Excellent Economist Mag. article on CA’s Gov. retiree Pension problems

[CA renter]

[quote=pri_dk][quote]No offense, but why do so many people continue with the lies about public sector workers not taking a hit?[/quote]

Nobody said they aren’t “taking a hit.” We saying that they are offering only a token, insignificant amount.

And they are using these minor concessions as a propaganda tool – trying to convince the voters that the public-sector employees are somehow the victims.

The facts clearly show which side is telling the truth.

The changes that are happening in public-sector compensation only address future pension obligations. They do not address the crux of the problem: The commitments that have already been made.

These changes you keep pointing out will not solve the problem, they will at best only help prevent it from becoming worse.

Apparently you didn’t even read (or comprehend) the very basic facts laid out in the OP article:

California’s unfunded pension liabilities are staggering, he points out; they have been estimated at between $240 billion and $500 billion. Plugging that hole will increasingly crowd out other things that Democrats care about, such as schools, parks and courts. But Mr Brown’s plan might save at best $11 billion over 30 years.

Even Brown’s current proposal, which is already facing resistance from the public-sector employees, will resolve less than 5% of the shortfall.

The real question is this:

Why do you continue to claim that these token concessions offered by a few public-sector employees will somehow make this massive problem go away?

You ignore the hundreds of thousands of state employees who will receive million-dollar (plus) retirement packages, and instead focus on the fraction of (mostly young) employees who will see their compensation cut to market levels.

There is no evidence that public-sector employees are making any sincere effort to address the problem. I don’t blame them, if I had managed to hustle such a sweet deal, I would be reluctant to give any of it back also. But as a taxpayer (their employer), I’m going to do what I can to make things right.

We are sacrificing the education of the next generation in order to allow a minority from our own generation to retire early and in extraordinary comfort. It’s disgusting.[/quote]

I can point to numerous posts where uninformed people have claimed that public employees are not taking a hit.

Not sure where you got the “extraordinary comfort” part, either. Most public employees live very modestly and have unremarkable pensions. The MSM likes to glom onto the very rare, sensational story about someone who got a $200K pension due to pension spiking, etc. That is NOT the norm…not by a long shot.

The concessions are neither “token,” nor insignificant. Where did you get your info? It’s obviously not from actual knowledge about the negotiations going on between unions and their employers.

The only person who is unable to read or comprehend is YOU, pri-dk. In every debate we’ve had, I’ve been the only one to cite facts and link to relevant articles, etc. You just rant and resort to personal attacks. Try doing some research for a change instead of resorting to personal attacks. You’re not scoring any points with your tactics.

If you want to debate, that’s fine. But keep it honest, clean, and objective. Try focusing on the topics being discussed rather than trying to shut somebody down with your idiotic, unfounded, disparaging comments.

[CA renter]

[quote=sdduuuude][quote=CA renter]No offense, but why do so many people continue with the lies about public sector workers not taking a hit? IMHO, many of them are going to see 10-35% pay cuts going forward. Some have already seen rather significant cuts already.[/quote]

Well, back to the original point someone made about defined contrib. vs. defined benefit.

If the public employees are taking a hit to boost their pension, then that is more like a defined contribution plan, which is a good thing. In a defined benefit plan, they wouldn’t take that hit – the state would have to.

So yes – some public employees may not be on a defined benefit plan.

This doesn’t mean I’m happy about the ones that are.[/quote]

No, they aren’t paying more to *boost* their pensions; the benefit amounts are determined by a fixed formula. They are paying higher contribution rates so that their employers (the taxpayers, according to some) will have to pay less.

I’ve tried to explain this so many times, but it seems I’m not explaining it well enough. TAXPAYERS DO NOT PAY THE BENEFIT PORTION OF THE PENSIONS. “Taxpayers” pay for the employer portion of the contributions, and the pension funds pay for the benefits — with the vast majority of that money coming from investment returns, not contributions from taxpayers.

Yes, the benefits are defined and guaranteed, but the contributions (including the ratio between employee/employer contributions) can change. It’s the *contribution amounts* that are the issue here, not the benefit amounts.

