Gov. Brown’s pension plan gets mixed reviews from reformers

SACRAMENTO – Gov. Jerry Brown and the Legislature mostly have avoided tackling the state’s unfunded pension liabilities, even though these taxpayer-backed debts to pay for pension promises to state and local employees have soared by 22 percent in the last year alone. Earlier this month, however the governor introduced a plan to help pay down the liabilities, but recent analyses from prominent pension reformers have been mixed.

The governor’s plan is similar to the idea of pension-obligation bonds. That’s when a government borrows money to pay down escalating pension debts, in the hopes “that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds,” according to an explanation from the Government Finance Officers Association.

The governor’s plan, by contrast, would borrow money from the Surplus Money Investment Fund, a low-interest (around 1 percent) account where the state holds money to pay for short-term expenses. It would then make a supplemental $6 billion payment to the California Public Employees’ Retirement System (CalPERS), which currently predicts a rate of return of 7 percent (even though last fiscal year it received only 0.61 percent). If the CalPERS fund performs as predicted, it will allow the state to save $11 billion in pension liabilities over two decades.

“Absent additional action to address these growing liabilities, paying off retirement liabilities will require an increasing percentage of the state budget. For example, the state’s contributions to CalPERS are on track to nearly double from $5.8 billion ($3.4 billion General Fund) in 2017‑18 to $9.2 billion ($5.3 billion General Fund) in 2023‑24,” according to the May budget revision’s summary. This is purportedly a painless way to pay down growing pension debts.

The idea got a boost from one of California’s best-known pension reformers, Sen. John Moorlach, an Orange County Republican who recently introduced a package of pension reform bills in the Senate. They were all killed by majority Democrats. Nevertheless, Moorlach wrote, in a column for Fox & Hounds that he wishes the governor’s prepayment plan had “a little more sizzle to make it an even more interesting opportunity.”

“Governor Brown should ask the board of CalPERS what type of incentive they will give the state for the prepayment,” he wrote. “CalPERS will benefit from the large influx and should provide at least a 3.75 percent reduction on the actuarially calculated required contribution.” That’s unlikely to happen, of course, but Moorlach wrote that he likes the Brown proposal and thinks the governor should move forward with it.

The idea follows the lead of the Orange County city of Newport Beach, explained Ed Mendel, in his May 29 Calpensions article. The city is paying down its pension debt to CalPERS as quickly as possible, helping it avoid the possible fate of other cities. Mendel quotes Modesto’s acting city manager, who told the Modesto Bee “he is hearing that many cities are facing bankruptcy over rising pension costs.” In the case of looming fiscal trouble, most say slashing at debt is a good idea.

But not everyone is so favorably disposed toward the governor’s plan. David Crane, a Stanford University lecturer and president of Govern for California, argues in a column that the plan is terrible precedent that transfers more pension costs from the beneficiaries of the pension system to the state’s taxpayers. When the state makes pension promises to employees, he wrote, both the state and the employees make contributions into the system, which he refers to as “normal costs.”

By contrast, when agencies increase benefit levels or stock-market earnings go down, the pension funds face those “unfunded liabilities,” which are the unfunded promises they’ve already made to current retirees and employees. CalPERS currently is 74 percent funded, which means that 26 percent of those promises are unfunded. “In contrast to joint sharing of normal cost, employees don’t share in the cost of unfunded liabilities,” he wrote. “One hundred percent of that cost falls on citizens, whose services get crowded out and taxes get raised to pay off the liabilities.”

Borrowing these taxpayer funds to pay off the pension debt, he explains, would just let CalPERS continue to set these shared “normal costs” at an unfairly low rate. Furthermore, Crane notes that this special fund is funded entirely by taxpayers, so he fears the state will borrow from other special funds. The state could claim that these monies are going to pay for public services, when in reality they are being siphoned off for pensions.

As Gov. Arnold Schwarzenegger’s pension adviser, Crane wrote that he helped the former governor “engineer ‘Deficit Reduction Bonds’ as a way to address the deficit he acquired upon taking office.” But he now regrets the move: “Those borrowings didn’t solve anything. They just covered up the problem, with interest to boost.”

State and local governments are understandably in a bind. They have “few ways to slow the rapidly climbing cost, among them: cut staff and services, lower pensions for new hires, get unionized employees to pay more for their pensions or cut salaries …,” explained Mendel. He noted the key obstacle limiting the ability of governments to cut pension accruals in the future is something called the “California Rule,” which is making its way to the state Supreme Court.

For some, then, shuffling funds around to prepay a little pension debt seems like a cost-free no-brainer to likely limit the growth of the debts. But to others, it’s just a shell game that evades the more politically dangerous course of tackling the size of those benefits head on – and running into powerful resistance from the state’s public-employee unions.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected]

24 comments

Write a comment
  1. O'Moore
    O'Moore 30 May, 2017, 14:32

    This is an excellent analysis, But Crane is right. For example, here in Pacific Grove, it had accumilated a $20M deficit because of adopting [email protected] during the stock crash of 2001. Instead of freezing salaries, it then granted the Police and Fire unions a 3 year 10% raise per year compounded and issued $20M in pension bonds: a classic example of David Crane’s criticism, that it is fool-hardy to throw more revenue at a broken system without fixing the system.

    Reply this comment
    • SeeSaw
      SeeSaw 31 May, 2017, 10:52

      Wasn’t the market soaring in 2001? A freeze on salaries would be fine if coupled with a freeze on prices–something like Nixon did.

      Reply this comment
      • DisillusionedDude
        DisillusionedDude 31 May, 2017, 13:38

        No SeeSaw, that’s not coorect. 2001 was an unbridled disaster for most markets. As just one of many possible examples, on November 1st, 1999 the NASDAQ index reached 3940. By May 1st of 2002, it had slid precipitously to 1328, a balcony-jumping loss of almost two-thirds of its value!

        SB400, which insanely increased retirement benefits (and retroactively to boot!) was hyped that it “won’t cost California taxpayers a dime”.

        Yeah, sure. Right. You betcha.

        Reply this comment
  2. Standing Fast
    Standing Fast 30 May, 2017, 14:59

    After getting as far as I could stand reading about the nonsense involving the Governor’s so-called pension-reform plan–I got up to the part where Stanford University’s David Crane says not so fast. I agree that making taxpayers responsible for something that should come from the beneficiaries is bad public policy. Now, what we need is a viable remedy for the purveyors of such foolishness.

    Reply this comment
  3. Dork
    Dork 30 May, 2017, 15:49

    This is so ridiculous, but I know how to fix, an initiative to Amend the Ca Constitution:

    There shall be No Taxpayer liability for any pension or retirement plan in excess of the maximum individual benefit paid by the Social Security Administration.

    Reply this comment
  4. Queeg
    Queeg 30 May, 2017, 16:02

    Comrades

    You are not question, think, espouse or nothing…..decrees must be taken seriously!

    Reply this comment
  5. Policy Wonk
    Policy Wonk 31 May, 2017, 05:59

    For many cities, the unfunded liabilities were largely created by retroactive benefit enhancements for workers that have now retired without ever having contributed toward the normal cost of that benefit. To tax current workers for that unearned benefit is not equitable.

    Reply this comment
    • Sean
      Sean 31 May, 2017, 08:11

      Look at the amount that will have to be paid by the state just to make up the unfunded pension deficit. It will rise to $9.2 billion by early next decade. That amounts to $600 per household in either lost services or increased taxes. That’s what the citizens of California are looking at and guess what, most of those people don’t have pensions and likely can’t afford to contribute much to their own retirement. Think of this in the context of the retirement savings plan the state wants to set up for people that don’t have access to a 401K plan. 3% of a $30K salary that their employer may deduct for them to put toward retirement is only $900. Then the state will put their savings in “safe” investments that 3% return, which is less than half the rate of return CalPERS expects to make on state worker pension fund. You’ll be hard pressed to convince the 10 million residents living in poverty that this is an equitable distribution of state resources.

