More Taxes and Tuition Buy Time for the Pension Bubble

November 27, 2014 By CPR Editors 1 Comment

“The ‘recovery’ is largely an illusion created by the effects of zero percent interest rates, quantitative easing, and deficit spending. The asset bubbles that have been created as a result of these policies have primarily benefited the owners of stocks, bonds, and real estate (the rich), while simultaneously deterring the savings and capital investment that is needed to actually create good paying jobs and increased purchasing power.”

–  Peter Schiff, EuroPacific Weekly, November 6, 2014

The question everyone should be asking, especially the managers of public employee pension funds, is how much longer our economy can run on zero percent (adj. for inflation) interest rates, quantitative easing and deficit spending.

When asked how we unwind all of this debt and deficits in a manner that doesn’t trigger a collapse of collateral and potentially catastrophic deflation, i.e., how do we create the preconditions for sustainable economic growth, respected economics blogger Charles Hugh Smith emailed back this answer:

“Those who foisted the debt off as safe have to absorb the losses, as did those who were conned. As it stands now, the hapless taxpayers are having to make the perps and their marks whole—that is wrong, morally and financially. The US has about $90 trillion in net worth. If $10 T were wiped off the books, it would be bad for the banks and those who trusted them, but it would not sink the country.”

Which brings us to the topic of this post.

As reported on November 16th in the Sacramento Bee:

This year, UC will pay about $1.3 billion to the pension fund, about 5 percent of its overall operating budget. UC officials want the state’s general fund to pick up nearly a third of the payment, which would cover the university’s portion of pension contributions for faculty and other employees who are paid from state funds. ‘Frankly, if the state were to pay that, we would not be proposing a tuition increase,’ said Nathan Brostrom, UC’s chief financial officer. ‘That is money that could go to other resources.’”

Like nearly every public employee pension fund in the U.S., the University of California’s pension system is underfunded. According to the Sacramento Bee, the system is 79 percent funded, which equates to a $7.2 billion unfunded liability.

What is going to happen to the UC System’s pension fund when these asset bubbles deflate?

The precariously low funded ratio challenging America’s public employee pension systems is itself based on the dangerous assumption that we are not experiencing unsustainable asset inflation. A healthy correction would lower asset values, making the basic necessities of life – housing and energy – affordable again. But a healthy correction in asset values would render pension systems insolvent because the value of their investments – already on the brink of inadequacy – would decline further.

In the public debate over this issue, there is another assumption at work, pernicious and misleading. That assumption is that faculty on the various UC campuses are making common cause with the students by insisting that state taxpayers pick up the tab for these pensions. But there is no common cause. Beneficiaries of public sector pensions are shareholders. From funds that control nearly $4 trillion in investments, this privileged class of state and local government workers collect pensions that – at least in California – average four times (or more) what someone with similar compensation (and similar withholding) can expect to receive from Social Security. And unlike ordinary shareholders, when the shares held by their pension funds decline, they are empowered to force taxpayers to cover their losses.

The faculty that populate the campuses of the University of California, and by extension, every public employee who collects a pension at taxpayer – and tuition payer – expense, have interests that coincide with the one percent of the one percent, and the biggest banks, and the hedge funds, and the Wall Street firms they love to demonize. They benefit from the asset bubble that is destroying the economic aspirations of the rest of America. When financial policymakers encouraged cheap interest rates so ordinary people could borrow more than they could ever hope to pay back, just so they could own a home, shareholders – including the biggest shareholder class in the U.S., pension funds – profited from the debt-fueled economic growth. When asset bubbles rendered a middle class lifestyle unattainable to most Americans, the public sector exempted themselves through automatic cost-of-living increases and enhanced pension benefits.

The solution to the University of California’s money crunch is to suspend cost-of-living increases, increase payroll withholding for pension benefits, and lower pension benefit formulas. Only then will the people who teach California’s youth truly be making common cause with their students.

As it is, the roadblocks to sustainable economic growth are those who benefit from debt fueled asset bubbles – super rich shareholders and their fully co-opted partners, government workers.

Ed Ring is the executive director of the California Policy Center.

