California cities look at tax hikes to pay rising pension costs

El Segundo and Arcadia were among two dozen cities urging the CalPERS board last month to avoid another employer rate increase, the fifth in the last five years, when adjusting its $344 billion investment portfolio this month.

Last week, the two well-funded cities, both with currently balanced budgets and high service levels, considered sales tax increases. Despite cutting costs, the cities now face deficits from a steep rise in CalPERS rates scheduled for the next seven years.

El Segundo’s mayor pro tem, Drew Boyles, told the California Public Employees Retirement System board last month the city’s required pension contribution this year is $11 million or 16 percent of general fund revenue.

In five years, Boyles said, the payment to CalPERS is expected to be $18 million and 25 percent of general fund revenue as the employer rate for safety employees increases from 50 percent of pay to 80 percent of pay.

“These increases are not sustainable and may result in the reduction or elimination of service to our community,” he said, “such as a hiring freeze, furloughs or even potential layoffs, reduction in parks and recreation services, library services, public safety, deferred maintenance on city infrastructure, and reduction to overall infrastructure.”

Steps already taken to “address the immminent financial crisis,” said Boyles, include a pension trust fund, advance payments of pension debt, no pay raises for some employee groups for the last five years, and deferring $2.3 million per year in facility repairs and maintenance.

The El Segundo city council considered a sales tax proposal last week (see video 1:26) for an unusual reason beyond maintaining the “exceptional level of municipal services” expected by residents and the business community.

A 3/4-cent sales tax or 0.75 percent is all that remains available for El Segundo under state law that caps the Los Angeles County sales tax at 10.25 percent. So, the city wants to get the 3/4 cent sales tax before the county takes it.

“It’s like the earthquake,” Mayor Suzanne Fuentes told the council last week. “It’s not a matter of if, it’s when the county puts the next tax item on the ballot. And it will pass, because every county tax ballot issue gets passed.”

Voters approved a 1/4-cent county sales tax increase in March to help the homeless, Measure H, and a 1/2-cent county sales tax in November last year to fund transportation projects, Measure M.

The original El Segundo proposal would ask city voters in April to approve a 3/4-cent sales tax generating $9 million a year that would not take effect until the county approved a new sales tax. If the county measure is rejected, the city tax would be suspended.

As a better defense against a legal challenge, the council told staff to prepare another option for consideration at its next meeting. The city tax would be triggered when the county places a measure on the ballot or on a date several years after the April vote, whichever comes first.

At the request of Boyles, who pointed to a pension debt of more than $100 million, the staff also was told to prepare a proposal to close a $400,000 budget deficit expected to open next October as a growing budget gap begins.

“I want to start with the mindset now because taxing is not going to get us there,” Boyles said. “There is no way we are going to continue to tax our way out of this hole we are in right now.”

Legislation can lift the state sales tax cap for local governments. Gov. Brown signed legislation (SB 703) in October that allows Alameda and Santa Clara counties and the city of Santa Fe Springs to impose limited sales tax increases outside of the state cap.

arcadia

“In every way we are the envy of everybody in the San Gabriel Valley,” the Arcadia city manager, Dominic Lazzaretto told the CalPERS board last month.

He said Arcadia has sales tax revenue from a thriving regional mall, increased property tax revenue from a luxury housing boom, and revenue streams not available to other cities from the Santa Anita Park thoroughbred racetrack.

“And still, in all, I cannot afford the flight path we are on,” Lazzaretto said, urging the board to avoid another employer rate increase. He said the city’s required CalPERS contribution, $11.6 million this year, is expected to increase to $17 million in five years.

Arcadia already has done “right-sizing,” negotiated “takebacks and pensions reforms,” maintained strong reserves that can cover a funding gap for a short time, and may like other cities ask voters to approve a sales tax increase, Lazzaretto said.

Last week, the Arcadia city council was told (see video 1:06) that a survey done by a consultant hired to explore a sales tax found residents are “extremely satisfied” with city services but “looming fiscal challenges are not well understood.”

The city council decided to shelve a tax proposal and extend the contract of the consultant, the Lew Edwards Group, to conduct a campaign to educate the public about the fiscal challenge and explore possible solutions.

“We should not be promoting one thing over another,” said council member April Verlato. “We should not be promoting that we are looking for a tax increase.”

Council members mentioned a state Fair Political Practices Committion probe into county television ads and social media posts appearing to support Measure H. The Howard Jarvis Taxpayers Association complained that campaign law had been violated.

Council member Roger Chandler reminded the council that Measure H used up some of the remaining sales tax allowed in Los Angeles County under the 10.25 cents state cap.

“Any new tax that is passed by the county will go against the city of Arcadia’s tax,” Chandler said. “We still have something left because our city has never used a sales tax to finance anything.”

