Pension 'pain train' coming

JULY 8, 2010

By KATY GRIMES

California’s private sector employees are not only paying for their own pensions and retirement funds, they are paying for the pensions of public sector employees, according to Governor Schwarzenegger. In his pension fund roundtable meeting today Schwarzenegger said, “We don’t have enough money,” to continue funding the state’s public pension fund liability.

California has $500 billion in unfunded pension debt – that’s half a trillion dollars. Even if the state froze pensions today, California would still be upside down in pension debt by billions of dollars.

According to roundtable participant San Francisco Public Defender Jeff Adachi, “San Francisco pays $1.2 billion every year for the city employees’ pensions and health care, but has cut summer school, gives out $80 parking tickets, and we charge people to come to our parks.” Adachi said that when he was elected, he analyzed the budget and asked, “Where is all the money going?” He said that when no one could answer him, he started doing his own research and discovered that the city employee pensions cost 28 times more than what the city spends on street repairs and maintenance.

Adachi has introduced a ballot initiative that would require city workers to contribute 9 percent to 10 percent to their own pensions, and double their contributions to dependents health care coverage from 25 percent to 50 percent. Adachi, a self-described progressive, said his initiative gathered 75,000 signatures when only 3,000 were needed, demonstrating vast support for the change.

In 1999, the Legislature passed SB400, to retroactively increase pension benefits by 20 percent to 50percent, authored by Democrat Sen. Deborah Ortiz and coauthored by Democrat Sen. John Burton, and Assembly members Lou Correa, D-Santa Ana, Anthony Pescetti, R-Sacramento, and Darrell Steinberg, D-Sacramento. Gov. Gray Davis signed the bill. Some state political analysts said the bill was a gift to unions for putting Democrats back in charge of the state after 16 years of Republican rule.

Governor Schwarzenegger is proposing a roll back of pension benefits to pre-1999 benefit levels. He wants to require employees to contribute to their own pensions, base the retirement rate on the three highest years of wages of employment instead of the one-year calculation now used, and require full disclosure by state pension funds and “honest funding of pension promises when promises are made.”

At the meeting, the governor’s special jobs and economic adviser David Crane, said that SB400 was only supposed to cost $648 million in the 2010-11 budget year however, the actual cost will be nearly $4 billion, 2,000 percent higher than 10 years ago. The projections were based on assumptions that the stock market boom in the 1990s would continue indefinitely. Crane said that the California Public Employee Retirement System (CalPERS) believed it could cover any additional costs through “continued excess returns” and expected that contributions from the state would hold steady at $350 million. Crane explained that the actual pension costs began at $145 million in year 2000, and are $3.8 billion this year. He said however, that the increases started well before the stock market crash of 2008, and that the CalPERS Board signed off on the pension changes without ever asking questions about how it could possibly be sustained.

CalPERS Board member Tony Oliveira said the biggest problem was that SB400 passed without any scholarly analysis. “Now the pain train is still coming, and locals are going to take it on the chin.” Oliveira said that his own county will be experiencing 35 percent increases.

Former Democratic Assemblyman Joe Nation (2000-06) and co-author of AB32, California’s global warming act, said that he was not in the Legislature in 1999 and did not vote for SB400, “however had I been, I probably would have because every other Democrat did and most Republicans did – because they didn’t even think about it.” Nation said, “You cast votes because it’s what the caucus recommends.” Nation added, “We need to step back and think about things, look at the facts. Facts are pretty stubborn things.”

Nation is correct – SB400 was supported by both parties, passed unanimously in the Senate, with only seven members of the state Assembly voting against it.

Crane was critical of the Legislature and questioned why not no one asked, “What happens if the stock market doesn’t continue to go up?” Referring to the dot.com and stock market boom of the 1990s, and the assumption that it would continue, Crane said the assumptions were entirely based on the Dow Jones rising. However, according to Crane, if the stock market doesn’t perform at the 1990s boom level, even with a rise, pension costs will still be higher, “even worse than these costs.”

Sen. Dennis Hollingsworth, R-Murrieta, tried to address the existing pension crisis by authoring SB919, however it was voted down along party lines. The measure would have increased the retirement age from 55 to 65, and required state employees to make higher contributions to their retirement accounts. The measure would also require retirement benefits be based on the three highest years of wages, instead of the using only the current highest single year.

Explaining that there once was a time when there were trade offs between higher paying private sector jobs and better benefits in public sector jobs, Hollingsworth said that today the public sector benefits are much greater than the private sector in both areas. But Hollingsworth stressed that the argument is that “pensions must be sustainable.”

Northwestern University Professor Joshua Rauh, author of The Liabilities and Risks of State-Sponsored Pension Plans … explained the dire financial situation of the state’s pension crisis, and how easily the pension funds got into trouble, because of lawmakers’ and board CalPERS members’ unrealistic assumptions about the stock market.

