How pension costs reduce government services

A think tank at Stanford University, known for bringing investment earnings forecasts into the public pension debate in California, issued a new study last week that looks at how rising pension costs are reducing government services.

The study found that while pension costs in a large sample of retirement systems increased an average of 400 percent during the last 15 years, the operating expenditures of the government employers only grew 46 percent.

Because of the “crowd out” from soaring pension costs, money for services have been reduced, including some “traditionally regarded part of government’s core mission,” said the study by Joe Nation of the Stanford Institute for Economic Policy Research.

“As pension funding amounts have increased, governments have reduced social, welfare and educational services, as well as ‘softer’ services, including libraries, recreation, and community services,” said the study. “In some cases, governments have reduced total salaries paid, which likely includes personnel reductions.”

The Stanford institute drew national attention in 2010 when graduate students calculated state pension debt was much larger than reported. To discount future pension debt, they used earnings forecasts for “risk-free” bond rates, rather than stock-based investment portfolios.

Nation’s study uses both the actuarial assumptions baseline of the retirement systems and a bond-based alternative to project that pension costs, even without a big stock-market drop, will continue to crowd out funding for government services during the next decade.

“Employer contributions are projected to rise an additional 76% on average from 2017-18 to 2029-30 in the baseline projection and 117%, i.e., more than double, in the alternative projection,” said the study.

There have not been many attempts to show how rising pension costs reduce services. A report last year from a citizens committee appointed by Sonoma County supervisors found $269 million in “excess costs” in the county retirement system between 2006 and 2015.

With $10 million a year, said the committee, Sonoma County could fund 44 more deputy sheriffs or pay for 40 miles of road improvement. Some Sonoma officials said concern about pension costs played a role in voter rejection of a 1/4-cent sales tax for transportation.

A Los Angeles Times story last month said a big part of a tuition increase at the University of California is going for increasingly generous pensions, including $357,000 a year for a former president, Mark Yudof, who worked for UC only seven years.

David Crane, a Stanford lecturer ousted from the CalSTRS board a decade ago for questioning overly optimistic earnings forecasts, showed in April and July reports how rising retirement costs are “shortchanging students and teachers” despite large school revenue gains.

The new Stanford institute study has 14 separate case studies: the state, six local governments in CalPERS including formerly bankrupt Vallejo and Stockton, the independent Los Angeles system, three county systems, and three school districts in CalSTRS.

The study said their “pension contributions now consume on average 11.4% of all operating expenditures, more than three times their 3.9% share in 2002-03,” and by 2029-30 will consume 14 percent under the baseline, 17.5 percent under the alternative.

In contrast, a survey of the public retirement systems done for former Gov. Arnold Schwarzenegger’s Public Employee Post-Employment Benefits Commission found pension contributions had been stable for more than a decade prior to the report in January 2008:

“Even though State pension contributions have risen in the past decade, they have remained at a relatively stable 3.5% to 4% of total General Fund revenues from the mid-1990s to present. The exception is 1999 to 2002 when contributions were significantly lowered.”

The Stanford institute’s case study of state spending on CalPERS and CalSTRS said $6 billion was shifted from other expenditures to pensions this fiscal year, much of the money apparently coming from social services and higher education.

The calculation was based on the growing cost of pensions during the last 15 years that, despite an expanding state budget, took 2.1 percent of operating expenditures in 2002-03 and an estimated 7.1 percent of operating expenditures this fiscal year.

The pension share of state operating expenditures in the baseline projection reaches 10.1 percent in 2029-30 and 11.4 percent in the alternative, crowding out an additional $5.2 billion or $7.4 billion.

“This expansion in pension funding requirements could be accommodated with additional 27% reductions in DSS and Higher Education expenditures (or reductions in other agencies and/or departments), or with slightly more than 4% across-the-board budget reductions,” said the study.

In an unrelated coincidence of numbers, the state got a $6 billion low-interest loan from its large cash-flow investment fund this year to double its annual payment to CalPERS, saving an estimated $11 billion over the next two decades by more quickly paying down debt.

The big loan, criticized by some who wanted more study, was bolstered late last month by a state Finance department analysis of the cash management, repayment plan, interest rates, investment earnings, and expected savings.

Annual state payments to CalPERS are expected to average about 2.2 percentage points less over the next two decades. Peak miscellaneous rates would drop from 38.4 percent of pay to 35.7 percent, peak Highway Patrol rates from 69 percent of pay to 63.9 percent.

“It is expected that any deviation from assumed CalPERS returns, or projected U.S. Treasury rates, will still result in significant net savings, and that any issues with funds’ ability to repay its share of the loan can be absorbed by the repayment schedule and effectively resolved,” said the Finance analysis given to the Legislature.

The California Public Employees Retirement System, like many public pensions, has not recovered from huge investment losses in the financial crisis a decade ago. The CalPERS state plans only have 65 percent of the projected assets needed to pay future pensions.

CalPERS estimates the $6 billion extra payment will increase the funding level of the state plans by 3 percentage points. The Finance analysis also said the extra payment would “partially buy down the impact” of a lower CalPERS discount rate.

Last December CalPERS lowered the investment earnings forecast used to discount future pension costs from 7.5 percent to 7 percent, triggering the fourth employer rate increase since 2012.

The annual valuations CalPERS gave local governments this fall reflect a drop of the discount rate from 7.5 percent to 7.35 percent next fiscal year, the first step in a three-year phase in.

A number of cities unsuccessfully urged the CalPERS board last month to analyze two ways to cut pension costs: suspend cost-of-living adjustments and give current workers lower pensions for future work.

The Oroville finance director, Ruth Wright, told the CalPERS board: “We have been saying the bankruptcy word.” Salinas Mayor Joe Gunter created a stir by using the “bankruptcy word” at a city council meeting on Sept. 26 while talking about rising salaries and pension costs.

