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Retirement Pensions Are Our #1 Problem (and what you need to know about it)

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retirement pensions & will rogers

“It’s not what we don’t know that hurts us, it’s what we know that ain’t so.”

—Will Rogers

retirement pensions deficit nationwide

America’s significant retirement pension funds are underfunded by an unfathomable $4.2 Trillion, according to an August 6 Wall Street Journal article. Ventura mirrors this phenomenon. Ventura workers participate in the state pension fund, CalPERS—the largest in the country. CalPERS is only 71% funded as of June 30, 2018, despite a 10-year bull market and a growing economy.

Because of the chronic funding shortfall, CalPERs demands rapidly increasing contributions from all participating local governments. Ventura will have permanent increases of at least $2 million per year for five to six consecutive years.

We respect the work city employees do. There is no denying that fire and police preform a vital job that is both dangerous and requires a high level of training and responsibility. Our concern is not about their work. It’s about the structure by which their retirement is accumulated and paid after retirement.

It is undeniable that city employees’ retirement pensions are crowding out the city’s ability to provide the service itself. Moreover, chronic underfunding of pensions will eventually hit a breaking point jeopardizing benefits too. Something in this equation has to change.

 

CalPERS retirement pensions obligation

Retirement Pensions Today

Most state, county and local pension benefits are considered to carry a virtually iron-clad guarantee to the workers to whom they have been promised. Even the smallest attempts to alter future benefits—much less current ones—have been met with furious opposition. Workers’ representatives and also the plan managers themselves—like CalPERS—oppose changes. That opposition has been mostly successful. Governments at all levels are hamstrung between their duties to provide on-going services to their citizens and their ever-increasing financial obligations to pension funds. In the State of California, once one hires an employee, their retirement cannot be changed.

A typical city employee would receive a pension almost the same as his or her working salary if they participated for their whole career. In the case of many public safety employees, their retirement will last longer than their employment as they are fully vested in their retirement pensions by age 50 or 55. For so-called “miscellaneous” employees (all others) the retirement age is higher, usually 62. Nevertheless, the years in retirement can still equal or exceed those worked.

Discussions about pensions get emotional because we’re talking about people’s future and security. What gets lost in the arguments is this. The law and politics guarantee retirement pension benefits, but not the actual returns on investments. There is no separate investment market for pension funds. All investment pools, large and small, invest in the same markets. The myth is that pensions are safe. They are not. The difference is that taxpayers pick up the difference between reality and what politicians promised.

Unprecedented Bull Market

For the past ten years, since mid-2009, there has been an incredible bull market in stocks. CalPERS has posted many good returns during those years. However, Ventura’s pensions are underfunded by $215.1 million. For far too long, pension promises have been at levels far beyond what the real markets can provide.

 

Ventura's specific retirement pensions problem

 

What Can We Do To Fix Retirement Pensions?

Politicians have made many attempts to improve the current system, but none have addressed the problem in a meaningful way. CalPERS does offer one solution: Cities can buy out of the system—technically—but the costs are so enormous that no municipality can realistically consider that an option. It’s no accident, of course. CalPERS’ onerous payment demand to end participation is designed to be a straight-jacket. As of June 30, 2017, for the City of Ventura, the amount required to get out of CalPERS is $1.254 Billion.

League of California Cities and Government Finance Officers Association recommended actions to confront unsustainable pensions.

  1. Reduce the unfunded liability by making annual catch-up payment even more than CalPERS instructs you to pay—if you can afford to pay more.
  2. Raise taxes
  3. Reduce services
  4. Require voter approval of any pension obligation bond, or POB.

Pension Obligation Bonds Explained

A city issues a pension obligation bond to pay down the unfunded pension liability. The POB converts the pension liability into a fixed rate of return. There are considerable underwriting costs when issuing a POB. The city invests the money received from the bond into higher returning investments, usually in the stock market. The central idea is that the stock market investments will produce a higher return than the fixed interest rate on the bond, thereby earning money for the pension fund.

