Pensions: the good, the bad and California

Although you may not find one in California, there is a place where officials get credit for handling public employee pensions, instead of a barrage of criticism about unaffordable debt.

It’s Wisconsin, a state with a tradition of good government and high taxes.

“I think Wisconsin is a pretty good example of how you do it right,” Wisconsin Gov. Jim Doyle told a Milken Institute conference in Los Angeles in April. “And I don’t take credit for this. This goes deep into our history.”

He said all of the state and local government pensions, except the city and county of Milwaukee, were consolidated in the 1970s. An unusual dividend feature allows retiree payments to be cut in hard times, 2.1 percent last year and 1.3 percent this year.

But Wisconsin also tries to keep the system fully funded. When the funding level fell to 82 percent after the stock market crash two years ago, said Doyle, the state added a contribution of about $200 million to bring the funding level back up to near 100 percent.

“So again I would love to take credit for this,” said Doyle. “But this is something that’s built into our culture for a long period of time. I will take credit for, even in these very dire times, we have never deferred payments. We pay them in.”

Some of the recent criticism of the Wisconsin system is that employees do not contribute to their pension costs. The system also may borrow to finance a costly move toward more stable bond-based investments, less affected by major market swings.

While Wisconsin was called a “national leader” and placed in the top rank in a Pew Center on the States study in February, the retirement system in neighboring Illinois was in the bottom rank with the lowest funding level, 54 percent.

It’s a different political culture. Two of the last six Illinois governors were convicted of crimes. A third, Rod Blagojevich, is on trial for using his power as governor to extort campaign contributions and other things, 24 counts.

For about the last 15 years, Illinois reportedly has skipped some annual contributions to the pension fund and issued a series of pension bonds to cover annual costs, including $10 billion in 2003. A $3.5 billion pension bond is proposed this year.

A recent New York Times story on Illinois‘ budget problem said: “Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.”

Illinois legislators raised the retirement age and cut benefits earlier this year, said the Times story, and then claimed immediate savings even though the changes only apply to new hires.

“For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession,” said the Times story. “Now Illinois has shouldered to the fore.”

Illinois still has a slightly higher credit rating than California, the lowest of any state. A California proposal for a pension bond, originally $1 billion in 2004, was blocked by a legal challenge from conservative groups, who said a public vote was required.

But big payments for state worker retirement costs being delayed now could increase California’s retirement costs in the future. And meanwhile, the money is not invested to yield earnings.

This fiscal year the state is expected to pay $6.5 billion for retirement costs: California Public Employees Retirement System $3.9 billion, California State Teachers Retirement System $1.2 billion, and state worker retiree health $1.4 billion.

The $6.5 billion payment is a big bite, 5.7 percent of the governor’s proposed budget for general and special funds, $114.3 billion. Yet in rough terms, it’s only half of the amount needed to fully fund the state’s retirement obligations.

The CalPERS board, which can set the annual state payment, imposed a $600 million increase in the new fiscal year that began this month. But that only gets the main state worker fund to an estimated 76 percent of the 30-year obligation.

The payments needed to cover losses in the stock market crash are being phased in over three years. An estimate in December, when the increase this year was thought to be only $200 million, showed the state payment increasing $1.1 billion in the next two years.

The CalSTRS board, which needs legislation to set contribution rates, is seeking an increase amounting to 14 percent of payroll, about $3.8 billion, if the assumed rate of annual earnings on investments remains at the current 8 percent.

If as staff recommends the earnings rate is dropped to 7.5 percent, the contribution increase would be 20 percent of pay — nearly doubling the current contribution of school districts 8.25 percent of pay, teachers 8 percent, and the state 4.5 percent.

For retiree health care, the state owes $51.8 billion over the next 30 years, state Controller John Chiang estimated in February. The state has negotiated some labor contracts that begin to set aside small amounts of money for future retiree health care.

But the nonpartisan Legislative Analyst said last year, when the unfunded debt was estimated to be $48 billion, that the state should be setting aside $1.3 billion a year to properly fund retiree health care promised current state workers.

The UC Retirement System ended a two-decade contribution “holiday” this year. Neither employer nor employee paid into the system, while costs were covered by investment earnings.

A required employee contribution to a 401(k)-style individual investment plan, 2 percent of pay, was switched to the retirement system in April. UC says the state should be contributing $320 million a year to cover normal costs, but it’s getting nothing so far.

The remarkable contribution holiday enjoyed by the UC system shows how public pensions depend on investment earnings. CalPERS got about 75 percent of its revenue from earnings for a decade, before dropping to 63 percent after the crash.

The big losses (the CalPERS portfolio went from $260 billion in the fall of 2007, to $160 billion in March of last year, before rebounding to about $200 billion) probably helped spark a debate between two disciplines, actuaries and financial economists.

Stanford graduate students, following the economists, issued a study in April saying the three state pension funds have a “hidden shortfall” of $500 billion, not the $55 billion reported before the market crash.