More than a half dozen cities in Los Angeles County have approved sales taxes that, with the state’s 7.5-cent share and the county taxes, total 10.25 cents: Compton, La Mirada, Long Beach, Lynwood, Pico Rivera, Santa Monica, and South Gate.

Pension costs for cities are rising mainly because the CalPERS board lowered the investment earnings forecast used to discount future pension obligations from an annual average of 7.5 percent to 7 percent.

More money from employers is needed to fill the funding gap created by the lower investment earnings forecast. Rate increases for cities begin next year and are scheduled to continue until 2024.

The sharp drop in the discount rate last December was irregular, prompted by a 10-year forecast of lower investment earnings and the failure of CalPERS funding to recover from huge investment losses a decade ago.

Now as part of a regular four-year process, the CalPERS board is expected to choose one of four investment allocation options next week. One would leave the earnings forecast at 7 percent, requiring no additional change in employer rates.

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

California Cities Spiking Taxes to Pay Spiking Pension Costs

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

California cities are being forced to spike taxes to pay for spiking public employee pension funding costs.

California Public Employees’ Retirement System (CalPERS) has just reported that its $344.4 billion defined benefit pension plan, which covers most state and local government employees, has fallen from a $2.9 billion surplus in 2007 to a $138.6 billion deficit as of June 2016. The rate of funding decline accelerated over the prior year by $27.3 billion.

With the pension plan’s funded ratio — equal to the value of plan assets divided by present pension obligations — having fallen to 68 percent, far below what actuaries call the 80 percent minimum for adequate fund, CalPERS is demanding that cities increase payments.

A recent report warned that CalPERS’ poor investment return of just 4.4 percent over the last decade could be further reduced by large and politically motivated “environment, social and governance” investment strategies. These so-called ESG strategies have drastically underperformed other pension plan returns, which explains why CalPERS is “in the midst of a plan to lower its investment return assumptions to 7% from 7.5% by July 1, 2019.”

CalPERS will pay out $21.4 billion in benefits to retirees and beneficiaries in 2017, a 5.5 percent increase from 2016 and more than double the $10.3 billion in 2007. But most of the 1.93 million retirement system members and 1.4 million health care participants who receive administration services from CalPERS are associated with local governments that are directly responsible for paying spiking benefit costs.

At the September CalPERS meeting in Sacramento, eight cities told the pension plan’s trustees that they are experiencing spiking pension funding costs. Representatives from the largest local governments in the Sacramento area claimed that pension funding costs are set to spike by 14 percent next fiscal year.

The city manager of Vallejo, which recently emerged from bankruptcy, said that the city’s police pension funding costs are expected to jump from about 50 percent to 98 percent of payroll over the next decade. Both Lodi and Oroville officials stated that they have had to cut a third of their staff over the last decade.

El Segundo mayor pro tem Drew Boyles told the CalPERS board last month that his city’s CalPERS required pension contribution will be $11 million next year, or about 16 percent of the general fund’s revenue. But the cost in five years is expected to hit $18 million, or 25 percent of general fund revenue. He blamed the increase on funding for police and fire pension costs that are set to spike from 50 percent to 80 percent of payroll.

The California legislature passed SB 703, which will allow Alameda County and its local cities to raise about $148.9 million by exceeding the 2 percent local sales and use tax rate cap. The City Council of El Segundo plans to spike the local sales tax by an additional 3/4-cent to 10.25 percent to generate $9 million to pay for spiking pension funding costs.

All the local government representatives that have been addressing CalPERS’ monthly meetings complain that even after eliminating of services, slashing infrastructure spending, and planning for layoffs, they will still be forced to raise taxes to fund pension costs.

Despite California already being the highest-taxed state in the nation, the California Tax Foundation warned in June that Sacramento politicians were proposing another $16.9 billion in “targeted taxes and fees.” If passed, much of that tsunami of new cash could end up at CalPERS to fund pension shortfalls.

This article was originally published by Breitbart.com/California

Cities reeling under the burden of growing pension debt

pension-2The California Public Employees’ Retirement System’s union defenders feign shock whenever pension reformers accuse it of “kicking the can down the road” in dealing with the state’s mounting pension debt. It’s like the scene from Casablanca, when Captain Louis Renault is absolutely shocked to find gambling going on in a gambling house.

CalPERS is never going to state the obvious: “We know these massive, underfunded pensions are not sustainable, but we’re going to do everything possible to push the problem into the future and blame everyone else for the problem.” But the pension fund’s board might as well have said as much after two actions it took at last week’s Sacramento meeting.