Rauh said that policy makers need to understand the facts and warned that with current pension promises, CalPERS and CalSTRS will run out of money by fiscal year 2026-27.

The governor told Rauh, “[G]ood luck making policy makers understand what you just said.”

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  1. StevefromSacto
    StevefromSacto 9 July, 2010, 12:56

    “Explaining that there once was a time when there were trade offs between higher paying private sector jobs and better benefits in public sector jobs, Hollingsworth said that today the public sector benefits are much greater than the private sector in both areas.”

    And because that noted non-partisan economist Dennis Hollingsworth said it, it must be true…NOT. Other than a few bogus studies that compare private sector McDonald’s workers with public sector auditors, Hollingsworth’s claim has never been proven. If you compare the pay of an auditor in the public sector with that of an auditor in the private sector, the private sector employee will have a higher salary every time.

    Reply this comment
  2. StevefromSacto
    StevefromSacto 9 July, 2010, 12:59

    One other thing, Katy. To say that private sector employees “pay for” the pensions of public sector employees implies that public sector employees don’t contribute to their own pensions. That’s flat-out wrong.

    Indeed, 75 cents of every pesnion benefit dollar comes from investment income, 13 cents from employee contributions and 12 cents from taxpayers.

    Reply this comment
  3. Hannah Katz
    Hannah Katz 9 July, 2010, 14:37

    Dennis Hollingsworth is not alone in noting that the public sector workers are paid more than private sector workers. I have seen multiple studies say the same thing. More generous benefits in most cases and more generous pay in many cases. Simply put, we cannot afford them any longer.

    Reply this comment
  4. StevefromSacto
    StevefromSacto 9 July, 2010, 16:33

    Multiple studies, Hannah? How about some examples? And I’m not talking about junk science from Keith Richman, Marcia fritz and her crowd.

    Reply this comment
  5. Tough Love
    Tough Love 14 July, 2010, 10:01

    Quoting StevefronSacto … “One other thing, Katy. To say that private sector employees “pay for” the pensions of public sector employees implies that public sector employees don’t contribute to their own pensions. That’s flat-out wrong. Indeed, 75 cents of every pesnion benefit dollar comes from investment income, 13 cents from employee contributions and 12 cents from taxpayers.”

    Tell you what ….. when your retirement payout checks are due to you each month, we (the Taxxpayers) will send you the 12 cents of each dollar … look into the mirror for the rest.

    Everything you say is nonsense … and I believe you know it.

    Climb back aboard you gravy train….. and report to your Union masters that all your BS isn’t fooling anyone.

    Reply this comment
  6. John D
    John D 14 July, 2010, 10:26

    Here in Mendocino County the Pension Liability reported in the County’s Pension Fund Actuarial Valuation is about $400 million. (That’s how much money the Pension Fund should have today.) The MARKET VALUE of the Pension Fund’s assets was $270 million – $130 million short. The County is solely responsible to eliminate that – unless the Pension Fund can earn about 18% yearly returns for the next decade (not very likely).

    In addition the County still owes $80 million on past Pension Obligation Bonds. From the citizens point of view, that means we – taxpayers, service recipients, people who depend on a sheriff showing up when needed – owe a total of $210 million of the total of $400 million that should be in the Pension Fund.

    That means the County still has to pay half of what should already be in the Pension Fund.

    The County is cutting county services all over the place – 20% of the workforce has already lost their jobs and its going to be much worse over the next few years.

    Only the County is responsible to make up Pension deficits – employees and retirees take no investment risk. Even though a majority of members of the Retirement Board either now or will receive County pensions – there is no impact on their pensions of their utterly poor investment performance (worse even than the market crash).

    I’m a life long Democrat and have been a financial/business analyst for 30 years. I’ve come to the conclusion that our state and local governments have not told us the financial truth about their retiree benefits. The real debt is much larger than reported, we have pushed a hugely unfair debt burden onto our kids.

    Politicians promised more than they could deliver and shoved the part they couldn’t deliver as far into the future as possible. Union officials took credit for “bringing home the bacon” even though the bacon wasn’t due until decades in the future.

    It would be someone else’s problem when the unpayable debts came due.

    They are now coming due.

    Reply this comment
  7. Wayne Martin
    Wayne Martin 14 July, 2010, 10:35

    Because of labor unions, salary and benefits have doubled every 12-15 years, sooner or latter, people in the public sector start making over $100K per year; additionally their pensions are linked to their high salary which are increased by COLAs. This means that most government sector employees will be making more in their retirement than they made when they were working.

