Millennials and Pensions – Do They Know Public Pension Systems Need Reform?

January 7, 2015 By Lance Christensen 3 Comments

After the midterm election results there has been a lot of talk about the young people who didn’t turn out to vote. There are around 8 million millennials, people ages 18-to-35, in California. And the conventional wisdom has been that since they helped elect President Obama twice, they’ll continue to help elect Democrats. But what about all that debt piling up on their backs?

The non-partisan Legislative Analyst’s Office predicts $340 billion in debt, deferred payments, pension costs and other liabilities will be on California’s balance sheets for years to come. Gov. Jerry Brown’s latest budget dedicates just over $10 billion to pay down this debt, barely making a dent in the problem.

The largest pension system in the state, the California Public Employee Retirement System has not reported their actuarial values of assets and liabilities for 2013 yet, but out of its four defined benefit plans, it has an unfunded liability of about $60.6 billion. In 2013, CalPERS only contributed 87.7 percent of their annual required contributions, not even making a full payment.

The states teachers’ retirement system, CalSTRS, had an unfunded liability of $70.5 billion in 2012 and $73.7 billion in 2013. In 2013, CalSTRS paid only 44.12 percent of their annual required contributions. Governor Brown worked with the Legislature to increase contributions — since they are controlled by statute — but his plan is to increase payments over the next five years and spread the costs to school districts and teachers. This will likely increase burdens on local public school budgets and impact their general fund spending priorities.

The University of California retirement system had an unfunded liability of $11.6 billion in 2012 and $13.8 billion in 2013. In 2013, they paid only 35.7 percent of their annual required contributions. This recently prompted the university regents to increase tuition on students to pay for a bloated bureaucracy and massive pension liabilities.

In total, taking the public statements of all the state systems at face value, the California defined benefit pension system had $142.7 billion in unfunded liabilities in 2012 (the figure for 2013 is not available as CalPERS has not provided the data). The aggregate funded ratio for the whole system in 2012 was 77 percent, compared to 90 percent in 2003. In 2013, the state only paid 65.6 percent of their aggregate annual required contributions.

It should be noted that if the state systems had simply paid their full contribution every year during 2003-2013, the cumulative missed contribution plus the associated returns is more than $41 billion. Instead, these missed payments have become compounding debt for which future generations will be responsible.

In 2012, Governor Brown signed a set of nominal pension reforms that capped some pension costs, though most of the changes only impacted new employees. However, CalPERS recently contravened both the spirit and the letter of the law and allowed 99 specialty pays to be counted as base pay for purposes of calculating pensions. This not only boosted the costs of the state pension fund, it also put many localities who contract with CalPERS in the unenviable position of accommodating higher costs on their employees and pensioners as these calculations put pressure on their bottom lines.

While state government retirees collect handsome guaranteed pensions, young taxpayers will foot the bill. This has particularly serious ramifications for the millennial generation, who are sinking under the weight of public debts and obligations made by people years before they were even born. Paying those debts leaves far less money to fund government services and amenities they’d like to focus on, like education, public safety, roads, water systems, parks, beaches and libraries.

More fundamental reform is needed to depoliticize pension benefits and policies, make pensions fair to government workers and accountable to taxpayers in a simple and transparent manner. Further, government employees deserve retirement accounts that they own, are portable and transferable, without the penalties associated with the current politician-controlled system. Reform also needs to eliminate unfunded liabilities on future generations.

Millennials won’t be the only losers if our elected officials do not have the courage to reform the state’s broken pension systems. The status quo may endanger our public institutions for generations to come. But reform won’t happen unless millennials get informed and engaged.

Lance Christensen directs the Pension Reform Project at Reason Foundation.

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California Comeback or Continuing Crisis?

January 6, 2015 By Jon Coupal 1 Comment

As the California Legislature reconvenes this week for the new session, Californians will hear two decidedly different messages from both politicians and political pundits about the “state of the state.”  Governor Brown will surely tout the “California comeback” and argue that the state is in much better fiscal health than just a couple of years ago.  On the other hand, more conservative voices will argue that California remains in fiscal crisis, that our system of governance is still fundamentally flawed and that those who believe the state is on the right track are simply fooling themselves. So who is right, the “declinists” – as Governor Brown has labeled some of us in the latter group – or the “delusional” in the former?First, in the “comeback” camp, there is no denying that California is enjoying the benefits of the national economic recovery. This rebound has resulted in much more than anticipated tax revenue for state coffers. In fact, for fiscal 2014-15 the Legislative Analyst is projecting an additional $2 billion.

