Local Officials Avoid Pension Discussion as They Push New Taxes

TaxesWhile public and media attention to this week’s primary election focused – understandably so – on contests for governor, U.S. senator and a handful of congressional seats, there were other important issues on Californians’ ballots.

One, which received scant attention at best, was another flurry of local government and school tax and bond proposals.

The California Taxpayers Association counted 98 proposals to raise local taxes directly, or indirectly through issuance of bonds that would require higher property taxes to repay.

The proposed taxes on legal marijuana sales and other retail sales and “parcel taxes” on pieces of real estate were particularly noteworthy for how they were presented to voters.

Most followed the playbook that highly paid strategists peddle to local officials, advising them to promise improvements in popular services, such as police and fire protection and parks, and avoid any mention of the most important factor in deteriorating fiscal circumstances – the soaring cost of public employee pensions.

City, county and school district officials howl constantly, albeit mostly in private, that ever-increasing, mandatory payments to the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are driving some entities to the brink of insolvency.

However, those officials are just as consistently unwilling to tell their voters that pension costs are the basic underlying factor in their requests for tax increases.

Why?

Tying tax increases to pensions, rather than popular services, not only would make voters less likely to vote for them but make public employee unions less willing to pony up campaign funds to sell the tax increases to voters. It is, in effect, a conspiracy of silence.

This week’s local tax and bond measures are just a tuneup for what will likely be a much larger batch on the November ballot.

It’s a well-established axiom of California politics that low-turnout elections, such as a non-presidential primary in June, are not as friendly to tax proposals as higher-turnout general elections, such as the one in November. Primaries tend to draw more older white voters who often shun taxes, while general elections have younger and more ethnically diverse electorates more attuned to taxes.

As local officials make plans to place those proposals on the November ballot, a bill making its way through the Legislature could skew local tax politics even more.

Senate Bill 958 would allow one school district, Davis Unified, to exempt its own employees from paying the $620 per year parcel tax that its voters approved two years ago.

The Senate approved SB 958 on a 24-19 vote last month, sending it to the Assembly. It’s being carried by Sen. Bill Dodd, a Napa Democrat whose district includes Davis.

The bill’s rationale is that housing is so expensive in Davis that teachers and other school employees cannot afford to live there, and that exempting them from the parcel tax would, at least in theory, make housing more affordable.

However, if SB 958 becomes law, it would set a dangerous precedent. It doesn’t take much imagination to see local government and school unions throughout the state demanding similar exemptions from new taxes with the threat, explicit or implicit, that they would refuse to finance tax measure campaigns.

The very people who benefit most from additional taxes by receiving higher salaries and/or better fringe benefits thus would be able to avoid paying those taxes themselves.

Where would it end?

olumnist for CALmatters

California Can’t Afford to Play Politics with Pensions

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

As a former mayor of the city of Newport Beach, I took very seriously the financial obligations related to our pension liabilities, the impact of pension costs on city services and the ability to keep our commitments to our employees, which is why recent developments in California concern me.

For years, a small group of voices nationwide has called for universities, pension funds, and other groups who hold investments in fossil fuels to abandon those investments. This movement, known as divestment, believes that abstaining from investment in fossil fuels is key to combating climate change. However, the divestment movement has found it difficult to gain traction, in large part because making political statements through public or institutional investments runs counter to the fiduciary responsibility of pension fund managers. Those who depend on pensions expect their fund managers to make decisions based off sound and profitable investment strategy, not political agendas. There is also no real evidence that walking away from fossil fuel stocks does anything to actually help the environment.

Frustrated by their failure to gain ground, divestment advocates have turned to new methods of create momentum. For example, state lawmakers in California have been asked to consider a rash of bills related to pension funds. In 2017, the legislature considered two bills related to this topic. Senate Bill 560, which ultimately died, would have required CalPERS and CalSTRS, pension funds that serve California’s teachers and public employees, to consider climate risk when managing their funds. Assembly Bill 20 forced these pension funds to examine their financial holdings related to the controversial Dakota Access Pipeline. This year, a third bill, Senate Bill 964, would require CalPERS and CalSTRS to report every three years on any investments related to climate change.  If these well-intentioned but misguided policies are enacted, the impacts will be felt by cities through rising pension liabilities and a reduction in funds available for basic city services like public safety and parks.