If the current contribution rates are determined to be inadequate based on investment returns, demographic changes, etc. (the “unfunded liabilities”), then the contribution rates have to go up to cover the difference. That’s where the bandied-about “tax increases” come in. What the MSM isn’t saying is that those increases *can* come from increased tax allocations/revenues, OR they can come from employee contributions, OR they can come from a combination of the two.

Perhaps I’ve not managed to explain it clearly enough, which is why we keep hearing the same tired lies over and over again. The pension funds have a fixed obligation to the employees. The contribution rates DO change, and THAT is what people are discussing during contract negotiations. The ***employees*** are being forced to increase their contribution rates. Those are public union ***employees*** who are often taking the hit for those increases, not just the employers. No, they are not token hits; and no, they do not just apply to younger employees.

[CA renter]

One more thing I’d like to add…

The propaganda machine is clearly out in full force about the increased contribution rates, but where were they when “taxpayers” had their contribution rates DECREASED because of outsized investment gains? There were years when “taxpayers” paid NOTHING toward pension contributions. Shouldn’t we average out the contributions paid into the system instead of focusing on a couple of years during which there was a “financial crisis”?

http://www.lao.ca.gov/analysis_2008/general_govt/gen_anl08011.aspx

If there is one thing I think everyone desperately needs to understand, it is this: The people behind the anti-union movement are NOT taxpayer advocates. They are corporate/financial interests who are trying to privatize our public assets and resources. The unions are the only thing standing in their way, which is why they are resorting to “divide and conquer” tactics where they pit private workers against public workers. They are playing on people’s emotions and stirring up envy — using the “financial crisis” as their opportunistic tool…so many people are in dire straits, they are now able to pit us against our own (middle-class worker vs. middle-class worker). I went into it some more in this thread.

http://piggington.com/gov_brown_proposes_state_worker_pension_changes?page=1

This move toward privatization has been going on for decades. We now have far more “government contractors” at the federal, state, and local levels doing work that was once done by public employees. Ask yourself this…have your taxes gone down as a result of this privatization? Are our expenditures and deficits reduced as a result of this privatization? Think hard about the FACTS. Do your own research and come to your own conclusions. Think about where the money goes if it is being spent on local salaries/benefits vs. going to some corporation that might be located in another state or country.

From everything I’ve seen, privatization does NOT result in savings for taxpayers. Instead, it decimates the job market, concentrates wealth into the hands of a few wealthy and well-connected people, and lower wages for ALL local workers — public and private, union and non-union.

I honestly am not here to convince people to agree with my stance, but I think it’s extremely important that people understand WHY we’re hearing the anti-union propaganda and know WHO is spreading it. Know the facts, then decide for yourself if YOU would benefit from the privatization of all public assets and resources. Ultimately, that’s what this argument is all about. It is NOT about tax savings for Joe Sixpack; I can assure you of that.

[CA renter]

[quote=pri_dk][quote=bearishgurl]pri_dk, can you point me to a link where you obtained this information? If it is already posted on this thread and I overlooked it, can you point me there? Thank you :)[/quote]

Um, the article linked in original post of this thread.

Please spare us the melodrama about the hardships of anybody’s career choice. I come from a family of steelworkers and coal miners. (My father was a electrical utility worker – a job with a higher workplace fatality rate than police officer.) Most of my uncles were promised a pension and got almost nothing when their employers went bankrupt. My father’s job was spared when the steel industry collapsed, so we helped out the rest of our family. That’s how it should work – there’s no certainty in the future and nobody should be forced to bail others out when rosy plans don’t quite work out.

As for me, I’m now too old to become a cop, and way too old to ever “vest.”

But, I promise not to bother you with my anecdotes if you agree not to waste space on this page with yours. Both are irrelevant to the issue presented here.

Like I said before, the fact that I, choose or do not choose a career as a cop doesn’t change the facts in the issue or the validity of my arguments. It it turned out that I was a retired CHP officer, will that make suddenly make all my points more correct? Or are you suggesting that public employees can set whatever salary they choose, and that taxpayers have no say?

So let’s try again:

Who is going to to pay for the $240-$500 billion shortfall?

And just to give some context to the number: That works out to an average of about $150-$312 thousand dollars per CalPERS participant. We effectively have to come up with enough money to buy a house for every one of the 1.6 million public employees in CalPERS.[/quote]

Another thing you might not know: That $500K number comes from a Stanford group who used a 4% (or lower?) return rate, IIRC.