The new CalPERS chief actuary, Alan Milligan, wrote in a Sacramento Bee article this week that academics and think tanks with “an ideological bent” are “exaggerating pension liabilities to scare the public and policymakers.”

The Stanford study assumed an earnings rate based on “risk-free” bonds, 4.1 percent, because pensions are risk-free, guaranteed by the state. Milligan said the CalPERS assumed earnings, 7.75 percent, follows time-tested actuarial rules and may be tweaked after a year-long public review.

A Northwestern University professor, Josh Rauh, who agrees with the Stanford study conclusion, made a dire forecast at a pension roundtable discussion held by Gov. Arnold Schwarzenegger earlier this month.

“I’ll just say that current assets are sufficient to pay for current benefits for CalPERS and CalSTRS only through 2026 and 2027, and that’s even assuming they make 8 percent returns,” Rauh said.

Without a contribution increase, CalSTRS agrees that its investment fund, now about $130 billion, will run out of money — but not until two decades later in 2045, according to its consulting actuary, Milliman.

“At that time, the state, as the plan sponsor, would be obligated to fund benefits on a pay-as-you-go basis, similar to the approach by which benefits were funded in the early years of CalSTRS,” said a CalSTRS staff report in February.

How big would the pay-as-you-go tab be 35 years from now?

“The state would be required to pay the current equivalent of about $9 billion each year to meet its obligation that could not be paid from available contributions,” said the staff report.

That would be about 11 percent of the $83.4 billion state general fund proposed by the governor for the current fiscal year.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 22 Jul 10

13 Responses to “Pensions: the good, the bad and California”

  1. john moore Says:

    Last night,the Pacific Grove,Ca. City Council enacted a Citizens’ Pension Reform Initiative into law. The Refor Initiative limits’ the Citys’ contribution AND Liability to 10 % of employees’ salarary. It will be effective after the Nov. election and applies fully to current employees. If current employees want 3@50,e.g.,they must pay and accept liability for all costs,such as additional contributions and investment losses,by deductions from their salaries and/or, a reduction in pension amounts. This is true pension reform. Reform that only applies to new hires is “suicide” pension reform: it guarantees the demise of all cities and counties that engage in that form of “Quackery”

  2. Charles Sainte Claire Says:

    How big would the pay-as-you-go tab be 35 years from now?

    “The state would be required to pay the current equivalent of about $9 billion each year to meet its obligation that could not be paid from available contributions,” said the staff report.

    That would be about 11 percent of the $83.4 billion state general fund proposed by the governor for the current fiscal year.

    Surely the general bund would be several times $83 billion 35 years from now.

  3. Tough Love Says:

    Until now, I have strongly advocated for reducing pension formulas for FUTURE years of service for CURRENT (as well as new) workers …… a VERY unpopular position in the eyes of those riding the Civil Servant gravy train.

    I’m about to become even more unpopular with this group, as I now believe the likelihood of this happening (soon enough and with sufficient formula reductions) is so low that a much better direction, and perhaps the ONLY way to avoid the financial disaster bearing down on communities throughout the nation is to OUTSOURCE 90+%of all Civil Servant positions.

    The CRITICAL CRITICAL CRITICAL need is to STOP the further growth of the pension liability from the excessive pension formulas granted EXISTING employees, and the ONLY way to do this quickly and VERY effectively is OUTSOURCING.

    And guess what … it’s ALREADY been tested … and the sky didn’t fall in … and the residents of Maywood, CA seem very pleased with the results of outsourcing 100% of their employees. Read all about it here:

    http://www.nytimes.com/2010/07/20/business/20maywood.html?pagewanted=2

  4. SeeSAW Says:

    The City of Pacific Grove can pass all the initiatives it wants to, but as a member of CalPERS, everthing it does, regarding pensions, will have to comply with CalPERS rules. If not, they can expect to put a lot of that money they think they are saving toward legal fees.

  5. john moore Says:

    To SeeSaw. Calpers has cost the little city of Pacific Grove 76 million in liabilities, in addition to annual payments, over just the last 8 years. That is over 9 million peryear. So a few million in legal fees to fight Calpers,the cause of all this misery, is more than welcome to the citizens of Pacific Grove. Bring it on! Pacific Groves’ pension reform is clearly legal according to the lawyers for the City and those for the people. PG is a Charter City and its’ charter specifies that all employees are at will,with no vested rights.

  6. SeeSAW Says:

    To JM: If the little City of Pacific Grove has had so much in CalPERS liabilities, it is because they must have been paying its employees very high salaries. Every City that contracts with CalPERS has to look at the rules of participation. It is their responsibility to allocate a certain percentage of payroll for payments to CalPERS each year. So if Pacific Grove is in trouble, they are with a lot of company, probably due to both the bad economy and bad management. But, don’t blame CalPERS. When the residents voted to leave CalPERS, the CalPERS actuaries estimated that it would take between 25 and 35 million to separate from its CalPERS obligations. I get this information from the same place everyone else does. So have fun, little City of PG. If you don’t plan to give your employees benefits, you won’t have to worry anyway, because you will have no employees.

