Ed Ring on: The Coming Impact of Pension Payments on California's Cities, and How Reforms Could Happen
BOPRN on: The Coming Impact of Pension Payments on California's Cities, and How Reforms Could Happen
It must be tough for a California state worker to deal with the rising resentment of private sector workers. It must be easy to consider all of this some sort of plot by big business and billionaires to smack down the public sector workers, now that they’ve finished their nefarious beat-down of the private sector workers. There may be comfort in these notions, but little accuracy. Here are some thoughts for our state worker brethren to consider:
The average CalSTRS pension in 2010 for retirees leaving with 30+ years of service was $68,000 per year (ref. Government Worker Understates Average Pension). This benefit is extremely out of line with what is financially feasible. In the competitive, globalized private sector, the ability to retire before age 60 with an income of $68,000 per year requires amassing a huge amount of wealth. When savings accounts are paying interest of less than 1.0%, and the stock markets have been down for over a decade, might you not want to question the assumption that CalSTRS can earn 7.75% per year, long-term?
A self employed person in the private sector who manages to earn over $80K per year pays 53.25% tax on every extra dollar they make – 15% for employer and employee FICA and medicare, 28% federal, and 10.25% state. That doesn’t include property taxes or sales taxes, or the many taxes embedded in the typical utility and telecom bills. And, of course, if they don’t work, they […] Read More
Whenever CalPERS, or any government worker pension fund, suggests that a long-term projected rate of return of 7.75% is realistic and prudent, one needs to consider the following: Across every major stock index in the U.S., and on most indexes in the rest of the world, publicly traded stocks have been down for the last 12 years. Here is a chart of the Dow Jones Industrial Averages staring in January 2000, and running through last week:
What is immediately clear from viewing this chart is that where the index began, nearly 12 years ago, and where it is now, are pretty much the same. To be precise, the Dow entered the week of January 4, 2000 at 11,522, and the Dow entered the week of August 8, 2011 at 11,269 (ref. Yahoo Finance – DJIA 1-2000 to 8-2011). The Dow has actually declined over the past 10.5 years.
Moreover, this loss of equity value should be measured using inflation adjusted dollars, not nominal dollars. If you review the Consumer Price Index from the U.S. Dept. of Labor, you will see that in January 2000 the index stood at 168.8, and in June 2011 (latest figures) the index stood at 225.7. This means that it would take $1.33 today to purchase what $1.00 would have purchased in 2000. From this perspective, the Dow index today would have to stand at 15,406 just to have kept up with […] Read More
August 13th, 2011 | Tags: government unions are Wall Street's collection agent, hedge funds steal from value investors, pensions are investing in hedge funds | Category: Finance | Comments are closed
The relationship between stagnant economic growth and high levels of total market debt should be clear to anyone trying to manage a household where their home mortgage payment consumes 50% or more of their entire household income. Similarly, the relationship between economic growth and the ability to borrow should be clear to anyone who has enjoyed the ability to purchase anything and everything in sight right up until they reached the point where every credit card they owned was maxed, and every dime of home equity available to them was already borrowed and spent. These comparisons hold true at the macroscopic level as well.
In the case of the federal government, borrowing has been facilitated by the ability to borrow money at cheap rates of interest. According to the official website of the U.S. Treasury, the Total Outstanding Public Debt, i.e., the total amount of money currently owed by the U.S. federal government is $14.3 trillion. From the same source, the Interest Expense on the Debt Outstanding for the first 9 months of fiscal 2011 (through June 2011) is $389 billion, which equates to an annual expense of $519 billion. Does anyone see anything wrong with this picture? The U.S. federal government is only paying interest on its debt at a rate of 3.6%. What happens if this rate of interest goes up?
August 4th, 2011 | Tags: the impact of debt on economic growth, US interest payments at various interest rates | Category: Finance | Comments are closed
While much has been made of the impact of pension “spiking,” it is helpful to quantify just exactly how much pension spiking will cost taxpayers, and how ill-prepared an otherwise adequately funded pension account is for this practice. In the two sets of examples below, the same assumptions and the same analytical model is used as in the previous post “What Percent of Payroll Will Keep Pensions Solvent?“; 30 years working, 25 years retired, pay in real dollars doubling between the hire date and the retirement date, and various rates of return.