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UC Pension Crisis Creates Teachable Moment

November 25, 2014 By Jon Coupal 2 Comments

Californians have abysmally low levels of civic engagement as evidenced by the recent election where voter turnout set an historic low.  And the widespread disengagement of California’s younger voters is even worse.

True, in 2008 California’s youth turned out in large numbers to elect Barack Obama as president.  And in 2012 they turned out again because, in addition to Obama being up for reelection, Proposition 30 was on the ballot.  Proposition 30, which gave California the highest income tax rate and highest state sales tax rate in America was, ironically, entitled Temporary Taxes to Fund Education.

During the Proposition 30 campaign, Governor Brown traveled to several university campuses to push the massive tax hike promising that passage would prevent tuition hikes. California’s college students, being as gullible as they are idealistic, believed the promise hook, line and sinker.  So much for critical thinking.

But perhaps California’s younger voters are finally getting wise to all the broken promises of tax-and-spend politicians and that might explain, in part, why they stayed home in this last election.  And sure enough, their increasing cynicism is proving to be well founded.

Despite the massive tax hikes ostensibly to keep higher education affordable, the University of California Board of Regents just announced a sizable increase in tuition.  And UC students are none too happy.

Turns out that the driving force behind these hikes is the growing unfunded liability of UC’s pension fund and other items of questionable compensation.  Allysia Finley with the Wall Street Journal explains:  “UCs this year needed to spend an additional $73 million on pensions, $30 million on faculty bonuses, $24 million on health benefits and $16 million on collectively bargained pay increases. The regents project that they will require $250 million more next year to finance increased compensation and benefit costs.”

Moreover, Finley reveals the extraordinary level of waste in the UC system:  “Ms. Napolitano [President of the University of California] says that the UCs have cut their budgets to the bone, yet her own office includes nearly 2,000 employees—a quarter of whom make six-figure salaries. An associate vice president of federal government relations earns $273,375 a year, plus $55,857 in retirement and health benefits, according to the state controller’s office.  Thirty professors at UC Santa Cruz rake in more than $200,000 in pay, and most faculty can retire at 60 and receive a pension equal to 75% of their final salary. More than 2,100 retirees in the university retirement system collected six-figure pensions in 2011.”

At the moment, the outrage expressed by students in their protests – one of which resulted in a shattered glass door outside a meeting of the UC Regents – seems a bit unfocused.  They’re angry but, aside from the mere fact that their education costs are rising, many are not clear about the causes.

In a weird way, UC’s pension crisis might be the ultimate teachable moment for college students who typically have little grasp of anything related to public finance.

So, students, here’s the scoop:  There’s no such thing as a free lunch.  Public employee compensation is expensive; especially pension costs that you will be paying long after those of us who are older are long gone. Government waste, fraud and abuse in California is a real problem.  Those who pay taxes – a lot of taxes – have choices where to live and move their businesses – and that may not be in California.  Debt means future costs.  You might like the idea of High Speed Rail but you might want to study both the costs and viability of any megaproject before you hop on board.

And finally, don’t buy into any promise by any politician about what they are going to do for you without first figuring out what they are going to do to you.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This article was originally published on HJTA.org

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Pension crisis divides CA Dems on UC tuition hikes

November 21, 2014 By James Poulos 4 Comments

 

 

Janet_NapolitanoA 14-7 vote yesterday by the full University of California Board of Regents made it official: Golden State Democrats are deeply divided on tuition increases, thanks to the intractable politics of underfunded pensions.

On one side are Democrats who favored the increases, including UC President Janet Napolitano, formerly President Obama’s secretary of the Department of Homeland Security; Regent Richard C. Blum, the husband of long-time U.S. Sen. Dianne Feinstein, D-Calif.; and the school’s overwhelmingly Democratic faculty, who seek the tuition hikes to fill their pension plan that is $25 billion underfunded and would benefit from the extra money taken from students.

Napolitano insisted the UC system could not maintain its “vitality” or “stability” without more money from students.

In the 14-7 vote, among those seven opposed were some heavy-hitters in Democratic state politics: Gov. Jerry Brown, Lt. Gov. Gavin Newsom, Assembly Speaker Toni Atkins and State Supt. of Public Instruction Tom Torlakson — all just re-elected to their offices; and former Speaker John Perez. Also in this camp would be many students who have protested the increases.

