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Archive for the ‘Calpers’ Category

Calpers, Pensions, etc. – Part II

Posted by Steve Markowitz on March 17, 2010

Yesterday this Blog posted an article about the problems the country has on the issue of pensions supplied by various government agencies for their employees.  Specifically, it addressed the huge liabilities that are being placed on taxpayers, yet are not being properly funded setting the stage for another major financial crisis.  Reader response has been very gratifying, as the purpose of this Blog is to foster discussion about the problems we as a country face.  One response was particularly enlightening and I have posted it below.  It’s a must read for all.  Thanks Tough Love for a dose of reality!

Tough Love said

March 17, 2010 at 12:50 PM e

State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.

Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.

Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRENT employees is “questionable”.

Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.

Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.

But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.

Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

Posted in Bailouts, California Public Employees’ Retirement System, Calpers, Debt, Deficits, economics, Pension Funds, Politics, Wasteful Government Spending | Tagged: , , , , , , , , , | 2 Comments »

Calpers and the Coming Pension Bubble

Posted by Steve Markowitz on March 16, 2010

The recession that began about two years ago has delivered a dose of reality to nearly all sectors of our economy, with the exception of the Federal Government for who the good times keep rolling.  We have had the well-publicized popping of the housing bubble with the problems continuing until the supply of houses balances with real demand for them.  Banks also face challenges as they are forced to right off bad loans made during the bubble days.  Until these loans are realistically valued, banks will remain hesitant to make new loans, hindering economic growth.  The unemployment rate remains high and will continue at high levels until consumers start increasing spending.  A recent addition to this list is the problem of sovereign debt brought to the forefront by Greece.

There are other structural issues in the economy that need correction that are also starting to get publicized.  This includes the challenges that pension funds are starting to encounter, especially those in the governmental sector.  Pension funds costs are more difficult to value than other employment costs such as wages, medical benefits and taxes.  For example, the annual medical cost for an organization is basically determined by the annual cost of this benefit per employee times the number of employees.

Determining the real costs of pension plans is much more difficult due to the many variables and assumptions used to produce these numbers, making this expense subject to manipulation.  Two main variables used are life expectancy and estimated long-term returns on plan investments.  While life expectancy has increased, this number is calculated by independent parties keeping the number “honest”.  Assumed long-term plan returns are determined by the plan administrators, usual employees of the organization supplying the pension benefit, and are little better than guesses.  This creates an obvious conflict of interest and leads to figure manipulation.

One type of pension plan, Defined Benefit Plan, have had their costs skyrocketed during the past two decades due to sagging returns and increasing life expectancies.  As a result, many private companies have eliminated these plans in favor of lower cost 401K type plans.  However, the pension plans offered to governmental employees have remained unchanged, greatly increasing the liability (cost) for current and future taxpayers.  This problem has been aggravated by government agencies hiding from taxpayers’ the real future liabilities.  This will create another financial crisis if not quickly addressed.

Calpers (California Public Employees’ Retirement System) is the largest state run Defined Benefit Plan in the country.  The Plan’s administrators has maintained an expected return assumption on the Plan’s investments of 7.75% annually.  This assumption is unrealistic, as anyone managing a retirement or 401k plan knows.  Calpers is finally considering lowering this assumption to 6% in 2011, a number that still may be too high.  However, even the decrease to 6% will increase the amount of cash injection required by billions from the insolvent state of California to fund the obligations.

The Calpers is one of many government pension plans at the national, state and local levels that have created huge and unaccounted taxpayer liabilities.  As the various plans assumptions are corrected, already strapped budgets will need to throw more money into the plans by either increasing taxes and/or cutting spending in other areas to fund the liabilities.  This will create tensions between the retiring Baby Boomers and the next generation when the real costs of these benefits are finally addressed.

There are solutions to this looming governmental pension crisis, but they are not painless.  It will require a capping and/or actually cutting the liabilities (benefits) as has occurred in the private sector.  Given the power of the public employee unions and their relationship with the Democrats and other Progressives, the people required to give back part of these benefits will not go down without a fight.  But, the battle is inevitable as previous knuckleheads in government promised benefits to their employees that the taxpayers could never afford to pay in the long-run.

Before solutions to the public pension issues can be disused and implemented, we the people need adequate information.  Actual pension liabilities at every level of government should be clearly spelled out, as well as the assumptions used to create the numbers.  To insure that the numbers are not rigged, independent auditors should be engaged to calculate them.  Finally, once the numbers are confirmed, current taxpayers must be required to pay for the outlays due.  We should not be allowed to use barrowed money to finance the mess thereby passing the problem on to the next generation.  Only this type of discipline can insure a proper balance between the recipients of the benefits and the taxpayers.

OK Mr. President, you campaigned with a promise of transparency.  Here’s your chance to walk the talk!  Tells us what we owe in pension liabilities at the federal level and how we are going to pay for this liability.

Posted in Bailouts, Bubbles, California Public Employees’ Retirement System, Calpers, Pension Funds | Tagged: , , , , , , , , , , , , , , | 15 Comments »

California’s Public Pension Fund – One of Many in Trouble

Posted by Steve Markowitz on October 19, 2009

Caplers logo-subThe California Public Employees’ Retirement System, referred to as “Calpers“, is America’s largest pension fund.  Calpers recently revealed that a former board member obtained $50 million in fees from it for arranging investments that ultimately went south.  The matter smells like “Pay to Play” where insiders take advantage of their positions to raid the public coffers.

Pay to Play occurs too often in American politics.  In the Calpers matter, the former board member Al Villalobos, made his connections by working as a consultant for then Governor Ronald Reagan, was a large donor to the Nixon administration, and helped raise money for then Governor Pete Wilson.  His Republican connections have done well for Mr. Villalobos, but was not so good for Calpers who purchased the bad investments. Read the rest of this entry »

Posted in Calpers, Pay to Play, Pension Funds | Tagged: , , , , , , , , , | Leave a Comment »