Lockyer: Pensions Won't “Crush Govt.”

MARCH 17, 2011

BY WAYNE LUSVARDI

Bill Lockyer’s recent harsh criticism of a bluntly honest Little Hoover Commission report, “Pensions for Retirement Security,” sounded more like Shakespeare’s King Lear than that of the Treasurer of the State of California.  Lockyer is so mad about the Hoover Report that he posted personal opinion “comments” on the State Treasurer’s website usually reserved for objective staff reports. He also issued an open letter rebuking the commission and asking them to revise the report more to his liking. So much for independent commissions!

If you remember the story of Shakespeare’s play, King Lear was an old deranged ruler who wanted an early retirement and foolishly disposed of his estate to two of his three daughters based on flattery — instead of to his daughter Cordelia, who was too honest for him — bringing tragic consequences for all who later tried to claim his estate.  King Lear was based on the legend of Llyr, a king of pre-Roman Britain.

Lockyer is the King of State Bonds and he doesn’t want anything to lower the state’s general obligation bond credit rating, already ranked the lowest in the nation and only one notch above post-earthquake and tsunami Japan.   He wants to preserve over-promised pension benefits for unions that flatter him with political contributions and favorable media coverage.

Lockyer’s outcast daughter, the Little Hoover Commission, doesn’t tell him what he wants to hear or what he wants bond underwriters and Wall Street to hear. And what Lockyer wants them to hear is that the alarm about California’s burgeoning pension obligations is overblown and that the state is not going to go bankrupt or default on its general obligation bonds. This may be true, but it is a rhetorical half-truth, as the state is shifting its unmet pension obligations to local governments that are vulnerable to going broke.

Lockyer’s pronouncements must sound like those of the insane King Lear after independent studies by both the Kellogg School of Management at Northwestern University and Stanford University both indicated state and local pension systems poised for a future nuclear meltdown.

Let’s look at Lockyer’s criticisms of the Hoover Commission report.

1. Lockyer: The report fails to address, in any meaningful way, the foundational question of what constitutes adequate retirement security.

Lockyer states that the Hoover report’s assertion that public retirements have become “wealth generators” rather than “retirement security” is “long on rhetoric and short on thoughtful analysis.”  But Lockyer offers no analysis of his own and uses a number of diversionary rhetorical devices.

Like all good liberal politicians in California, Lockyer is always playing the “look at the other guy” game instead of focusing on his job of being accountable for California’s pension system funding levels. Lockyer wants to reverse roles and make the Little Hoover Commission accountable to him in kingly fashion.

When Lockyer doesn’t sound like old King Lear, he sounds like the California version of the philosopher Descartes: “I say it, therefore it is!”  He’s the King of the State Treasury, so take it on his authority that he is right! No evidence, just an appeal to his authority.

“What’s so bad about public employees retiring with pensions reflecting 75 percent of their former salaries?” asks Lockyer. This dodges the bigger questions of the huge unfunded future deficit in state and local pension systems. And how would the treasurer recommend plugging it without strangling the entire state economy or resulting in business flight to other states?

Deficits aren’t necessarily bad if you have growing revenues.  But California hasn’t the prospect of growing revenues soon even as the tsunami of pensions will hit California beginning in about 2015 or sooner.

Nor does Lockyer try to explain the downside risks involved with CalPERS’ current 7.5 percent target return on its pension portfolio.  CalPERS lost $96 billion from 2007 to 2009 gambling on high-risk investments in speculative real estate projects with even higher expected returns, and thus higher risk. Lockyer doesn’t want it widely known that CalPERS gambled and lost.

Neither does Lockyer want everyone to know that the state pension system is structured on plugging the funding gap between contributions by member cities, counties and special districts with investment returns from speculative and risky Wall Street investments, including hedge funds. The Little Hoover Commission apparently wants “secure” contributions and investments, not hedge funds and unrealistic interest rates, backing up constitutionally entitled pensions.  This is why the Little Hoover Commission wants pension funds valued by a safe return rate (say 4 percent), not the nearly double 7.75 percent rate CalPERS had been using up until this week, when it lowered its target rate to 7.5 percent.

Taxpayers should seek to legally void guaranteed pensions above member contributions and a safe rate of return on its pooled resources as “gambling,” and thus an abrogation of the pension social contract with taxpayers. This is why Rep. David Nunes (R-Visalia) has introduced the Public Employee Pension Transparency Act (PEPTA).

According to a Wall Street Journal study, the assumption of 7 percent to 8 percent annual returns is a practice confined to U.S. public pension funds and is not used in Canada or other Western nations.  The Stanford study cited above found that if a 4 percent rate were used, California’s unfunded pension obligations would mushroom to $500 billion!  That is why King Lockyer wants the truth-speaking Little Hoover Commission report squashed.