Brown went to the extraordinary length of offering his own counterproposal, falling back on the traditional idea of convening a panel of experts to recommend a policy.

Although the split among Democrats has dominated the news, tuition has not been the only issue to introduce party fractures in recent months.

State Democrats previously divided on education in the wake of the Vergara ruling, wherein Judge Rolf Treu ruled that California’s teacher tenure system unconstitutionally violated students’ civil rights. The controversy helped tee up a close and rancorous race between union-backed incumbent Superintendent of Public Instruction Tom Torlakson and his challenger, Marshall Tuck. Both are Democrats.

But a broader range of issues also proved problematic. Environmentalists chafed, for instance, at Brown’s diversion of cap-and-trade fees into the costly high-speed rail project, which wouldn’t help reduce statewide emissions for years.

An open secret

The pensions crisis, however, has been quietly pushing Democrats apart. Outgoing controller and incoming Treasurer John Chiang, encouraged by Gov. Brown, developed a reputation for laying bare the abuses of pension funds like the California Public Employee’s Retirement System, whose pension-sweetening machinations recently drew the ire of the governor.

Chiang’s relatively bold stand has led some observers to speculate he could upset an anticipated struggle between Newsom and Attorney General Kamala Harris to replace Barbara Boxer in the U.S. Senate two years from now. For the moment, however, Chiang has helped drive a wedge into the Democratic Party by giving political cover to Democrats willing to object to California’s pension burdens. And though the pension issues at the heart of the UC tuition increase have been an open secret, they have yet to receive a commensurate amount of media attention.

As Bloomberg recently reported, the UC system operates an independent $90.7 billion pension fund, underfunded by about 20 percent. The state of California covers the employer’s percentage of pension costs for most state employees, but not for UC teachers.

Nathan Brostrom, UC’s chief financial officer, put the problem to Bloomberg in blunt terms. “Frankly, if the state were to pay that, we would not be proposing a tuition increase,” he said.

But Bloomberg pointed out, “Brown’s budget office says the pension system is independent and lawmakers have no input into how it is structured or the level of benefits provided. If the state were to pay more toward the university’s retirement costs,” Brown’s administration reasoned, “It would essentially be the same as giving them more funding.”

Given Sacramento’s current level of pension obligations — and the fraught politics surrounding the outcome of pension-fueled municipal bankruptcies in cities like Stockton — state Democrats have not been motivated to take on the UC’s massive pension obligations.

Student frustrations

Confusion and a sense of powerlessness among students have deepened the political impact of UC’s pensions.

At San Francisco’s UC campus in Mission Bay, where the regents gathered, “hundreds of students” staged angry protests, with some, as the San Francisco Chronicle reported, breaching “metal barricades and police security lines.”

Ry Rivard at Inside Higher Ed recounted the judgment of Student Regent Sadia Saifuddin, who told Regents she’d been obliged to take on four jobs to cover her schooling costs. Saying “students have always been taken hostage,” Saifuddin claimed “students have always had to pay the price of economic mismanagement by the regents and the state.”

This article was originally published on CalWatchdog.com

 

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Higher UC tuition hikes — for what purpose?

November 12, 2014 By Joel Fox 4 Comments

Last week, on a post-election panel presented by Capitol Weekly, I raised the issue of potential tax increases being contemplated by public unions and other groups in the next election and said that one of the reasons more revenue was sought was to cover pension obligations.

A union representative on the panel scoffed that pensions were “yesterday’s news.”

Actually, pensions were that day’s news if you read accounts about the University of California’s request that tuition be raised by 5 percent a year for a five year period.

The chief reason for the tuition increase appears to be retirement costs.

According to the Sacramento Bee,  U.C. Chief Financial Officer Nathan Brostrom cited retirement costs in explaining the need for tuition hikes. This is how the Bee put it: “Brostrom emphasized that UC feels it is not getting what was promised to the university with the Proposition 30 tax hikes, which increased revenues by 8 percent, and that it could avoid raising tuition if the state helped fund its retiree costs.” (My emphasis.)

How can you read that without concluding that the money is for retirement costs?