Rebranding their efforts to focus on climate risks, as opposed to directly calling for the abandonment of fossil fuel holdings, divestment advocates are taking new approaches toward the same goal. But while some might view these bills as well-intentioned measures to help the environment, the reality is quite different.

For starters, there is no evidence that these measures do anything to help the environment or combat climate change. Even Assembly Bill 20, with its targeted focus on a single pipeline, has had no impacts on the Dakota Access Pipeline’s investments or implementation. Rather, the value of passing such a measure lies mostly in its symbolism, a fact acknowledged by Bill McKibben, an environmental activist helping to drive the divestment agenda.

In practice, “climate risk” measures open the door for playing politics with retirement funds. This is especially dangerous for large funds tasked with protecting the future of Californians. Consider, for example, that the state’s public employees fund, CalPERS, manages the largest public pension fund in the United States, serving nearly 2 million people and holding around $300 billion in assets. CalSTRS, which serves education employees, is the world’s largest educator-only pension fund and the second largest pension fund in the U.S., managing a portfolio of more than $200 billion. Recent figures show that more than 200,000 retirees currently depend on CalSTRS for their pensions. Divestment from tobacco related stocks has already cost the CalPERS system more than $3 billion according to recent studies. We simply cannot afford more of this waste.

There is clearly an incredible amount at stake when it comes to managing these funds and others like them in California, with job number one being safeguarding the money that these employees worked so hard to earn. Both CalPERS and CalSTRS, California’s two largest pension funds, explicitly require fund managers to adhere to their fiduciary responsibilities. Misguided legislation requiring pension managers to follow political agendas when managing money only distracts from that duty, putting public funds and retirement nest eggs at great risk. Now more than ever, pension managers must focus on achieving returns that address the looming unfunded pension crisis, not on playing politics.

The truth is that divestment and related ideas like climate risk have always lived on shaky ground. Instead of walking away from investments in fossil fuels and losing a seat at the table, isn’t the better approach to affect change through active engagement? Instead of requiring pension fund managers to mitigate climate risks, shouldn’t we allow them to fulfill their fiduciary duty and leave climate discussions to policymakers? Hopefully retirees and their elected officials are paying attention to this dangerous rebrand of the divestment movement.  The consequences are higher unfunded pension liabilities and the crowding out of municipal services.  With today’s turbulent financial markets, it is more important than ever that we protect the hard-earned money of Californians.

Keith Curry is a former Mayor of Newport Beach and former financial advisor to state and local governments.

Dubious Investments Further Imperil California Pension Plan Already in Crisis

pension-2The California Public Employee Retirement System, known as CalPERS, is in crisis. And it sure looks like things are going to get a whole lot worse before they can get a whole lot better.

The system already has a $153 billion unfunded liability, one of the largest shortfalls of any state, and it only has funds to cover 68 percent of promised benefits into the future. And because CalPERS is already cash negative, paying out $5 billion more in benefits to retirees each year than it takes in, there aren’t many scenarios whereby the system would be able to make good on those promises absent outside intervention (read: taxpayer bailout).

Lawmakers and the fund’s board should be considering reforms to improve the system, but California voters and taxpayers faced another setback recently. Overseers of the pension plan — the nation’s largest — passed a funding plan earlier this year that projects shortfalls over the next decade but assumes rosy investment returns in coming decades to make up the difference. Given the high market valuations today, that assumption seems dubious.

When the CalPERS investment committee reallocated its investments recently, it assumed a 7 percent annualized rate of return. While CalPERS has enjoyed some good years — for example, its 2017 return may exceed 11 percent — that’s not the norm. The fund has averaged a 4.6 percent rate over the past decade, and its 2016 rate was an abysmal 0.6 percent.

CalPERS’ strategy — and to a large extent that of the state in general — seems crafted first and foremost to advance the interest of public sector labor unions. The high compensation for state government workers and the state’s munificent retirement benefits make it difficult for local government officials to find the money necessary to meet their obligations. Rising contribution rates for local governments mean that municipalities and schools have less money to educate children, build roads or provide other essential government functions.