In this analysis, each block of data has three rows. The first row shows the amount by which the final pay is “spiked,” i.e., increased by a disproportionate amount through a large pay raise, cashing in of accumulated sick time, or other methods that increase pay more than it would ordinarily increase. The second row shows how much would have to be set aside as a percent of payroll each year and contributed into the employee’s pension fund, in order to ensure the fund would have sufficient assets to pay out the calculated retirement pension for 25 years. The third row puts this another way, by showing how much money would need to be in the employee’s pension fund at the time they retire. There are three sets of three rows, representing the results under three different return on investment scenarios; a 4.75% rate of return over the life […] Read More
July 24th, 2011 | Tags: how pension spiking and lower rates of return combine to challenge pension solvency, how pension spiking increases the assets required at retirement, how pension spiking increases the required pension fund contribution | Category: Finance | Comments are closed
In a previous post “Why Pensions Are Grossly Underfunded,” the point is made that for every percentage point that an investment fund lowers their projected rate of return, the required annual pension fund contribution as a percent of salary goes up by over 10%. The assumptions underlying that analysis were 30 years working, 30 years retired, a pension equivalent to 90% of final salary, with the salary doubling (in inflation adjusted dollars) between the first year of employment and the final year of employment. Using the same assumptions, but for a pension equivalent to 60% of final annual salary, for every percentage point that an investment fund lowers their projected rate of return, the required annual pension fund contribution as a percent of salary goes up by a bit less than 10%. The implications of these facts should be clear to anyone involved in the issue of public employee pension benefits.
This post is in response to a commenter who, after reading the previous post, asked what the impact might be on required annual contributions to pensions if the assumptions are changed so that the years retired are shortened. The implication was that a 30 year working, 30 year retired scenario is an unlikely average, since on average, employees who log 30 years of government service do not survive an additional 30 years in retirement. But when analyzing the variability of required pension fund contributions based on 20 year and 25 year retirements, while […] Read More
July 23rd, 2011 | Tags: pension contribution rates and length of retirement, pension solvency and length of retirement, pension solvency and rates of return, why CalPERS projections may be optimistic | Category: Finance | 17 comments - (Comments are closed)
The agenda of California’s union-controlled state politicians is to do whatever they can to increase the amount of tax revenue flowing into the government, and increase the amount of dues revenue flowing into the coffers of government worker unions. This isn’t news, and any law they pass can be appropriately viewed in this context. But beyond grasping for tax revenue ala AB 155, which imposes sales tax on internet purchases, or grasping for union dues revenue ala SB 104, which (vetoed this time) would have imposed unionization via “card check” on agricultural workers, California’s union-controlled legislature is enacting laws that will change the ground rules of politics and governance.
The purpose of these laws, too numerous to compile, is to consolidate the power of public sector unions and ensure that government of the government workers, by the government workers, and for the government workers, will be the perpetual fate of California. As citizens awaken to the fact that government workers in California, on average, make twice as much money and work half as many hours in their careers as the taxpayers who support them, a seismic wave of reform sentiment gathers. To prepare for this tsunami, California’s government worker unions are building a seawall of regulations, many of them buried within budgets and unrelated new statutes. Here are just a few:
AB 114 – Dramatically reduces local financial control of school districts; prohibits layoffs; removes requirement for school districts to perform […] Read More
July 13th, 2011 | Tags: AB 114 – Dramatically reduces local financial control of school districts, AB 455 - Allows unions to appoint 50% of the members of personnel management boards for local governments and agencies, AB 506 - Restricts ability of municipalities to declare bankruptcy, ACA 10 - Would allow the Legislature to amend or repeal voter-initiated statutes after they have been in effect for four years, ACA 6 - Prevents passage of initiatives that reduce tax revenues, SB 168 - Bans ballot committees and individuals from paying people who circulate petitions for initiatives on the basis of the number of signatures they collect, SB 448 - forces circulators of those kind of petitions to wear a button that tells whether they are paid or volunteer, SB23-1X - Grants local governments the power to raise taxes | Category: Politics | Comments are closed
To declare that union reform, public sector union reform in particular, is a nonpartisan cause, is certain to attract vociferous challenges from defenders of unions, but events continue to trump ideology.