Squeezing

Like other government budgets, pension costs are squeezing the college budgets like a boa constrictor. When pro-tax advocates talk about the need for more money to pay for services, we should ask for a list of how that money will be spent and how much will be used to offset pension costs.

Higher education costs do seem out of control, rising 100 percent in the last decade. The debt burden on student loans is unconscionable and should be dealt with, starting with an examination of student loan interest rates.

What are the other costs driving up costs of higher education?

Before tuition is raised, the Regents should audit the system to see what is driving the cost.

But let’s not hide from pensions’ sizable role in any budget debate.

That is not yesterday’s news. It is today’s news and tomorrow’s news until some reforms come to be.

This article was originally published on CalWatchdog.com

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Higher Ed Tuition Hikes for What Purpose?

November 9, 2014 By Joel Fox 4 Comments

Last week, on a post-election panel presented by Capitol Weekly, I raised the issue of potential tax increases being contemplated by public unions and other groups in the next election and said that one of the reasons more revenue was sought was to cover pension obligations.

A union representative on the panel scoffed that pensions were “yesterday’s news.”

Actually, pensions were that day’s news if you read accounts about the University of California’s request that tuition be raised by 5 percent a year for a five year period.

The chief reason for the tuition increase appears to be retirement costs.

According to the Sacramento Bee, UC Chief Financial Officer Nathan Brostrom cited retirement costs in explaining the need for tuition hikes. This is how the Bee put it: “Brostrom emphasized that UC feels it is not getting what was promised to the university with the Proposition 30 tax hikes, which increased revenues by 8 percent, and that it could avoid raising tuition if the state helped fund its retiree costs.” (My emphasis.)

How can you read that without concluding that the money is for retirement costs?

Like other government budgets, pension costs are squeezing the college budgets like a boa constrictor. When pro-tax advocates talk about the need for more money to pay for services, we should ask for a list of how that money will be spent and how much will be used to offset pension costs.

Higher education costs do seem out of control, rising 100-percent in the last decade. The debt burden on student loans is unconscionable and should be dealt with, starting with an examination of student loan interest rates.

What are the other costs driving up costs of higher education?

Before tuition is raised the Regents should audit the system to see what is driving the cost.

But, let’s not hide from pension’s sizable role in any budget debate.

That is not yesterday’s news. It is today’s news and tomorrow’s news until some reforms come to be.

This article originally appeared on Fox and Hounds Daily

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Pension funds feel heat on climate change issue

September 29, 2014 By Ed Mendel 5 Comments

This piece was originally published on Calpensions.com:

CalPERS signed a United Nations pledge in Montreal last week to measure the “carbon footprint” of its $296 billion investment portfolio, with the goal of reporting the results before a UN climate change conference in Paris late next year.

CalSTRS announced in response to a UN climate summit in New York last week that its investments in “clean energy and technology,” now valued at $1.4 billion, will be increased to $3.7 billion over the next five years.

UC Regents voted on Sept. 17 to reject a student-led call for divesting fossil fuels from a $91 billion investment portfolio (three-quarters in retirement funds), but did not rule out using divestment later after developing a new investment framework.

Pension funds have used their investment clout for targeted social goals, notably divestments or stock boycotts of apartheid South Africa and tobacco. Curbing the use of carbon-emitting fossil fuels said to be disastrously warning the climate is a much larger global undertaking.

“We call on other investors to join us in assessing the climate risk in their investment portfolios and using that knowledge and insight in their investment decision,” Priya Mathur, the CalPERS board vice president, said in the carbon pledge news release.

President Obama called for more worldwide action to reduce climate change as he spoke at the UN climate summit in New York last week. “Nobody can sit on the sidelines on this issue,” he said.

Consultants announced last week that 180 institutions (pensions, religious, philanthropic, local governments and others) have pledged to divest fossil fuel holdings worth $50 billion, including the $860 million Rockefeller fund, founded on an oil fortune.

A coalition of groups announced that nearly 350 global institutional investors, managing $24 trillion, called on government leaders to phase out fossil fuel subsidies and provide “carbon pricing,” which would help redirect investments to clean energy.