Here is CalPERS’ response to their “study” (done by graduate students):

“Over the past 20 years, CalPERS has earned an average annual investment return of 7.91 percent – which includes the past two years of investment declines. This performance exceeds the pension fund’s actuarial rate of return assumption of 7.75 percent needed to pay long-term benefits.

The study appears to use the yield of the 10-year Treasury bond as the risk free discount rate to estimate the present value of liabilities. The duration of the 10-year bond is approximately 8 years and well below the estimated duration of the CalPERS liability in the study. It would be more appropriate to use the yield of the 30-year Treasury bond as the risk-free discount rate for purposes of such a comparison.

CalPERS does not believe that using a risk-free rate as suggested in the study is appropriate since the fund can earn a premium over the risk-free rate with high certainty by investing in a diversified portfolio with an acceptable level of risk.

The study relies on data when the system had $50 billion less in assets than it has today. CalPERS assets are valued at nearly $210 billion – a gain of more than $50 billion since the market downturn.

The study’s findings are based on a mathematical model that uses current interest rates, which are very low and make liabilities appear to be much higher. That method is inconsistent with the Governmental Accounting Standards Board and current actuarial standards.

The study recommendations are based on bond returns over the past 25 years of 7.25 percent for investment grade corporate bonds, which are only 0.66 percent lower than CalPERS total return of 7.9 percent but with much lower volatility. CalPERS experts believe that this reasoning is flawed. Prospective returns on bonds are much lower today since yields are at an historic low and the return to bonds will equal the current yield to maturity which is around 4 percent for most broad band indices. Also bonds could be more volatile than the past if economic conditions are more uncertain as in the recent period.

The study ignores our diversified investment portfolio that has been time-tested during our 78 year history. If CalPERS had followed the recommended approach in the study, it would have given up billions of investment earnings that have helped finance pensions rather than relying on tax dollars.
Actuarial/Benefit Formula Related
The study misstated some of the benefit formulas in Table 3 and seems to suggest that CalPERS violate the California Constitution by using surpluses to “reduce state debt.” Pension raids were determined to be unlawful during the Wilson Administration.

To adhere to some of the changes suggested in the report, CalPERS would be violating actuarial standards of practice and undo 50 years of governmental accounting rules in favor of an approach that would be “zero” risk.

Funded status should not be viewed as a long-term irreversible trend. A pension fund’s funded status – whether a liability or surplus – is constantly changing, depending on current economic circumstances. It is a snapshot in time that can change dramatically over a fairly short period of time due to the health of the overall economy. Funded status snapshots are useful in showing how far or how near one is to full funding. Experts agree that a funded status of 80 percent is the mark of a very healthy plan. CalPERS notes that the Stanford Report acknowledges that using the data selected, CalPERS was more than 80 percent funded.

Benefit formulas are not set by CalPERS. They are determined through the collective bargaining process, between the employer and the employee representatives. CalPERS recently held the California Retirement Dialogue, and information on the various viewpoints on benefit formulas is available on the pension fund’s website CalPERSResponds.com.”

http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-archive/pr-2010/april/responds-stanford-policy-brief.xml

——————-

The study also doesn’t take into accout the fact that retirement ages can change, and contribution ratios can change as well. These things alone would drastically change the numbers used to calculate the “unfunded liabilities” that taxpayers would hypothetically have to pay. Combine this with the return rates that the funds have earned historically, including the past couple of years, and the liabilities are far, far lower than these “shock and awe” numbers.

[CA renter]

Some facts:

FACT: The average public pension in California is $25,000 a year. 80% of public employees such as nurses, school employees, college professors, and child protection workers who retire receive less than $2,500 a month in retirement benefits.

FACT: Public service workers already pay 7 to 10 percent toward their pensions. Nearly 80 cents of every dollar in benefits comes from workers’ contributions and investment earnings–not from taxpayer contributions.

FACT: California’s contribution to retirement for state employees is less than 5 percent of the state budget. The state of California pays less as a percentage of its payroll for pensions today than it did in 1980.

http://www.californiaprogressreport.com/site/californians-need-debate-retirement-security-based-facts-not-scare-tactics

[Anonymous]

Ok, so what is the shortfall?