As documented in an earlier post “The Democratic Party War,” even in California, a state where public sector unions wield nearly absolute control, there are increasing numbers of prominent democrats who are standing up to the unions. They include Los Angeles Mayor Antonio Villaraigosa, former State Senator Gloria Romero, President of the California NAACP Alice Huffman, San Francisco Public Defender Jeff Adachi, former Assembly Speaker Willie Brown, and Matt Gonzalez, former President of the San Francisco Board of Supervisors. From education reform to pension rollbacks, Democrats are lining up to make hard choices in California, staring down union power in the process.
A series of similar reality checks are happening all over the United States, as Democrats realize the agenda of public sector unions is often in direct conflict with their ability to fund government programs and infrastructure projects. As reported in the New York Times earlier this week in an article entitled “Cuomo Secures Big Givebacks in Union Deal,” a democratic governor in a union stronghold is making tough decisions in an attempt to restore budget solvency. As reported on June 21st on the website “Intercepts,” in a post entitled “Rage Against the Machine,” Democratic lawmakers in New Jersey have […] Read More
June 28th, 2011 | Tags: Cuomo Secures Big Givebacks in Union Deal, Democratic Chicago Mayor Emanuel cancels teacher raises, LA Times editorial – card check only benefits unions not workers, New Jersey democrats enact pension reform, Sacramento Bee editorial – union concessions only hope for city of Sacramento | Category: Politics | 2 comments - (Comments are closed)
The San Diego Union Tribune ran a report on June 17th entitled “Escondido firefighters do contribute to pensions.” Apparently this report was to correct an error from a previous article in which the Tribune stated that Escondido’s firefighters did not make any contribution to their pension. In reality the firefighters contribute to their pension fund an amount, in the form of payroll withholding, equivalent to 9% of their salary.
While it is commendable that Escondido’s firefighters do pay something towards their pensions, considering how many safety employees in California still pay nothing, it is important to place this 9% contribution within the perspective of how much it really costs to fund a “3 at 50″ pension.
The following table depicts how much, in terms of percent of salary, an employee will need to have contributed into their pension fund in order to maintain solvency based on various rates of return for the fund.
This table uses after inflation numbers, which makes the returns appear small. In reality, CalPERS, CalSTRS, and most other pension funds, project a long-term rate of inflation of 3.0%. This means that the nearly best case scenarios here, 7.5% before inflation (showing as 4.5% after inflation on the table), are representative of the current official long-term projections used by most pension funds. Based on the official rates of projected returns for pension fund investments, a 30 year veteran, retiring on a “3.0% at 50″ pension, will collect 90% […] Read More
June 27th, 2011 | Tags: impact of pension return on contribution requirements | Category: Finance | 7 comments - (Comments are closed)
California’s legislature is moving a bill forward that will throttle back the ability to place citizen initiatives on the statewide ballot. As noted in Ballot Access News on May 10th in a post entitled “California Democratic Legislators Advance Bills Injuring Ballot Access for New Parties, Initiatives,” the bill is nearing passage by both houses of California’s legislature:
“On May 9, the California Senate passed SB 168, which makes it illegal to pay circulators on a per-signature basis, if they are working on initiative, referendum, or recall petitions. On the same day, the Senate passed SB 448, which forces circulators of those kind of petitions to wear a button that tells whether they are paid or volunteer. These bills also passed on party line votes, with all Democrats voting “yes” and all Republicans voting ‘no.’”
The impact of this legislation, which is expected to pass the Assembly and get signed by California Governor Brown, will be to double (or even triple) the price of successfully placing a citizen initiative onto California’s state ballot. Anyone who has tried to raise money to qualify a state ballot initiative knows what an advantage the powerful special interests have in this high-stakes political niche, whether they are public employee unions or large corporate interests. Only grassroots organizations with limited access to funding, from taxpayer groups to progressive organizations, are negatively impacted by this legislation.