CalPERS’s school district contribution rates to the pension plan are projected to skyrocket in the near future. The rates have risen to 15.5 percent from 11.8 percent in the 2015-2016 fiscal year, and are scheduled to reach 22.7 percent in 2020. School districts have little power to fight the increases, which are mandated at the state level. The only way to reduce pension contributions is to cut staff. Some layoffs may make sense for districts facing declining enrollment, but they can also harm educational outcomes.

Fund managers should be laser-focused on increasing investment returns for its beneficiaries, which would lessen the fund’s burden on taxpayers. But its board is more interested in pursuing a political agenda. For the majority of California taxpayers who hold a portion of their retirement assets in the stock market, CalPERS’ activism means that some of their money will be used to support a political agenda that hurts their investment returns.

CalPERS has played an increasing role in politicizing annual shareholder meetings in recent years. These elections are on the horizon—a majority of U.S. public companies hold the mandated meetings between March and July—and CalPERS is already planning to force votes on proposals on environmental and social issues.

Traditionally, these proxy votes have been about improving corporate governance with one goal in mind: improving shareholders’ returns. But CalPERS and other activist investors have aggressively pushed proposals irrelevant to companies’ missions that could have a harmful impact on shareholder value.

CalPERS has prioritized relatively poor-performing environmental, social and governance (ESG) investments at the expense of other options more likely to optimize beneficiary returns. As a recent study by the American Council for Capital Formation shows, four of CalPERS’ nine worst performing funds were ESG-focused.

CalPERS responded to the criticism by noting that the plan’s private equity portfolio, which includes the funds, has performed well overall. But CalPERS would serve its beneficiaries—and taxpayers—better if it focused on investment returns and not politics.

Making investment decisions based on social issues has real consequences. Last year CalPERS’ board expanded its ban on investing in companies that produce tobacco products, against recommendations by its professional staff. In an analysis of the cost of divestment produced for CalPERS, Wilshire Consulting placed the system’s total foregone investment gains at more than $3.6 billion.

CalPERS is facing a serious, long-term crisis that could cripple school districts and local governments while forcing tax increases to pay for the pension system. Getting the fund out of politics won’t alone fix the system’s fiscal woes. But it would be a good first step.

California pension funds likely to face new pressure to divest from fossil-fuel companies

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

New York Gov. Andrew Cuomo’s call for his state’s biggest government pension fund to stop new investments in fossil-fuel companies and phase out existing investments is likely to lead to renewed calls for the Golden State’s two massive pension funds – the California Public Employees’ Retirement System and the California State Teachers’ Retirement System – to do the same.

The Common Fund – New York’s pension fund for state and local public sector employees – has $200 billion in holdings. Cuomo, a Democrat who is expected to run for president in 2020, said it was time to craft a “de-carbonization roadmap” for the fund, which “remains heavily invested in the energy economy of the past.”

New York City Comptroller Scott Stinger agreed with Cuomo and called for changes in the investment policies of the city’s five pension funds, with holdings of about $190 billion.

The announcements were hailed on social media as a reflection of the mission statement of the 2015 Paris Accord outlining international efforts to address global warming.

It’s possible Brown could use his State of the State speech later this month to reveal his call for CalPERS and CalSTRS climate-change divestment. The pension giants have already been forced to end investments in coal companies because of a 2015 law signed by the governor, selling off shares worth less than $250 million, a tiny fraction of their overall portfolios.

But selling off stakes in energy companies would be a much more impactful event. Giant firms like ExxonMobil are among the most common holdings of pension funds around the world.

Some unions worry divestment will hurt CalPERS finances

And while the California Democratic Party has been largely unified behind Brown’s and the state Legislature’s efforts dating back to 2006 to have California lead the fight against global warming, such unanimity is unlikely should Brown follow Cuomo’s lead because some public employee unions are worried about divestment damaging the finances of CalPERS and CalSTRS.

As of July, CalPERS had $323 billion in assets and said it was 68 percent funded – meaning it had about $150 billion in unfunded liabilities. As of March, CalSTRS had $202 billion in assets and said it was 64 percent funded, leaving unfunded liabilities of about $100 billion.