“How do we get this under control? How do we keep this city sustainable so we don’t have to file for bankruptcy?” Gunter asked.

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. Posted 9 Oct 17

9 Responses to “How pension costs reduce government services”

  1. CalPERSon Says:

    This study was funded by John Arnold, who got very wealthy at Enron and is an anti-pension activist. Plus Stanford (think Hoover Institute) tilts right. This casts some doubt on its objectivity. Too bad we couldn’t have a study done by an objective source.

  2. Tough Love Says:

    There is nothing more GREEDY than a Public Sector Union/worker ……….. and with a Taxpayer-be-damned attitude as to the cost of their ludicrously excessive pensions & benefits.

    Taxpayers should renege on the 50% of Public Sector pension & benefit “promises” that assuredly would NOT have been granted in the absence of the Union/politician collusion.

  3. Pete Smith Says:

    Figures Tough Love would be rambling and whining on the same day those “greedy” public sector employees–especially the public sector employees he so hates—are out risking life and limb fighting fires to protect the citizens of California.

  4. Tough Love Says:

    Pete Smith…………..

    The insatiable GREED of Public Sector Unions/Workers via their ludicrously excessive (80% to 90% TAXPAYER-funded) pensions & benefits is a noose around the Taxpayers’ necks 24/7, 365 days/yr ………. as well as their taxpayer-be-damned attitude.

    What you (likely a Public Sector worker or retiree now collecting or expecting to collect one of these absurdly generous pensions) call rambling and whining, I call educating the readers as to the decades-long financial “mugging” that has been perpetrated against them.
    **************************************************************
    P.S. per the US Gov’t BLS many jobs are far more dangerous than those of Safety workers, and with WAY WAY less compensation.

  5. Mike411 Says:

    CalPERSon:
    Arnold Foundation: I’d describe them as “anti-poor pension management activists”, not just “anti-pension activists.” Their website describes them as pro-employee pension. And the Hoover Institution, well yeah it tilts right, but just exactly where in Joe Nation’s report is their subtle right hand shown?

    As for objectivity, it’s clear that if you have a variable cost that continues to rise and a fixed source of revenue some other cost center is going to have be reduced. Maybe this report generalized too much as to which cost centers have been reduced though as I read through it it seems pretty bullet proof. Though their sample selection was not disclosed, other than in broad areas, I can see why you might think he cherry picked his sample. So I need your objective response as to which one of the case studies was in error, Vallejo, Visalia, BART, etc. Let’s discuss objectively.

  6. spension Says:

    TL says: “Taxpayers should renege on the 50% of Public Sector pension & benefit “promises” that assuredly would NOT have been granted in the absence of the Union/politician collusion.”

    Perhaps we taxpayers should renege on every single “promise”, including all bonded indebtedness that was granted through collusion of Wall Street bankers, our current President, and foreign lobbyists.

    Sovereign default by States a number of times in US history… if States promise too much, don’t single out any one contract entered into by the State. Cancel `em all would be… fair.

    That 6th grade teacher of mine who worked for 40 years and gets a $50,000 a year pension… well, TL, if you (who didn’t even go to school in California) want to reduce her pension to $25,000 a year, I disagree with you.

    And I don’t understand why you don’t want to cut payments to billionaires, Wall Street bankers, China, Venezuela, Saudi, and other holders of California indebtedness. Perhaps they are all your clients but my old 90+ year-old 6th grade teacher isn’t.

  7. Tough Love Says:

    spension,

    Given that you’re riding the Public Sector pension/benefit “gravy train” you have little credibility here, and all of your comments are colored by self-interest.

    I comment only as a well-informed taxpayer, fed-up with the decades-long financial “mugging” perpetrated upon by the Public Sector Union/Elected-Official cabal.
    ********************************

    P.S. those who have lent America’s States & Cities their hard-earned income via the purchase of Bonds didn’t CHEAT anyone ……….. as have Public Sector Union/Workers via their unholy relationship with our Elected Officials (resulting in Public Sector pensions & benefits that are unnecessary, unfair to Taxpayers, ludicrously excessive, and clearly unaffordable).

  8. S Moderation Honestly Says:

    “The study found that while pension costs in a large sample of retirement systems increased an average of 400 percent during the last 15 years, the operating expenditures of the government employers only grew 46 percent.”

    “The calculation was based on the growing cost of pensions during the last 15 years that, despite an expanding state budget, took 2.1 percent of operating expenditures in 2002-03 and an estimated 7.1 percent of operating expenditures this fiscal year.”

    2000, it was a very good year…

    It used to be much easier…

    Arnold Schwarzenegger, 2010 State of the State address…

    “The cost for state employee pensions is up 2,000 percent in the last ten years, while revenues have only increased by 24 percent.”
    :::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::

    In 2000-2001, CalPERS contributions were zero for miscellaneous workers, and an all-time low of 13.7 percent for CHP.

    Of course, that comparison would require citing “cost of pensions during the last 17 years”, perhaps a little to brazen example of cherry picking data.

    Go back to pension contributions in five year intervals (especially to 25 years ago, when contributions were 19.5% of wages) for an example of how contributions vary over time, according to current economic conditions.

    https://www.calpers.ca.gov/docs/rate-history-state-2014.pdf

    (FWIW, in case you did not follow the link to the Stanford study, the “400 percent increase in pension costs in 15 years is in constant dollars, not inflation adjusted.)

  9. CalPERSon Says:

    Mike411: Arnold Foundation: I’d describe them as “anti-poor pension management activists”, not just “anti-pension activists.”

    His foundation has given money to city and state initiatives to move government employees out of DB plans and into 401(k)’s. That’s about as anti-pension as you can get.

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