    Using a COLA of only 2%, CalPERS retirees receive the following payouts:

    Total Pension Payouts
    Pension
    $100K–10-Years: $1.1M | 20-Years: $2.5M | 30-Years: $4.1M
    $150K–10-Years: $1.7M | 20-Years: $3.4M | 30-Years: $6.2M
    $200K–10-Years: $2.2M | 20-Years: $5.0M | 30-Years: $8.3M

    Police and Fire Department employees are routinely drawing over $100K in the larger cities and some over $200K, with their pensions at 90% of their high salary and many claiming “disability retirement” which reduces their income tax liability. In another decade, or so, the public sector will totally bankrupt the private sector with their pension demands.

    Non-public safety CalPERS-based pensioners can look forward to as much as 80% of their high years salariess:

    http://www.scribd.com/doc/32579238/A-Look-At-Santa-Clara-CA-Pension-Payouts

    Comments from public sector employees that private sector employees should be advocating for similar programs demonstrates how little public sector types understand the massive liabilities that these “defined benefit” programs have created. Most state governments are destined to go broke in the next twenty years or so, unless there are sea-changes put into effect that radically alter the current pension “albatross” around the taxpayers’ necks.

    There are other options:

    1) Radically reduce the pension multiplies so that the payouts do not make multi-millionaires out of government employees
    2) Shift all employees into the US Social Security System.
    3) De-link pensions from salaries.
    4) Create a top salary for pension awards (like $150K).
    5) Don’t award pensions at all, increasing the employees’ salary to reflect the present value of the pension and let the employees create their own retirement accounts.
    6) De-link pensions from COLAs after, say, 5-10 years.
    This issue needs a complete modeling of the State’s (and all municipalities too) financial futures. The current plan is just too much of a “quickie” fix, without any evidence of long-term understanding of the real costs.

    No one should be give $6-$8M as a retirement “benefit”. This mess has to be cleaned up, pronto!

    Reply this comment
  8. Charles
    Charles 14 July, 2010, 10:44

    Actually our problems have been caused by idiotic decisions on the part of State government. Anyone who has lived in California for any length of time knows that we have boom bust cycles that are more severe than other States. Yet out Legislature has continually spent every nickle of money in good times on their pet projects, ignoring that the cycle will inevitably drop and money will be short. During the boom times they also pay little or nothing into Calpers and act shocked (as in “I am shocked, shocked I tell you that this is going on.” My apologies to Casablanca) when the inevitable day comes to pay up for past neglect.
    Calpers was more than one hundred percent funded in the early 2000s and still would be if State and local government would have paid in as the employees did.

    Reply this comment
  9. Tough Love
    Tough Love 14 July, 2010, 11:00

    Dear Wayne Marting…

    Nice and ACCURATE Write-up, but you missed one very important option that I anticipate will be used to a MUCH larger degree going forward. That’s outsourcing. From a Pension standpoint, it’s (the BEST option … from the taxpayers’ perspective), equivalent to a “hard freeze” … no further benefits accrue (via salary increases or additional years of service).

    What’s odd is that the Unions’ refusal to renegotiate (with the SUBSTANTIAL, not MINOR reductions needed) will be the straw that get this (outsourcing) going full steam … with the upshot being the throwing of all their member under the bus.

    Reply this comment
  10. Tough Love
    Tough Love 14 July, 2010, 11:05

    Charles, Everything you said EXCEPT your last sentence is true.

    A few years back CALPERS was well funded, but still only by using unrealistically high interest rates for valuing Plan assets and liabilities.

    They still say they are 85% funded, but using the MARKET VALUE of ACTUAL assets and REALISTIC interest rates, they are only 50-55% funded.

    CalPERS speaks with “forked tingue”

    Reply this comment
  11. SkippingDog
    SkippingDog 14 July, 2010, 13:55

    I once worked for a Wayne Martin. He owned several Texaco stations that went belly up during the first oil crisis. Is that you Wayne?

    Reply this comment
  12. Charles
    Charles 14 July, 2010, 15:16

    Tough Love

    Perhaps you have been reading the Governor quoting from his paid for study by college students who used a 4% discount rate to run their numbers.

    Calper uses a 7.75% rate and actually earned 7.79% during that last twenty years including the wall street meltdown.

    Reply this comment
  13. Fake OCO
    Fake OCO 14 July, 2010, 15:51

    Because of labor unions, salary and benefits have doubled every 12-15 years
    =============
    Actually public safety has gone up 87% in salary the last 10 years, the pensions went up 50% overnight with SB 400.