CalPERS’ steady increase in rates it charges local agencies to provide pensions and the heavy costs facing school districts because of the Legislature’s 2014 CalSTRS’ bailout have taken a heavy toll on government budgets.

Corona Police Lt. Jim Auck, treasurer of the Corona Police Officers Association, has testified to the CalPERS board on several occasions, imploring members to focus on making money with investments, not making political statements.

According to a July account in the Sacramento Bee, Auck said public safety is hurt when police departments must spend ever-more money on pensions.

“The CalPERS board has a fiduciary responsibility to the membership to deliver the best returns possible,” Auck testified. “Whatever is delivering the return they need, that’s where they need to put our money.”

The International Union of Operating Engineers, which represents 12,000 state maintenance workers, has taken the same position, according to the Bee.

In New York, Gov. Cuomo also is not assured of success. The sole trustee of the Common Fund is State Comptroller Thomas P. DiNapoli. While he agreed to work with Cuomo in establishing a committee to consider possible changes in its investment strategies, his statement pointedly emphasized that there were no present plans to change the fund’s approach to energy stocks.

While DiNapoli cited his support for reducing global warming and the Paris Accord, his statement concluded with a sentence emphasizing his priorities: “I will continue to manage the pension fund in the long-term best interests of our members, retirees and the state’s taxpayers.”

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

CA Teachers Pension Fund Weighs Divestment from Gun Retailers

CalSTRS1The California State Teachers’ Retirement System (CalSTRS) is considering a divestment from any retailer that sells guns or ammunition, in the wake of the Oct. 1 mass shooting in Las Vegas.

California State Treasurer John Chiang believes the divestment should focus on retailers that sell “banned military-style assault weapons.”

According to the San Diego Union-Tribune, the case for divestment was pressed by Jason Irvine, a Reno, Nevada, resident whose sister, Jennifer Topaz Irvine, was shot and killed in the Vegas attack. He spoke of having to identify his sister’s body after she was shot and said, “I saw with my own eyes and felt with my hands the carnage these weapons inflict.”

Although weapons do not inflict damage — rather, people who misuse weapons do — Irvine’s words found their mark and CalSTRS investment committee chairman Harry Keiley voiced support for looking into divestment. Kieley said, “This is an issue that we alone cannot solve. At the same time, I don’t think we should sit by idly.”

State Treasurer Chiang approached divestment from the angle of minimizing investments in companies “who business efforts are a risk to public health and safety.” He said, “It would be difficult to argue that battlefield assault weapons and aftermarket accessories designed to rain down bullets don’t fall into this category.”

CalSTRS voted to divest of specific firearm and ammunition manufacturers following the December 14, 2012, attack on gun-free Sandy Hook Elementary. On April 3, 2015, Breitbart News reported that some teachers were outraged to find that the pension was still invested in Bushmaster Firearms over two years after the attack. (Bushmaster is the make of gun Adam Lanza stole and used to kill innocents at the school.)

Pension managers told the angry teachers that divestment is a process that could take years in some cases, and it was still ongoing in 2015.

Now Chiang and others want the fund to undertake divestment “in retail companies that sell the weapons and ammunition.”

AWR Hawkins is the Second Amendment columnist for Breitbart News and host of Bullets with AWR Hawkins, a Breitbart News podcast. He is also the political analyst for Armed American Radio. Follow him on Twitter: @AWRHawkins. Reach him directly at awrhawkins@breitbart.com.

This article was originally published by Breitbart.com/California

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.

Average “Full Career” CalPERS Retirement Package Worth $70,000 Per Year

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

“‘What makes the ‘$100,000 Club’ some magic number denoting abuse other than the claims of anti-pension zealots?’ said Dave Low, chairman of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees.”

This quote from a government union spokesperson, and others, were dutifully collected as part of Orange County Register reporter Teri Sforza’s eminently balanced reporting on the latest pension data, in her August 8th article entitled “The ‘100K Club’ – public retirees with pensions over $100,000 – are a growing group.”

In the article, Sforza’s team evaluated data released by Transparent California on 2015 CalPERS pensions, and reported the number of pensioners receiving $100,000 or more per year was 3.5% of total retirees, up from 2.9% in 2013. That truly does seem like a low percentage, but it ignores two key factors, (1) the total retiree pool includes people who only worked a few years and barely vested a pension, and (2) the total retiree pool includes people who worked many decades, sometimes 30 or 40 years or more, but they only worked part-time during their lengthy careers.

So if you restrict your pool of participants to those who worked a full career, and retired within the last 10 years, what percentage of those retirees would belong to the $100,000 club? As it turns out, there are 75,279 CalSTRS retirees who worked more than 25 years and less than 35 years, retiring after 2006. And as it turns out, 9,763 of them, or 13%, are receiving pensions in excess of $100,000 per year.

Moreover, CalSTRS doesn’t report the value of retirement health benefits and other retirement benefits, which almost certainly exceed $10,000 per year. If you make this reasonable assumption, you now have 14,901 CalPERS retirees, or 19% of our 75,279 pool of full career retirees, receiving a retirement package worth over $100,000 per year. Worth noting – we didn’t have the data necessary to screen the part-timers out of this pool. If we did, the numbers would be higher.

So if you use the appropriate denominator, the “$100 Club” isn’t 3.5% of the pie, it’s 19%, but so what? It’s still not a very big slice. Here’s where the flip-side of “full career pension” comes into play. Most people don’t work 25-35 years in public service. But most of them do vest their pension benefits, which can be vested in as little as five years. What happens when someone quits after five years, and only goes on to collect, say, a $20,000 per year pension? Someone else is hired, they work five years, and they also qualify to eventually collect a $20,000 per year pension. Then someone else, and then someone else – until you have three or four (or more) people who are all going to receive a $20,000 per year pension – for a job that one person could have performed if they’d stayed with the agency for a full career.

This is a critical point to understand. The significance of “full career” pensions is this: The taxpayer will fund pensions at that level of generosity, even if the benefit is split among multiple partial career participants – people who presumably worked elsewhere (where they also saved for retirement) during the majority of their careers. Should you expect a $100,000 per year pension if you only worked for five years? Of course not. But that’s what taxpayers are funding – whether it goes to one person, or to five people who worked a few years each to collectively fill one person’s full-career position in government.

This is why, when you are considering whether or not pensions are fair and affordable, the full career average pension is the only relevant measure. So what is the full career average?

For CalPERS in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $60,277.  Add to that the value of their retirement health benefits and other retirement benefits and the average was probably closer to $70,000 per year.

Just for comparison, for Orange County (OCERS) retirees in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $73,628.  Add to that the value of their retirement health benefits and other retirement benefits – information which OCERS also refuses to provide – and the average was probably over $80,000 per year. As for the OCERS “$100,000 Club”? Within the pool of full career retirees as described, and accounting for retirement health benefits, 31% of them were members. Nearly one in three.

Public sector spokespersons frequently point out that public employees don’t get Social Security. Actually, about half of them do get Social Security, but never mind that detail. Because the maximum Social Security benefit, which one must wait until they are 68 years old to receive, is a whopping $31,668 per year.

Calling critics of this double standard “anti-pension zealots” is lazy rhetoric. The problem with defined benefits is not that they exist. The problem is that we have set up a system where public employees operate under a set of retirement benefit formulas and incentives that are roughly four times better than what private sector workers can expect. Yet these private sector workers pay the taxes to fund these pensions and bail them out when the investment returns falter.

Ed Ring is the president of the California Policy Center.

Study Shows CalPERS / CalSTRS Have Nearly $1 TRILLION in Unfunded Liabilities

As the Chief Whistle blower for KSFO San Francisco (560), I was on the Brian Sussman show at 6:45 am, as I have for six years. Today we discussed three issues:

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

1.  The Stanford University study showing that CalPERS and CalSTRS have a total of just under one trillion in unfunded liabilities. (Full story here)

2.  Why does the UC Irvine Administration allow students to protest around the campus, and in the face of Jewish students with the chant, “Long Live the Intifada”? (Full story here)

3.  Why do some cities, like Madera, population 63,000 pay the City Manager $214,000 and nearby city of Fresno with a population of over 500,000 pay its City Manager $235,000? (Full story here)

All of these stories, and more, are found at California Political News and Views.

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