June 10th, 2011 | Tags: SB 168 will throttle grassroots initiatives | Category: Politics | One comment - (Comments are closed)
An interesting analysis was published last week on Reason.com by Emily Ekins entitled “Differences on Social Security Reform.” In her article, Ekins presented data from a poll that asked whether or not the respondent would support or oppose reducing Social Security taxes and allow individuals to invest in their own retirement instead.
The results were stratified by age, education, income, ethnicity, gender, political ideology, party affiliation and union membership. Some of the results were predictable and showed strong polarization – the older the respondent was, for example, the more likely they were to favor preserving social security as it is, and the younger the respondent was, the more likely they were to favor reducing social security taxes and benefits. Another obvious result from the survey was the split between progressives and libertarians, where the mirror image expressed by their sentiments – progressives 58% vs. 35% opposed, libertarians 57% vs. 31% in favor – bordered on parody.
Crucially, Hispanic voters, rising demographically in the U.S., were opposed 52% vs. 38%; African Americans also opposed lowering social security taxes and benefits, 59% vs. 32%. One needn’t read too much into that, while Hispanics may be destined to become the decisive swing vote in elections of the future, if not already, their political sentiments may change. But reality is about to trump the political debate between those who believe in the ownership society and those who believe in the great society.
June 4th, 2011 | Tags: how to protect defined benefits for public employees, how to provide defined retirement benefits to all Americans, how to save social security | Category: Finance | Comments are closed
Several years ago a consummate Sacramento insider told me “unions run this town,” and subsequent research and observations have confirmed the truth of this statement. Slowly, very slowly, this reality, and the disastrous fiscal consequences of this reality, are being recognized. Criticizing unions is still something responsible people do with some reservations, after all, in the 19th and through much of the 20th century, unions played a vital role in securing basic worker’s rights. These contributions should not be dismissed. But unions today, especially in the public sector, are a different beast entirely. In our current anti-capitalist political climate, unions are getting far less criticism than they deserve, particularly because in the case of state, city and county governments, the unchecked power of public sector unions are almost the sole reason we have a fiscal crisis. Here are some points to consider:
(1) Compensation to public sector employees is not limited to their wages, but must take into account the value of their increased number of paid days off (AND the “9/80” program which equals another 26 paid holidays per year), as well as the current year funding requirement (less whatever they contribute out of their paychecks which is usually only a fraction of the cost) for their retirement health and pension benefits. This “overhead” can easily double the annual cost for public sector employees, whereas in the private sector, overhead costs of this sort rarely exceed 25%. This overhead must be included when assessing how much public sector employees […] Read More
June 9th, 2009 | Tags: California's deficit, public sector unions | Category: Politics | 14 comments - (Comments are closed)
With almost 3 months we have plenty of time to fully check out minor party candidates, and see how the polls read, before we decide whether to hold our noses and vote against someone. All are articulate and experienced speakers who will hit each other from all sides for a more lively and watchable debate and more viewers. League of Women Voters openness and trust might draw more still. Voting methods are an open topic, including ranked choice, approval and proportional, which most of the world uses and my favorite, like many Greens, and Libertarians. Open national debates would encourage local affiliates to follow suit for local candidates, for Public Service credit to all. Whether or not Trump joins, the debates should be lively. Don’t let a lively race turn boring, don’t let the majors coast.
Congratulations to Hillary and Donald. For those of you who aren’t ‘with Hill’, check out Jill Stein, MD, presumptive Green candidate for President. For those of you who aren’t ready to worship The Donald, Gov. Gary Johnson is likely the Libertarian candidate. More are running and Colorado’s Secretary of State keeps a long list that already needs updating. Voting methods are open topic, including ranked choice, approval and proportional, which most of the world uses and my favorite.
This might be a great election to break up the two parties, one voice. 15% polling will allow 3rd party candidates to debate, unless the major parties change the rules, again. Shift those polls now and see how they shape up. You have until November to decide how degraded you’ll feel with a late vote against the candidate you fear.