Second, Brown will contend that we have already made substantial progress in dealing with the vast amount of accrued government debt racked up in the last decade. To his credit, Brown has at least laid out a game plan for some – but not all – of the pension obligations by requiring that public school teachers pay more into their pension fund known as CalSTRS. Moreover, the red hot stock market has – at least temporarily – made a significant dent in the unfunded liability of the state’s pension funds

Third, while not the hard spending cap based on inflation and population that fiscal conservatives would prefer, the passage of Proposition 2 in November enhanced the efficacy of the state’s “rainy day” fund. California’s most significant fiscal problem is the over-reliance on a fraction of California’s population – the wealthy – to pay the lion’s share of tax revenue. This results in wild swings in revenue depending on how the wealthy are doing. Proposition 2 was designed to smooth out the peaks and valleys of revenue so that we might be better prepared when the next inevitable recession occurs.

The opposite of this optimistic view is the “declinists/naysayers” camp whose adherents believe that California remains in fiscal crisis.  Sure, the economic recovery is making things look better temporarily, but this is no more than putting a coat of paint on a decrepit house with a crumbling foundation.

The list of metrics supporting the naysayers is impressive.  California ranks number one in poverty out of all 50 states.  Nearly a quarter of the state’s 38 million residents (8.9 million) live in poverty.  Business flight out of California to more business friendly states like Texas, Arizona, Nevada and Utah is accelerating.  The tax hikes approved by voters via Proposition 30 slammed California’s wealthy with a huge retroactive income tax hike.  Their response has been to vote with their feet and move to more favorable climes such as Texas & Nevada which have no income tax at all.

There remains a broad consensus that California’s tax structure is irrational.  Rather than lowering taxes which would make California more competitive, the response from the political left is to propose a new tax on services.  Given that California already has the highest income tax rate in America as well as the highest state sales tax rate, any tax “reform” that seeks to generate billions in new revenue will sink California even further.

Recent reports from the Los Angeles Times, no bastion of conservatism, note that millennials – the youth we need for economic survival – can’t afford housing in California and are moving out of state to escape anti-growth regulations which unnecessarily double the cost of a home or apartment.    The Times also reported that the same out migration is occurring for the poor and middle class.  And speaking of the middle class, they are about to be hit with a one-of-a-kind gas tax – imposed only by California – that will make fuel costs even higher.

A comprehensive list of California’s governance problems would fill volumes and can’t be recounted here.  Suffice it to say, however, that those of us who have been labeled as “declinists” have a firmer grip on reality that those who believe that California’s natural beauty and weather will overcome all problems.

To be clear, those of us who possess a realistic grasp of the magnitude of challenges facing the Golden State do not believe that California is a bad place.  To the contrary – it is a great state with a great deal of potential.  The only question is whether our elected leadership will allow the citizens of California to pursue happiness as they see fit unshackled by foolish and counterproductive government policies.

This article was originally posted on HTJA.org

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.

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Coal Ban Would Boost Tax Cost of Pensions

December 20, 2014 By John Seiler 2 Comments

California public pensions already have a big problem with adequate funding. The nonpartisan state Legislative Analyst pegs the pensions’ unfunded liabilities at $340 billion.

It should be obvious what the investment strategy should be for the California Public Employees System, the California State Teachers Retirement System and other mammoth funds: maximize fund values through the most prudent and profitable investments.

Because if investments are not prudent and profitable, then the lower fund values will have to be made up by either increasing the cost to taxpayers, who ultimately are on the hook for the funds’ payouts to retirees; or by cutting retiree benefits.

That’s the background for new state Senate President Pro Tem Kevin De Leon’s proposal to ban coal from retirement investment portfolios. According to the Bee, De Leon said, “Coal is a dirty fossil fuel. I think that our values should reflect, you know, who we are as the state of California.”

But if coal is the best return on CalPERS and CalSTRS investment dollars; and these funds are forced to invest in something else; then the funds’ return on investment will be lower than it could have been. Which brings up the scenario above: taxpayers will have to pay more, or retirement benefits will have to be cut — or both.

Do state employees and retirees see this?