Carbon pricing, charging a tax or fee for emitting a ton of carbon dioxide, is favored by many economists as a workable way to reduce global warming. The concept has the support of CalPERS and CalSTRS.

“If a meaningful price on carbon emissions is established, CalSTRS believes its clean energy and low-carbon investment could grow to almost $9.5 billion, nearly seven times the current level of investment,” Chris Ailman, CalSTRS chief investment officer, said in the climatesummit news release.

California has a limited form of carbon pricing with a “cap-and-trade” program for oil refineries, power plants and large factories. As a cap on greenhouse gases tightens, industries must cut their emissions or buy an “allowance” from other firms or the state.

Calling for action on climate change, demonstrators marched through Manhattan last week at the climate summit, as many as 400,000 in some estimates. But there also are climate change skeptics. Summit news reports showed contrasting views of how the issue is viewed in the political arena.

National Public Radio reported that Chris Lehane, a Democratic strategist for a committee putting money from billionaire Tom Steyer into a half-dozen close races, said, “In many of these campaigns, climate is being used as a wedge issue, focused on Republicans.”

Fox News reported that Dan Simmons of the Institute for Energy Research said a recent Gallup poll found 41 percent think the economy is America’s biggest problem, while only 1 percent cited the environment and pollution. “Limiting greenhouse gas is not something that the majority of Americans consider one of the most pressing issues of our time,” he said.

CalPERS and CalSTRS have moved away from divestment, troubled by the cost, no hard evidence of results and legislative meddling. They prefer to use their status as shareholders for “constructive engagement” with companies to push for change.

California Public Employees Retirement System consultants estimated that a 1987 law requiring divestment of South African-connected firms cost CalPERS $529 million, and not being able to invest that amount boosted the total to $1.86 billion by 2006.

South African divestment cost the California State Teachers Retirement System $600 million to $750 million, the consultants said. Similar costs resulted when CalPERS and CalSTRS voluntarily divested tobacco stock.

The two big pension funds clashed with the Legislature over a 2007 law requiring divestment of foreign companies doing defense or energy business in Iran. Labor-backed Proposition 162 in 1992 gives public pension systems sole control of their funds.

Now climate change is creating a new wave of pressure. Last July the mayors of Oakland, Berkeley and Richmond published an article in the Sacramento Bee urging CalPERS to join their cities and San Francisco and Santa Monica in fossil fuel divestment.

The mayors said that if global warming is to be limited to 2 degrees Celsius, believed to be the best chance of avoiding runaway climate disruption, no more than a third of proven fossil fuel reserves can be consumed prior to 2050.

If governments act to control climate change, the mayors said, the companies will have to leave most of their reserves in the ground, even though they continue to spend hundreds of billions exploring for new reserves.

“A growing ‘carbon bubble’ — overvalued companies, wasted capital and stranded assets — poses a huge risk to investments in fossil fuels,” the mayors said.

When the CalSTRS board was urged to divest fossil fuels last June, similar arguments were made by Deborah Silvey and Jane Vosburg, representing teachers and retirees with the 350 Bay Area Divestment Campaign.

The international grassroots campaign founded by author Bill McKibben takes its name from the view of some scientists that the current carbon dioxide in the atmosphere, 392 parts per million, must be reduced to 350 ppm to avoid a climate tipping point.

After a 10-campus student group, “Fossil Free UC,” urged divestment, UC Regents appointed a task force on sustainable investing. The regents adopted the task force recommendations during a well-attended meeting Sept. 17.

The goal is to develop a framework for sustainable UC investing by next July that includes ESG (environmental, social and governance) factors. An evaluation of ESG strategies is to include “whether to use divestment.”

Regent Bonnie Reiss said that making the case for divestment should be an “uphill battle” because of fiduciary obligations. Reiss and Regent Gavin Newsom suggested a look at coal holdings, which Stanford University plans to divest.

The University of California also will “allocate $1 billion over a period of five years to solutions-oriented investments such as renewable power and fuels, energy efficiency, and/or sustainable food and agriculture.”

Meanwhile, 350.org groups throughout California have been working to get the support of CalPERS and CalSTRS members and unions and may soon launch a formal divestment campaign, “Fossil Free California.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

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