I’m ok with using your number.

Don’t bother us with the details and explanations, just provide a number.

What is the shortfall?

[bearishgurl]

[quote=CA renter]…Some facts:

FACT: The average public pension in California is $25,000 a year. 80% of public employees such as nurses, school employees, college professors, and child protection workers who retire receive less than $2,500 a month in retirement benefits.[/quote]

All very good points, CAR …

In my experience with non-sworn, non-professional county government workers, their average pension varies from about $600 to $1300 mo for those who retired PRIOR to March 2002 and about $800 to $2000 mo for those who retired AFTER March 2002. (Those employees retiring AFTER March 2002 have a much higher contribution rate.) The lower end applies if the employee decided to take benefits early. Full retirement age is 62 (age 60 for post 3/02 retirees).

There are MANY MORE non-professional workers who keep the wheels of gov’mt turning than there are “chiefs” (who have MUCH higher pensions). Most “midmanagement” positions were done away with between 1998 and 2002. As those incumbents retired (either voluntarily or with a 2-yr “service credit” carrot placed before them), their (mostly redundant) positions were simply not replaced and never will be.

edit: Here’s the (very interesting) ’06/07 Grand Jury Investigative Report on SDCERA.

http://www.sdcera.org/pdf/Grand_jury_report_5-07.pdf

As far as I am aware, the county has followed ALL of its recommendations.

[sdduuuude]

[quote=CA renter]The contribution rates DO change, and THAT is what people are discussing during contract negotiations. The ***employees*** are being forced to increase their contribution rates. Those are public union ***employees*** who are often taking the hit for those increases, not just the employers. No, they are not token hits; and no, they do not just apply to younger employees.[/quote]

I think the concern is not what has happened already, but what has to happen to cover the shortfall.

Also, we are suggesting that putting new employees on a defined benefit plan only poses a risk for the future, give that we have seen this epic failure of the investments. Just put them on a 401K, negotiate a salary + employer 401K contribution, get out of the investment business and move on.

[sdduuuude]

[quote=CA renter]From everything I’ve seen, privatization does NOT result in savings for taxpayers.[/quote]

Well, I actually agree with you a bit here. Just because a private organization is doing the work, it is still funded by the government. That really isn’t “privitization” to me. Privatization would be eliminating garbage service and making people buy their own from a private service.

I’m not a corporation and I’m dead against public unions. Has nothing to do with propaganda. Public unions are truly horrible. That isn’t to say private contractors are not.

To me, the unions look exactly like a private corporation – both act in their own best interest and not in the interest of the taxpayers. The only difference is corporations admit they are in it for profit while unions try to pretend to have some noble purpose.

The crux of both problems is the fact that decisin-makers in the government have power over too much money and they are going to give it to their friends – be they union or corp. Beaurocrats have control of massive amounts of funding but each individual beurocrat only needs a little for themselves to be bought. So, with a small investment a private organization (union or corp) can spend a few hundred thousand buying the right politician to get millions in return.

The answer is to run less money through the government so neither the unions nor the contrators can buy their own politicians.

I would just like to see you admit that a public employee union is really no different from a corporate contractor. They just use different agruments to justify why the government should send the money their way.

[SK in CV]

[quote=sdduuuude]
Also, we are suggesting that putting new employees on a defined benefit plan only poses a risk for the future, give that we have seen this epic failure of the investments. Just put them on a 401K, negotiate a salary + employer 401K contribution, get out of the investment business and move on.[/quote]

Defined benefit plans used to be the model. Both private and public employers are moving towards defined contribution plans. Both may be short sighted. Big corporate entities moved away from defined benefit plans primarily because the cost of what they promised employees increased faster than the actuarial assumptions accounted for.

If you remember a few years ago when the auto industry was in massive trouble. The promised retirement benefits cost them more than they could afford. But it wasn’t monthly pensions. It was health care. More than once over the last 30 years, they had pension trusts that were actually over-funded, and they made deals with the unions to take that money back. Then the cost of health care spiraled up and out of control, and they were no longer over-funded.