A POB creates debt to pay off debt. Such a bond is essentially a gamble with public money. Simi Valley is considering issuing a POB, and Ventura might follow suit if Simi Valley is successful.

The League of California Cities and Financial experts, including Government Finance Officers Association, strongly discourage local agencies from issuing Pension Obligation Bonds (POBs). This approach (going into debt to pay off debt) “only delays and compounds the inevitable financial impacts.”

These are terrible choices for the public.

What The City Council Might Do To Reform Retirement Pensions

retirement pensions superheroThere are two other choices for our City Council to consider if they have the political will to do anything about this crisis that will cripple the City of Ventura.

  1. Make beneficiaries pay more. With the city covering 100 percent of the unfunded liability, the problem will continue to grow. There will be minimal reforms because the actuarial losses fall on the taxpayer. Capping the employer contribution at a fixed percentage of salary would cut pension costs for the city. As pension costs increase over the years, the employees will pay all the costs associated with the growth.
  2. Change when retired city employees may begin collecting pensions. This alternative solution applies to new employees only. What if police and fire could fully vest their generous pensions by age 50 or 55, as they do now, but the payments did not start until age 65? Why would that help? The reason is that even if the city makes no further contributions, the fund will have ten more years to grow. At current official pension growth rates, that would more than double the value of that fund over those ten years. Also, the retirement payment period would be ten years shorter, given the same life expectancy. Such a system would still offer retirement security, but it would start at what most of us consider average retirement age.

social security retirement pensionsPublic sector employees may resist the changes but think about it. Private sector employees don’t get their full social security until 65 or even 67, depending the year they were born. Moreover, Social Security is only going to be one quarter to one-half of your working earnings.

Editor’s Comments

Even with an unprecedented bull market, Ventura’s unfunded pension liability grew over the past ten years. During such a period, one would expect the excess liability to at least shrink some.

Instead, the pension liability is growing faster than market returns can ever expect to make up. CalPERS annual demand will now permanently increase by about $2 million per year for the five to six years and then stay there. There is no assurance it will not increase even further in the future. Something has to change. Otherwise, the city will either cut back needed services, raise taxes, or both.

Past retirement pension negotiations were based on union bargaining and raw political power, creating a gap between what politicians promised and what cities realistically can pay. We offer some solutions, but it will take political will to bring the retirement benefits back to reality. Changing the system is the only way these promised benefits can be truly sustainable and dependable for retirees. It’s also the only way that taxpayers can afford to pay for them.

Demand Retirement Pension Reform

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Tax & Spend California

Failed Tax Initiatives Force California To Look For Money Elsewhere

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“Reflect how you are to govern a people who think they ought to be free …Your scheme yields no revenue; it yields nothing but discontent, disorder, disobedience; and such is the state of America, that after wading up to your eyes in blood, you could only end just where you begun; that is, to tax where there is no revenue to be found…”
—Edmund Burke

THE FAILED TAX INITIATIVES

[WHAT IT MEANS FOR VENTURA]

California voters sent a message in the last election about a state government out of control, and out of touch. By rejecting the political establishment’s $16 billion in higher taxes, spending gimmickry and more borrowing, the voters got it right.  They are willing to accept the consequences of today’s economic realities notwithstanding the Governor’s threats of releasing criminals, firing teachers, firing public safety personnel, etc. The citizens have made it clear that it is time that our “elected officials” and the entrenched state bureaucracy faced the same spending limitations that this recession is imposing on everyone else.

Teachers unions, government funded business leaders, prison guards and everyone else, enjoying the good life at the public tax trough, outspent initiative opponents by six-to-one and LOST.  The voters decided that as painful as these cuts may be, the alternative of letting the state’s tax-and-spend machine continue was worse.

THE STATE SCRAMBLES TO FIND OTHER REVENUE

The response so far from Sacramento is typically short-sighted. To circumvent the apparent will of the voting public our good governor, legislators and public-worker unions are now pursuing plan B: a federal bailout or plan C: take real property taxes from the cities.   The Governor was seen scrounging in Washington a month ago, along side Mr. Gettelfinger of General Motors, sounding like a Detroit auto executive, declaring: “We need assistance.” in the form of  a federal guarantee on California’s next $6 billion bond offering.  Moreover, just who will repay the bonds Governor?