      Reply this comment
      • Tobi
        Tobi 12 June, 2017, 19:25

        Sean, I doubt if any people living in poverty have the ability or the interest to understand the complexities of this pension issue. Besides, all of their sustenance is likely provided by the state of the feds, so why would they care as long as the handouts continue? I know it sounds mean and cold-hearted, but I wouldn’t count on those managing life as dependents of the state to care much about CalPERS even if they do vote. Their primary concern – and I’m talking only about those able to work and take care of their lives that don’t – is the continuation of their free ride!

        Reply this comment
  6. ricky65
    ricky65 31 May, 2017, 09:42

    Whether this tactic works or not seems to rely on lots of assumptions and static analysis of interest rates, returns, etc. It needs lots more analysis from real experts before jumping on board this new version of the Jerry Brown crazy train.
    It sort of reminds me of the familiar tactic of people in debt trouble who open a new credit card to pay off the last one which has reached the credit limit and the minimum payments are not affordable.
    That solution always seems to end badly.

    Reply this comment
  7. SeeSaw
    SeeSaw 31 May, 2017, 10:46

    Every entity that belongs to CalPERS needs to complement whatever the state does to bring the plan to sustainability by doing something also. Each needs to get to the table and work on its own solutions. For starters, how about a cap on vacation leave. My entity has a cap. I cashed out my maximum allowed vacation leave, coupled with half of my unused sick leave, after 40-year’s as a public employee, with a grand total of $23,000–$13,000 was left after taxes.

    Reply this comment
  8. hammer10
    hammer10 31 May, 2017, 12:23

    Very good article. It’s clear the “chicken are coming home to roost.” Sadly, the politicians don’t care. We have seen the politicians “kick the can down the road” for years. They and or the citizens of California have passed the following for the pension plans:
    Prop 30 – 13.3% income tax
    Cap & Trade Bill
    Prop 55 – continue 13.3% income tax
    Prop 51 – $9Billion Bond for schools
    12 cent gas tax increase
    Car registration increase
    Borrow money from Surplus Fund
    This is only the beginning. A sales tax on real property is being considered among many other proposals. Where does it end is the question? The union bosses will NEVER negotiate a reduction in the pensions. The unions hope the bankruptcy judge is a democrat. This is the true situation in California.

    Reply this comment
    • Bill
      Bill 31 May, 2017, 16:45

      Don’t forget the 20 cent a gallon and also the sales tax increase on diesel. What do you think that will do to the price of anything shipped by truck?

      And don’t forget there is an additional 7 cent a gallon increase to the tax on gas that kicks in 2019.

      And don’t forget that the tax on diesel, gas and the vehicle registration tax will go up automatically EVERY year as these taxes are now indexed to inflation.

      But you are right. This is only the beginning.

      These pensions are woefully underfunded and the politicians will attempt to bleed the taxpayers white to deal with it. Plus all the other idiotic schemes these politicians have that will have to be funded somehow.

      Reply this comment
  9. Bill
    Bill 31 May, 2017, 16:49

    Yes, for years all Brownie and the Demonrats have done is to re-arrange the deck chairs on the Titanic.

    But now their orgy of tax increases have begun. Be prepared to have the shiite taxed out of you.

    Reply this comment
  10. Bill
    Bill 31 May, 2017, 16:55

    Just wait until Gabby Nuisance…er…Gavin Newsom becomes dictator…er…governor.

    He’ll tax the shiite outta ya to make sure all these pensions and single prayer…single payer gets paid for.

    Reply this comment
  11. Standing Fast
    Standing Fast 31 May, 2017, 17:08

    The only way out of this mess is to educate, educate, educate.

    Buy a case or two of Charles Adams’ “For Good and Evil: The Impact of Taxes on the Course if History”. It is suitable for just about everybody, including literate twelve-year olds with a good dictionary and an inquiring mind. Keynesians will probably pass out while reading the Introduction, but not to worry. They will probably donate the book to a Friends of the Library booksale.

    Buy a case or two of Robert Murphy’s “Politically Incorrect Guide to the Great Depression and New Deal”. It is a lot of fun to read, suitable for high school students and up.

    Do not give up. Your representatives need to hear from you. Plan a family vacation around visiting the State Capitol. The old capitol building is very beautiful and worth several tours. If either house is in session, get a copy of the agenda and stick around. This is a good experience for you and your kids.

    Stop by to pay your respects to the Governor and your representatives in the Senate and Assembly. Be sure to leave your name and a courteous greeting. You may have a chance to talk about the issues with an aide, and get their business card.

    If your representative is in, you may be invited into his office for a chat even if you don’t have an appointment. Drop by the Legislative Analyst’s Office, and the Office of the State Controller, also.

    Then, visit the Railroad Museum and Old Town, and take a carriage ride around the historic Capitol area before dinner. Go someplace nice where you can sit down at a table and relax over some really fine food.

    If you can afford it, stay in a really good hotel. It is well worth the price to be treated like royalty though thou art a tax slave. Also, you have a better chance of seeing our betters during their time off.

    Talk to your kids about public policy and find out what they are being told in school. If you don’t, by the time you get around to it, it will be too late.

    Reply this comment
  12. Queeg
    Queeg 31 May, 2017, 22:57

    Comrades

    There is only one way when dealing with Plutocrats and Publicans:

    Taxes UP

    Reply this comment
  13. Ronald Stein
    Ronald Stein 1 June, 2017, 08:01

    It’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring them to pay higher taxes and work later into their lives to pay for these promises. It’s the inmates running the pension Asylum that are loading up system with lucrative packages for themselves, to be paid for by taxpayers.

    The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance, financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

    Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    The inmates know that debt for our future generations buys votes. Over the decades, the proven “concept’ practiced by voters is to defer as much financial responsibilities as possible from our current financial responsibilities to future generations, that have no votes on the subject. Simply stated, if we cannot afford it today, pass it off to the future generations to minimize any impact on our current lifestyles.

    Another insult to the taxpayers and future generations paying their pensions is that many of those early retirements collect their guaranteed pensions, and then take a second job.

    Virtually all elected officials are heavily financed by unions which are focused on entitlements for their current members. The unions, government, and other bureaucrats have been very successful in manipulating the system to enrich themselves. Thus, no changes can be expected in the foreseeable future for elected officials to ever abandon their source of votes.

    Even before those young folks can vote our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars.

    Reply this comment
  14. Bill - San Jose
    Bill - San Jose 3 June, 2017, 19:21

    There is only one answer I want to hear.

    The truth.

    Abolish future pensions forever. Create matching 401K and insure it to match a “virtual pension”. But get these cling ons off my back for 30 years of non-productive life because they “worked” hahaha for the state.

    I’m done with this folly.

    Reply this comment
  15. SeeSaw
    SeeSaw 4 June, 2017, 20:44

    Bill, there is no way that an employee can save enough in a personal 401K to sustain for life after work is over. I poured $600/mo into my 457 when I worked in the public-sector (no employer match) and ended up with enough to buy my groceries and utility bills for as long as the money lasts–not enough for all of the other necessities. What you need to realize is that if the defined benefit pensions were abolished, there would be no benefit for you personally, since you will still be paying the same taxes to fund the public services you receive. In the final analysis: Defined benefit pensions are what keeps the retirees sustainable and off the DDS roles. The end of the defined benefit systems in most of the private sector was a very bad thing for society in general.

    Reply this comment
  16. Tobi
    Tobi 12 June, 2017, 19:11

    If the state pension fund managers are allowed to push the overages they can’t cover onto the backs of the taxpayers, there is no incentive for them to roll back the pensions they are negotiating for the future. That is a giant recipe for failure to reform anything! Only when the employees who contribute and the state agency are totally responsible for funding the pensions will they have any motivation to reform.

    Reply this comment

Write a Comment

Your e-mail address will not be published.
Required fields are marked*



Steven Greenhut

Steven Greenhut

Steven Greenhut is CalWatchdog’s contributing editor. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”

Related Articles

Brown’s Budget Blockbuster

MARCH 22, 2011 By WAYNE LUSVARDI (Satire) Gov. Jerry Brown may have learned in Jesuit school how to put the

CA vaccination regulations gain more steam

After a fractious debate, the California Senate passed a revised draft of the controversial bill that would largely eliminate the

Now New York fires a shot across California’s bow

  Gov. Jerry Brown was not amused this past February when Texas Gov. Rick Perry made a four-day recruiting trip