In one case, it decided to seek a legislative sponsor for a bill that would enable it to shift the blame to local agencies whenever such agencies decide to stop making their payments to the fund and retiree pensions are cut as a result. In the second case, at the urging of cities CalPERS decided to delay a vote on a more actuarially sound means of paying off pension debt – rather than risk a fifth rate hike to local governments, and risk a mutiny among hard-pressed local governments.

Both of these actions maintain the status quo and – you got it – kick the can down the road.

The first action involved the fate of two local agencies that have exited the pension fund because they couldn’t afford to keep making their payments. As California Policy Center previously reported, the tiny Sierra Nevada town of Loyalton in 2013 decided to exit the plan, but then was hammered with a $1.66 million termination fee that it couldn’t possibly afford. The town’s entire annual budget is $1 million and it couldn’t even make its $3,500 month payments to the fund.

Furthermore, the East San Gabriel Valley Human Resources Consortium, known as LA Works, shut its doors in 2014, but was likewise penalized by CalPERS for stopping its payments. The end result: Loyalton’s four retirees have their pension benefits sliced by 60 percent, and LA Works’ retirees lost as much as 63 percent of their pension checks.

In making an example of these small agencies, CalPERS revealed an ugly truth. The pension fund assumes a rate of return of 7 percent to 7.5 percent on its investments. The higher the assumed rate, of course, the less debt on its books. It’s in the union-controlled fund’s interests to assume the highest-possible rates and maintain the status quo – even if that means that taxpayers ultimately will have to pick up any slack.

When agencies decide to leave the fund, however, CalPERS puts them in a Terminated Agency Pool, where CalPERS assumes a rate of return of a measly 2 percent. Upon departure, these agencies can no longer expect future earnings or taxpayers to pick up the shortfall, so the 2 percent rate is the actual risk-free rate that CalPERS expects from its investments.

The legislation the fund seeks, facetiously referred to as the Anti-Loyalton Bill, would “require a terminating agency to notify past and present employees of its intention to terminate,” according to the language approved by the full CalPERS board last Wednesday. Bottom line: CalPERS wants local agencies to provide the bad news to employees and retirees so that they, rather than the massive pension fund, receive the brickbats.

The proposed bill is not a big deal per se, but it’s yet another example of how CalPERS is more interested in hiding – rather than dealing with – its pension debt. Basically, this is a public-relations strategy designed to discourage agencies from leaving the fund. It’s a way to tighten the golden handcuffs and punish agencies that want to exit the fund.

In reality, if 2 percent is the earning rate that CalPERS can safely expect on its long-term investments, then that should be the rate that it assumes for all of its investments. But lowering the assumed earnings to such a realistic number would cause mass panic, as municipalities would need to come up with dramatically increased payments. They already are struggling with their current payments.

Under that scenario, the state’s pension debt would be around $1.3 trillion, according to some estimates – and it would become implausible to push the problem down the road. Even with the current high assumption rates and even after a great year of earnings of 11.2 percent, CalPERS is only funded at a troubling 68 percent. (The California State Teachers’ Retirement System had even better returns last year, but is funded only at 64 percent.)

In its second major action last week, “CalPERS delayed action … on the chief actuary’s proposal to shorten the period for paying off new pension debt from 30 years to 20 years, a cost-cutting reform that would end the current policy not recommended by professional groups,” explained Ed Mendel, on his respected Calpensions blog.

Localities already have faced four major rate increases since 2012. CalPERS assesses the increases to make up for the unfunded liabilities, and recent studies suggest that local governments are slashing public services to come up with the cash. Had CalPERS decided to pay off new debt in a shorter time frame, it would have meant a fifth increase, according to Mendel. He quoted the League of California Cities’ official Dane Hutchings with these words of warning: “The well is running dry.”

It’s a mess. If CalPERS does the right thing, it exacerbates local governments’ current problems. But maintaining the status quo will make them worse down the road. As Mendel explained, under CalPERS’ current payment approach, “the debt continues to grow for the first nine years” with the payment not even covering the interest. “(T)he payments do not begin reducing the original debt until year 18, more than halfway through the period.”

In other words, I have a great 30-year plan for paying off your credit-card debt: You make minimum payments for the next 18 years and then worry about it then. Isn’t that the very definition of kicking the can down the road?

It’s hard to feel too sorry for these struggling cities. Do you remember when they warned about the impending disaster if the state Legislature passed a 1999 bill, promoted by the California Public Employees’ Retirement System, that would retroactively raised pensions across the state by 50 percent? Do you remember when city managers angrily resisted union-backed efforts to raise pensions at their city councils? Neither do I.

Unfortunately, their efforts to avoid another rate hike only helps CalPERS do what it likes to do most – remind us that all is well and that the stock market will pay for all the pension promises. It might, but then again it might not. If the market slows, there will be a lot of California officials shocked to find a dead end up ahead.

Steven Greenhut is 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 article was originally published by the California Policy Center

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