2. Lockyer: The report’s central recommendation — reducing unaccrued benefits for current workers — has no foundation. The report distorts testimony to make its case for the central recommendation — and to support its claim that pension costs “will crush government.”

Lockyer refuses to accept that the most sound way to deal with unfunded pension liabilities is to lower them to realistic levels, instead of continuing to gamble in the stock and hedge fund markets, hoping for some federal bailout that won’t happen because the feds are broke, or for a return to the high rolling bubble economy, which is unlikely and risky.

What makes Lockyer really mad is the Little Hoover Commission statement that pension costs will “crush government.”  He says there is no foundation for such a statement. But Lockyer apparently suffers from political dementia.

The Northwestern University study mentioned above found that, out of 50 municipalities surveyed nationally that are in potential financial insolvency due to future pension obligations, 18 of them (or 36 percent) are in California. Pensions would eat up the following percentage of annual general fund revenues from the California counties listed below, depending on a no-growth scenario or a growth scenario of 3 percent per year:

Percent Municipal Revenues Consumed by Pensions:

County Best Case
(2019)
Worst Case
(2015)
Fresno County 78% 142%
San Diego Co. 62% 119%
L.A. County 41% 91%
San Bernardino County 45% 90%
Kern County 51% 82%
Ventura County 38% 76%
San Francisco 34% 74%
Source: Kellogg School of Management, Northwestern University 2010

In other words, under the worse-case scenario, Fresno and San Diego counties would have to completely shut down and increase taxes 19 percent to 42 percent to only pay pension obligations.  There might be enough money for Los Angeles, San Bernardino, Kern, Ventura and San Francisco counties to operate their courts on a barebones budget, but nothing else under the worst-case scenario shown above.

Even under a best-case scenario, pension costs would rise to 34 percent to 78 percent of county budgets.  What would you call this but pension costs “crushing government”?  A king can issue decrees and use his bully pulpit to intimidate the public and the press to accept his version of reality, but that doesn’t change the reality.

3. Lockyer: The report ignores or dismisses inconvenient data. The report takes rhetorical pot shots that undermine its credibility and reveal its bias.

At best state Treasurer Bill Lockyer is apparently trying to protect the state pension fund from further downgrading by bond underwriters; at worst he is buying time and deflecting blame for the looming wave of pension debts that will hit state and local governments about 2015 or sooner.

Demanding the Little Hoover Commission alter its report to not recommend any pension reductions is not a solution, nor is it full disclosure to pensioners and taxpayers alike that California still has no plan, other than continued gambling, to meet public pension shortfalls.

Lockyer should heed the advice of the “Fool” in Shakespeare’s play King Lear, who advised the king:

Have more than thou showest,
Speak less than thou knowest,
Lend less than thou owest.

— William Shakespeare, King Lear, 1.4.132

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  1. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 19 March, 2011, 19:20

    Bill Lockyer is a joke. He knows damn well CalTURDS is BK.

    He is a bought an dpaid for public union whore.

    Reply this comment
  2. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 19 March, 2011, 19:25

    This is why the Little Hoover Commission wants pension funds valued by a safe return rate (say 4 percent), not the nearly double 7.75 percent rate CalPERS had been using up until this week, when it lowered its target rate to 7.5 percent.

    ==========================
    They didn’t lower it to 7.5%

    Reply this comment
  3. Tough Love
    Tough Love 19 March, 2011, 20:54

    Lockyer has become one heck of a mouthpiece for the Unions.

    Hey Lockyer …… FOCUS …. the real point is that Total Compensation in the Public Sector should be no greater that that in the Private Sector for comparable jobs. With Cash pay in the 2 sectors relatively equal for most occupations, there is ZERO justification for ANY better pensions or benefits for Civil Servants…..PERIOD !

    Currently, Civil Servants ROUTINELY get pensions 2, 4, even 6 times greater than their Private Sector counterparts …. with Private Sector taxpayers paying for 80-90% of Civil Servant pensions. How utterly ridiculous !

    Boy do we need change ! Read on:

    So let’s cut to the chase …….

    Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

    More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
    2% per year of service w/o COLA – 29%
    2% per year of service with COLA – 39%
    3% per year of service w/o COLA – 44%
    3% per year of service with COLA – 58%

    Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

    This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

    TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

    Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

    Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

    It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

    Reply this comment
  4. art
    art 20 March, 2011, 17:58

    About 3 yrs ago when this started i saw this guy get dismantled on CNBC by some knowledgeable questioners. A joke.. “What’s so bad about public employees retiring with pensions reflecting 75 percent of their former salaries?” would be like Madoff saying “what’s wrong with my investors getting 12% on their investment”. It is essentially the same thing

    Reply this comment
  5. SkippingDog
    SkippingDog 21 March, 2011, 12:33

    The problem with your analysis, Wayne, is that it does not reflect the Kellogg study conclusions. Novy-Marx and Rauh postulate that in the absence of any stock market growth, and with the adoption by local governments of a pay-as you-go approach to pension payments out of the general fund, the funds would eventually exceed the budget of the governments they support. Elsewhere in the same report, the authors note a “worst case scenario” in which government contributions to their pension funds would be required to invest two to three times their current rates of pension fund contributions.

    Assuming that pension funds currently require 2.5% to 3.5% of each government’s general operating budget, even their worst case scenario only leads to a situation in which cities and counties will be required to pay 8% to 10% of their annual budget into their pension fund obligations. Difficult in tight money times? Absolutely, but not remotely the catastrophic event you imply in your story here.

    Reply this comment
  6. Rex ther Wonder Dog!
    Rex ther Wonder Dog! 21 March, 2011, 12:52

    Assuming that pension funds currently require 2.5% to 3.5% of each government’s general operating budget, even their worst case scenario only leads to a situation in which cities and counties will be required to pay 8% to 10% of their annual budget into their pension fund obligations. Difficult in tight money times? Absolutely, but not remotely the catastrophic event you imply in your story here.

    =================
    Yes Skippy if the operating budget was CURRENTLY ONLY 2.5%-3% there MAY not be a problem.

    The problem with your comment is the pension contributions are NOT 2.5%-3%

    In LA it is 19%, in San Diego it is 19%, expected to be 33% in 5 years. In Fresno it is even higher.

    So try doubling or tripling 19%-33% and you may get the TRUE picture.

    If that is not a catastrophic event then I do not know what is.

    Reply this comment
  7. Tough Love
    Tough Love 21 March, 2011, 12:55

    Hi Skippy … no battles today, but (as you are one of the sharper, and certainly less nutty commentors) I though I would pass along one of the best explanations of public pensions issues I’ve read. In particular, the Accounting section is particularly good … especially the example in the last paragraph. This last item explains in plain English (and by example) something few understand: (a) that the “funded ratio”, being (PV of Liabilities)/(Current Assets) does NOT make use of an assumption of future earnings on Plan assets, and (b) the the rate use to discount liabilities need not (and should not, other than by coincidence) be assumed to be what you expect to earn on your assets.

    Here is a link to the article:

    http://www.ocregister.com/opinion/dan-290724-serious-acumen.html

    Reply this comment
  8. Charles
    Charles 21 March, 2011, 14:55

    BS.

    But I suppose it sells newspapers. Calpers is at least 20 years away from BK. Assuming they never earn another dime. Perhaps I will be dead by then. If not, I will go to work for Walmart. Or Home Depot.

    And you will still be where you are. If that is anywhere.

    Reply this comment
  9. Charles
    Charles 21 March, 2011, 15:06

    As usual Rex the Wonderdog doesn’t understand basic math. Pension contributions in California now make up about 19% of payroll. In 1969 it was 18% of payroll. (I was there at the time.) In 2000 it was zero% of payroll.

    That 19% of payroll today is 2% of the State budget. And that is “crushing” California’s State government? When welfare costs almost 40 times more?

    Go back to the 7th grade and retake Math 101, Rex.

    You may be loud, but you are not very smart. People who frequent these pages know that.

    Nice picture of the dog though.

    Reply this comment
  10. Charles
    Charles 21 March, 2011, 18:00

    Rex

    You are an insult to ALL dogs. Your comments make little sense some of the time, and none most of the time. Take the picture of that poor dog off your post. The poor carnivore must be insulted and humiliated.

    At least I never owned a dog who wouldn’t sense that.

    You are an insult to dogs and dog owners everywhere.

    According to Samuel Langhorne Clemens (1835-1910) man is the only animal who can blush (or needs to) and the only animal who can be skinned twice.

    Your logic doesn’t fit in there anywhere.

    In fact you have NONE. And I bet you know it. You probably don’t have a job and spend hours at a time on the internet between cashing your welfare checks. Well each to his own. I have always found avoiding work takes more effort than just doing your job. And doing your job well makes your working day go shorter. I lived by that for 40 years and got paid well for doing work I enjoyed. Try it. Maybe you won’t be so bitter. And you might live longer.

    Give it a try there Dude.

    Reply this comment

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