But a federal bailout is an injustice to the residents of other states, especially those that run their governments responsibly. Why should taxpayers in other states pay for California’s incompetence?  But even worse, we know that once the Federal Government gives you money they then feel they have the right to tell you what you can or cannot do.  It is not inconceivable to expect that the Obama Administration’s price of a bailout would be a demand that California remove its requirement for a two-thirds legislative majority to pass a tax increase; or, repeal of the Proposition 13 property tax limitations.  Once you make a pact with the devil you lose all freedom of choice.

Likewise, cities should not have to pay for the incompetence of state government or that of other cities.   Taking real property taxes from each City and County is an injustice to the residents of each community who pay those taxes for the benefit of their community.  It is disingenuous for the state legislature to “borrow” [steal is a more realistic term, albeit radical] each cities tax money, because the state “needs” the money to balance their budget, when they know that they will have no money to pay it back.

SOLUTIONS

Some want to throw all of the rascals out on their ear, some are leaving the state, some want a constitutional convention but most are just plain disgusted, not understanding what happens when that elected official gets Sacromentized.

Thirty years ago this November, the not so distant past, when California’s economy was in a similar rut, three-quarters of the voters approved the famous Gann Amendment. That limited the annual growth rate of state spending to population growth and inflation.  The result was that California’s annual average rate of spending growth after inflation fell to 2% through the 1980s from 9% in the 1970s. California’s state per-capita expenditures fell to 16th in the nation in 1990 from 7th in 1979. The economy soared, growing by 121% — 14% faster than the U.S. average.   This success however was just too good not to be tinkered with, thus in 1988 and 1990, through two separate initiatives the Gann limits were effectively neutered by two initiatives that exempted education and transportation from the cap.  Expenses soared.  This must be fixed, not the elimination of the Prop 13 Gann Amendment.

The next item is to fix California’s steeply progressive and anti-business tax code. California’s 10.55% income tax and 9% sales tax are driving businesses and high income taxpayers out of the state, depleting the tax base month after month.   Add the city sales taxes to this mix and the picture is worse.    When tax money flowed in times of plenty our good state and city governments were slurping up the public revenues, spending and enacting expensive new social programs like as if such revenue would flow forever. Those who urged cautions were labeled as doom and gloomers, or were dismissed as ranting eccentrics.  In the last 5 to 7 years those with money (you know, the ones who pay 75% of the income taxes) and business are leaving this state, and they will not return when a neighboring states imposes fewer taxes. A 5% to 6% tax rate on sales and income without deductions would halt the flight to low-tax neighboring states and invite newcomers who could start buying houses again, hire people, pay salaries, buy goods etc.

The state’s public-employee pensions also need to be overhauled. According to the California Foundation for Fiscal Responsibility, the state pension funds are more than $200 billion under funded. Public employees can retire after 30 years on the job in their early 50s, with lifetime retirement benefits at 90% of their final salary. Some retirees receive $200,000 a year or more in pensions. The cities are not too different.  The City of Ventura alone faces an unfunded liability of $ 294,673,595.   Just how state legislators or city council members can myopically ignore what happened to the airlines, Chrysler or GM, when faced with such unfunded union liabilities, seems perplexing to a logical person, until you recognize that these politicians depend on the votes of vested interest groups, such as public employee unions, to get into office.  A solution, short of firing a gaggle of public employees, is to follow Florida’s lead and require new workers to accept defined contribution pensions like the 401(k) plans now dominant in the private work force. Without such a reform, many California cities will fail just as the City of Vallejo failed.

Editors’ comments: 

Edmund Burke’s observations are as relevant today for all levels of government as they were in 1774.  You can expect government at all levels to impose taxes and fees to cure their malfeasance.  Truly, “No man’s life, liberty, or property is safe while the legislature is in session”.

 

Editors:

B. Alviani        S. Doll                J. Tingstrom

K. Corse          R. McCord         T. Cook

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