The same thing has happened with many public retirement plans. We know that CalPERS was on target to be over-funded. And that was with very small contributions from both the state and the employees. So the earnings assumptions were actually smaller that actuals. Some plans had such outstanding investment performance than no contributions were required by either the state or the employees for many many years. Not even what is considered “normal costs”. Investment earnings covered both the projected future costs and the additional costs added each year. We didn’t hear any complaints those years about the high cost of public sector retirement benefits. Those savings weren’t set aside, they were spent elsewhere, or exactly like the tax cuts of almost a decade ago, returned to taxpayers in the form of lower tax rates.

My point is, in addition to risk, there is also a potentially huge benefit to defined benefit plans. (Ford, GM and Chrysler wouldn’t have had financial calamities they had, if the increase in the health care cost portion of the promised retirement benefits hadn’t far exceeded the outstanding investment performance of their retirement trusts) We had a once in 3 generations crash that the economy still hasn’t recovered from. Predictable? Maybe. But that was the cause of the problems with the public sector retirement pension shortfall. Not the overly generous pensions.

[bearishgurl]

[quote=SK in CV] . . . If you remember a few years ago when the auto industry was in massive trouble. The promised retirement benefits cost them more than they could afford. But it wasn’t monthly pensions. It was health care. More than once over the last 30 years, they had pension trusts that were actually over-funded, and they made deals with the unions to take that money back. Then the cost of health care spiraled up and out of control, and they were no longer over-funded. . .[/quote]

Overall good and informative post, SK. Since retiree healthcare was provided older “Tier 1” retirees but never contracted with the unions, the way SDCERA solved the escalating costs of retiree healthcare was to charge the retirees 100% of their (group rate) premium. Tier I retirees plus the formerly Tier II (now added into Tier I) *newer* (pre March 2002) retirees are paid an allowance of $200 – $300 mo to offset monthly premiums (only if they subscribe to a plan) but the monthly premiums are nearly twice that and far beyond. Those retiring after 3/8/02 under an *enhanced* (Tier A) plan do not get the healthcare allowances. The entire monthly premium is/will be subtracted from their pensions.

The 06/07 Grand Jury Investigative Report on SDCERA stated that, at that time, only about 2/3 of (non-Medicare) retirees availed themselves of the County’s plans. This is understandable given the current competitive and choice-laden individual market out there (available to those without pre-existing conditions).

edit: The monthly healthcare allowance paid to SDCERA Tier I retirees (a finite amt of employees who have already left svc) is a fixed sum between $200 and $300 mo based upon years of service. As health plan rates continue to rise, this sum will continue to be fixed.

I note that nearly 100% of the older original “Tier 1” retirees are now eligible for Medicare or dead.

[SK in CV]

[quote=bearishgurl]

Overall good and informative post, SK. Since retiree healthcare was provided older “Tier 1” retirees but never contracted with the unions, the way SDCERA solved the escalating costs of retiree healthcare was to charge the retirees 100% of their (group rate) premium. Tier I retirees plus the formerly Tier II (now added into Tier I) *newer* (pre March 2002) retirees are paid an allowance of $200 – $300 mo to offset monthly premiums (only if they subscribe to a plan) but the monthly premiums are nearly twice that and far beyond. Those retiring after 3/8/02 under an *enhanced* (Tier A) plan do not get the healthcare allowances. The entire monthly premium is/will be subtracted from their pensions.

The 06/07 Grand Jury Investigative Report on SDCERA stated that, at that time, only about 2/3 of (non-Medicare) retirees availed themselves of the County’s plans. This is understandable given the current competitive and choice-laden individual market out there (available to those without pre-existing conditions).

edit: The monthly healthcare allowance paid to SDCERA Tier I retirees (a finite amt of employees who have already left svc) is a fixed sum between $200 and $300 mo based upon years of service. As health plan rates continue to rise, this sum will continue to be fixed.

I note that nearly 100% of the older original “Tier 1” retirees are now eligible for Medicare or dead.[/quote]

Good information. I included the part about the spiraling health care costs only as it related to the auto industry, and that it wasn’t the monthly pension costs that almost killed them.

I really didn’t know exactly what the obligations for retireee health care costs for state and muni pensions in CA. Thanks for the info!

[sdduuuude]

[quote=SK in CV]…returned to taxpayers in the form of lower tax rates.[/quote]

HAHAHAHA. That’s a funny one.

[quote=SK in CV]We had a once in 3 generations crash that the economy still hasn’t recovered from. Predictable? Maybe. But that was the cause of the problems with the public sector retirement pension shortfall. Not the overly generous pensions.[/quote]

Well, there are two points of discussion:
1) Choosing to offer a defined pension at all
2) The amount of that pension.

So, you are right, it wasn’t the overly generous pension. It was the fact that a pension was offered at all instead of a simple 401K-type plan.

For the state to choose to put taxpayer money at risk and imagine themselves to be capable of investing the money properly is a plan that will work perfectly up until the day when it doesn’t. Plus, they have to turn to a private investment contractor and have them do the investing for them – a cost that I’m sure CA Renter would like to avoid.

It isn’t the government’s place to take care of their employees for life or put our money at risk. The definition of “risk” is that there is both an upside and a downside, by the way.

Pay the employees now, let them manage their own retirement, avoid the risk, and avoid putting taxpayer money on the shoulders of the evil wall street people. I don’t see how that is a bad idea.

[SK in CV]

[quote=sdduuuude]For the state to choose to put taxpayer money at risk and imagine themselves to be capable of investing the money properly is a plan that will work perfectly up until the day when it doesn’t. Plus, they have to turn to a private investment contractor and have them do the investing for them – a cost that I’m sure CA Renter would like to avoid.

It isn’t the government’s place to take care of their employees for life or put our money at risk. The definition of “risk” is that there is both an upside and a downside, by the way.

Pay the employees now, let them manage their own retirement, avoid the risk, and avoid putting taxpayer money on the shoulders of the evil wall street people. I don’t see how that is a bad idea.[/quote]

I don’t necessarily disagree, but I’ll add a couple of points.

A DB plan isn’t just risk. There is, and has been, pretty substantial reward.

And the state doesn’t actually manage the money. It’s managed by a somewhat independent committee made up of representatives from the employees, appointees of the governor, and I think a couple ex-office holders (like former state treasurer, or something like that). Fees to the private contractors they hire to manage are paid by the fund itself, not directly by the state. Which means their fees are paid out of state monies, employee contributions and earnings.

And governments really do sometimes return savings to taxpayers in the form of tax reductions. It certainly happened at the federal level. And the top CA income tax rate has floated between 9-11% for many years. (may have been a rate slightly below 9%, i can’t remember.) So while the savings solely from pension cost reductions may not have been the reason rates went down, it was probably part of the reason.

On the taking care of employees for life thing…eh. Part of the comp package. I think there was a time when they weren’t covered by Social Security. Pretty sure teachers weren’t. I think SDPD for instance, still isn’t. DB pensions are/were a way to equalize.

[CA renter]

[quote=sdduuuude][quote=SK in CV]…returned to taxpayers in the form of lower tax rates.[/quote]

HAHAHAHA. That’s a funny one.

[quote=SK in CV]We had a once in 3 generations crash that the economy still hasn’t recovered from. Predictable? Maybe. But that was the cause of the problems with the public sector retirement pension shortfall. Not the overly generous pensions.[/quote]

Well, there are two points of discussion:
1) Choosing to offer a defined pension at all
2) The amount of that pension.

So, you are right, it wasn’t the overly generous pension. It was the fact that a pension was offered at all instead of a simple 401K-type plan.

For the state to choose to put taxpayer money at risk and imagine themselves to be capable of investing the money properly is a plan that will work perfectly up until the day when it doesn’t. Plus, they have to turn to a private investment contractor and have them do the investing for them – a cost that I’m sure CA Renter would like to avoid.

It isn’t the government’s place to take care of their employees for life or put our money at risk. The definition of “risk” is that there is both an upside and a downside, by the way.

Pay the employees now, let them manage their own retirement, avoid the risk, and avoid putting taxpayer money on the shoulders of the evil wall street people. I don’t see how that is a bad idea.[/quote]

SK is right; public employers (“taxpayers”)were paying very little (or nothing at all) for quite a while when the pensions were super-funded.

[Author]

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