  7. john moore Says:

    SeeSaw. You are right when you say PG is no worse off than other Calpers cities. However,Calpers is one of a kind for incompetence. As for hiring employees,no problem,because of Calpers ,PG barely has any services left. Just a couple of bean counters.

  8. Tough Love Says:

    Quoting SEESAW …”If you don’t plan to give your employees benefits, you won’t have to worry anyway, because you will have no employees.”

    The vast majority of Private Sector workers have SOME benefits …. about 1/4 to 1/6 of what most public sector workers get. And private sector employers have no problem finding competant staff.

    The public sector could EASILY do so too (reduce pension & benefits by a factor of 4 or 6), if it wanted to. But it doesn’t. Because then the elected officials who approve these rich pensions and benefits wouldn’t be getting all that Union money & support, now would they ?

  9. SeeSaw Says:

    JM: CalPERS is not a city. It is a pension plan that PG happened to join. No one held a gun to its head to join CalPERS. In fact, CalPERS does not allow the kind of pension spiking that you see with other CA plans. I go back to my first point. PG is a victim of the worldwide economic collapse, just like any other entity as well as CalPERS. This we know for certain. Since the City must resort to draconian measures because of its CalPERS obligations, its probably poor management at PG as well. CalPERS obligations must be paid–good luck to PG.

    TL: There you go trying to compare applies and oranges again. As far as unions are concerned: I worked at my muni about 20 years before we brought in professional representation to make it easier than doing it ourselves. We still had pensions and benefits prior to union membership. Unions are very overrated as the cause of all our problems. I believe that the politicians are going to be swayed by donations from all quarters. If it isn’t unions giving donations, its going to be the large corporations and rich individual donors. I prefer to trust the unions who represent the rank and file–not the wealty.

  10. john moore Says:

    SeeSaw: PG had no choice;Calpers losses have averaged over 9 million per yr. PG raised taxes and has cut services to the bone. Even with pension reform PG is buried beyond salvation. Because of Calpers,even Bankruptcy can not help. Regardless,with Calpers off its’ back,except for the 76 million Calpers losses,PG may be able to restore some services in 30 or 40 years. By the way,as a Charter City<PG is not nearly as buried as Calpers "at law" cities. At Law cities probably need to convert to a Charter City before it can enact Reform that will nuetralize the impact of the incompetent political group called "Calpers"

  11. SeeSaw Says:

    JM: I don’t understand why you insist on referring to CalPERS as an incompetent political group. First of all, CalPERS has existed for 78 years and never missed a benefit payment. That is incompetent? Poor management practices and the global economic holocaust are what brought down PG. And, secondly CalPERS is not a political group. It is a gatekeeper for the funds of all the entities that belong to the Plan.

    I don’t pretend to know much about the difference between charter and general law cities. From what I understand in reading another article on the City of Bell–the Bell officials used a ballot initiative to change the City of Bell from a general law city to a charter city, for the purpose of skirting the legislative cap on the salaries of elected officials. It was a scam of their part, so that they could set their own salaries at the levels we are learning about. In a City of 40,000 population, only 400 people voted in that election–296 of them mail in.

  12. john moore Says:

    SeeSaw: I am a full time stock market investor. Only fools only play the market to go UP. That is CALPERS.et al ORGs like Goldman-Sachs bet on the market to go up or down depending on the circumstances. It made a fortune on the Fannie-Freddie mortgage bust. Not only did Calpers lose 29.2% of its’ capital,but failed to make a bundle on a once in a life time opportunity. But its’ biggest sin,is that after telling the legislature that it could fund 3@50 without rate increases,it has refused to admit that it can’t,especially with a defict of between 200 and 500 billion dollars. that deficit compounds at 7.75% per annum,which means it will double every 9.3 yrs.That is why its’ chief actuary admitted that Calpers will cost 50% of salaries,forever,unless Reform reduces pensions for existing employees.New tiers for new employees is a creul political joke and will continue to create deficits forever.

  13. IT Pro Says:

    You “equalize” the playing field by slashing defined benefits, don’t come crying when you have to immediately give the technical and professional staff significant salary increases to continue to be competitive with the now “level” private sector. You will lose talent.

    Let me make this clear: In public sector IT (and yes, I blame the unions in large part for this) your most productive people are doing significantly more quality work than than your less productive people. Your most productive people will leave for higher salaries in the private sector and you will be left with people that can barely wipe themselves without video instructions.

    Although we don’t directly teach your children, put out your fires, or stop bad guys from doing bad stuff to you, we help make it possible for others to do so. I shutter to think of the quality of IT staff that would be left to do all this if even just the top 20% left for the private sector.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: