city managers state that they are facing Chapter 9 bankruptcy and even providing the precise upcoming year they may be filing is a massive disclosure. You would think it would be headline news for the local papers where the cities are located. The California Policy Center certainly thought the discussion was disturbing and provides the piece below.

I’m trying to address the pension crisis in California. It’s getting noticed. Let’s hope the testimony of a dozen plan sponsors wakes up the super majority in the Capitol. Also see MOORLACH UPDATE — Pursuing Reforms — August 11, 2017.

BONUS:  If you happen to watch the linked video to the CalPERS meeting, you will observe the public employee unions testify as the concluding witnesses to strong arm those CalPERS Board members who just also happen to be public employee union members. The massive influence of public employee unions in Sacramento is evident and detrimental to the fiscal well being of our state. I discuss this in more detail on Rick Reiff’s most recent “Inside OC” program and it is worth a watch at https://www.youtube.com/watch?v=t-rpMqqQJJE&feature=youtu.be.

DOUBLE BONUS:  I don’t want to be in the “me thinkest thou protesteth too much” category, but crime is going up (see MOORLACH UPDATE — Taken to Task — August 23, 2017). The FBI released the 2016 crime statistics on Monday of this week and the news is not good. Allow me to give you just one of the many links, as I spend a lot of time in Sacramento, at http://www.kcra.com/article/sacramentos-violent-crime-rate-was-higher-than-us-crime-rate-in-2016/12473362.

TRIPLE BONUS:  To date, the governor has not addressed any of the top 20 bills Assemblyman Harper and I have recommended he veto (see MOORLACH UPDATE — 2017 Top 20 Veto Worthy Bills — September 22, 2017).

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. …

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