This article was originally published on CalWatchdog.com

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CA’s $12.3 Billion in Proposed School Bonds: Borrowing vs. Reform

October 29, 2014 By Ed Ring 5 Comments

“As the result of California Courts refusing to uphold the language of the High Speed Rail bonds, the opponents of any bond proposal, at either the state or local level, need only point to High-Speed Rail to remind voters that promises in a voter approved bond proposal are meaningless and unenforceable.”

–  Jon Coupal, October 26, 2014, HJTA California Commentary

If that isn’t plain enough – here’s a restatement: California’s politicians can ask voters to approve bonds, announcing the funds will be used for a specific purpose, then they can turn around and do anything they want with the money. And while there’s been a lot of coverage and debate over big statewide bond votes, the real money is in the countless local bond issues that collectively now encumber California’s taxpayers with well over $250 billion in debt.

Over the past few weeks we’ve tried to point out that local tax increases – 166 of them on the November 4th ballot at last count, tend to be calibrated to raise an amount of new tax revenue that, in too many cases, are suspiciously equal to the amount that pension contributions are going to be raised over the next few years. For three detailed examples of how local tax increases will roughly equal the impending increases to required pension contributions, read about Stanton, Palo Alto and Watsonville‘s local tax proposals. It is impossible to analyze them all.

As taxes increase, money remains fungible. More money, more options. They can say it’s for anything they want. And apparently, bonds are no better.

At last count, there are 118 local bond measures on the November ballot. And not including three school districts in Fresno County for which the researchers at CalTax are “awaiting more information,” these bonds, collectively, propose $12.4 billion in new debt for California taxpayers. All but six of these bond proposals (representing $112 million) are for schools. Refer to the list from CalTax to read a summary of what each of these bonds are for – “school improvements,” “replace leaky roofs,” “repair restrooms,” “repair gas/sewer lines,” “upgrade wiring,” “renovate classrooms,” “make repairs.”

To be fair, there are plenty of examples of new capital investment, “construct a new high school,” for example, but they represent a small fraction of the stated intents. On November 4th, Californians are being asked to borrow another $12.3 billion to shore up their public school system. They are being asked to pile another $12.3 billion onto over $250 billion of existing local government debt, along with additional hundreds of billions in unfunded retirement obligations for state and local government workers. They are being asked to borrow another $12.3 billion in order to do deferred maintenance. We are borrowing money to fix leaky roofs and repair restrooms and sewers. This is a scandal, because for the past 2-3 decades, California’s educational system has been ran for the benefit of unionized educators and unionized construction contractors who work in league with financial firms whose sales tactics and terms of lending would make sharks on Wall Street blush. These special interests have wasted taxpayers money and wasted the educations of millions of children. Their solution? Ask for more money.

Nobody should suggest that California’s public schools don’t require investment and upgrades. But before borrowing more money on the shoulders of taxpayers, why aren’t alternatives considered? Why aren’t educators clamoring for reforms that would cut back on the ratio of administrators to teachers? Why aren’t they admitting that project labor agreements raise the cost to taxpayers for all capital investments and upgrades, and doing something about it? If their primary motivation is the interests of students, why aren’t they supporting the Vergara ruling that, if enforced, will improve the quality of teachers in the classroom at no additional cost? Why aren’t they embracing charter schools, institutions whose survival is tied to their ability to produce superior educational outcomes for far less money? Why don’t they question more of these “upgrade” projects? Is it absolutely necessary to carpet every field in artificial turf, a solution that is not only expensive but causes far more injuries to student athletes? Is it necessary to spend tens of millions per school on solar power systems? Does every high school really need a new theater, or science lab? Or do they just need fewer administrators, and better teachers?

And to acknowledge the biggest, sickest elephant in the room – that massive, teetering colossus called CalSTRS, should teachers, who only spend 180 days per year actually teaching, really be entitled to pensions that equal 75% of their final salary after only 30 years, in exchange for salary withholding that barely exceeds what private employees pay into Social Security? Thanks to unreformed pensions, how many billions in school maintenance money ended up getting invested by CalSTRS in Mumbai, Shanghai, Jakarta, or other business-friendly regions?

How much money would be saved if all these tough reforms were enacted? More importantly, how much would we improve the ability of our public schools to educate the next generation of Californians? Would we still have to borrow another $12.3 billion?

Here’s an excerpt from an online post promoting one of California’s local school bond measures: “It will help student academic performance, along with ensuring our property values. If you believe that strong schools and strong communities go hand in hand, please vote…”

Unfortunately, such promises are meaningless and unenforceable. The debt is forever.

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

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