    Reply this comment
  14. Fake OCO
    Fake OCO 14 July, 2010, 15:53

    Charles says:

    Calper uses a 7.75% rate and actually earned 7.79% during that last twenty years including the wall street meltdown.
    ===================
    Charles, CalTurds ROI the last 10 years was 2.41%

    Sorry, that SEIU spin won’t work here, try it at a purple shirted SEIU beach party 🙂

    Reply this comment
  15. Fake OCO
    Fake OCO 14 July, 2010, 15:55

    And Charles, this one is for you and my good public employee buddy StevefromSacto;

    DJIA 5-13-1999 = 11,100 (when SB 400, aka 3%@50, was passed)

    DJIA 6-30-2010 = 9,774

    A full 1,326 point LOSS in 11 years

    So much for that CalTurds 7.75% ROI right Sir Charles 😉

    Reply this comment
  16. Fake OCO
    Fake OCO 14 July, 2010, 15:58

    Actually our problems have been caused by idiotic decisions on the part of State government. Anyone who has lived in California for any length of time knows that we have boom bust cycles that are more severe than other States. Yet out Legislature has continually spent every nickle of money in good times on their pet projects,
    ==============

    Unless you call gifting out billions in comp to gov employees “pet projects” you’re 100% wrong.

    San Diego, Vallejo and other cities all were having major pension problems before the 2008 meltdown came…..the other muni’s would have gotten to the same point in time too

    Reply this comment
  17. Fake OCO
    Fake OCO 14 July, 2010, 16:04

    StevefromSacto says:

    One other thing, Katy. To say that private sector employees “pay for” the pensions of public sector employees implies that public sector employees don’t contribute to their own pensions. That’s flat-out wrong.

    Indeed, 75 cents of every pesnion benefit dollar comes from investment income, 13 cents from employee contributions and 12 cents from taxpayers.
    ============
    Hahahha….if 75% of the pension costs were from investments there would be no meltdown.

    95% of penion funds come from the taxpayer, in some cases 100% comes from the taxpayer b/c the muni “picks up” the employee portion in MANY MANY cases.

    In fact the cost to fund a “safety” (3%@50) pension is 40% of salary based on a 7.75% ROI, but if you use a 5% ROI that costs goues up to about 115% of salary.

    Steve, you have more spin than a merry go round-and that’s why I like you!

    Reply this comment
  18. Tough Love
    Tough Love 14 July, 2010, 16:08

    Charles, a few points:

    (1) The 4% assumption was used for discounting liabilities, not assets. For liabilities that are supposedly “guaranteed” 4% is an appropriate discount rate.

    (2) The past is not relevant. VERY few financial economists believe the 8% rate (or anywhere near it), is an a realistic asset investment return assumption for the future …. yet CalPERS uses it, because the use of a lower (more appropriate rate) would significantly reduce the Plans funded ratio …. upping the pressure for pension formula reductions, new tiers, older retirement ages, higher employee contributions, etc. ….. something CalPERS doesn’t support because it’s really just another arm of the Unions at this point.

    Reply this comment
  19. Fake OCO
    Fake OCO 14 July, 2010, 16:17

    StevefromSacto says:

    Other than a few bogus studies that compare private sector McDonald’s workers with public sector auditors, Hollingsworth’s claim has never been proven
    =====================
    Oh brother…..;

    Federal pay ahead of private industry
    By Dennis Cauchon, USA TODAY
    Updated 3/8/2010

    Federal employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations, a USA TODAY analysis of federal data finds.

    http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm

    Reply this comment
  20. SEESAW
    SEESAW 15 July, 2010, 07:51

    CalPERS just put out a press release today on its gain for fiscal year 2009-2010–11.4 percent. That ought to shut up the people who are crying that CalPERS and CalSTRS are going broke.

    Reply this comment
  21. Tough Love
    Tough Love 15 July, 2010, 08:25

    Seesaw, A gain of 11.4% immediately following the 30+% losses of 2008 was expected …. it’s just the correction after overshooting the downside when everyone ran for the (stock market) exits expecting a depression.

    The problem is that CalPERS is STILL assuming an 8% return forever … that’s what is absurd.

    Reply this comment
  22. john moore
    john moore 16 July, 2010, 13:15

    Here in Pacific Grove,Ca. the city Council approved real pension reform by a 6-1 vote. The City can contribute 10% of salary for employee pensions and no more. Except for the 10%,the City cannot be liable for pension deficits: that means if employees want a “defined benefit” they must pay all costs over the 10% and all investment losses.Fortunately there are hundreds of certified police officers who would love to work for Pacific Grove even with the reform.Pacific Grove still has a 76 million dollar debt for past Calpers losses,but at least it has capped the leak in its well.

    Reply this comment
  23. Tough Love
    Tough Love 16 July, 2010, 21:37

    Quoting …”The City can contribute 10% of salary for employee pensions and no more. Except for the 10%,the City cannot be liable for pension deficits: that means if employees want a “defined benefit” they must pay all costs over the 10% and all investment losses.”

    That change make Pacific Grove the smartest town in CA.

    By-the-way, sounds like you were in CalPERS at one time. How did the town make this change … as I would expect the employees (especially safety) to fight it to the n-th degree. They may not know know it yet, but the Taxpayer were the BIG winners on this one.

    Reply this comment

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