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Think Tank: Blame Pension Costs For The 140 Tax Increases On California’s Ballot

When Californians go to vote on November 4, they will find a ballot stuffed with tax hikes. There will be 140 different proposed tax increases on ballots across California. Is there a reason behind the surge?

Mark Bucher, president of the California Policy Center, thinks he knows the reason. In a new column he says voters need look no further than pension costs. From Bucher’s column in the Sacramento Bee:

Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com.

[…]

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013.

These are the pensions of Susan Kent, a retired Los Angeles city librarian, who took home a $137,000 pension in 2013. And Thomas Place, a retired San Joaquin court reporter, whose pension was $105,000. And, Betty Smith, a retired Alameda nurse, who received $116,000.

Anecdotal evidence aside, more tax dollars than ever are going toward paying pension costs. From Bucher:

Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions. That’s up from one in 16 tax dollars in 1994. Tax increases now do not increase government services, but simply service government pensions.

And these compensation figures do not include five-figure health benefit obligations, which will only increase as the population ages and health care costs inflate. Bankrupt Stockton, where city employees who worked as little as one month receive a lifetime of retiree health benefits (including spousal coverage), is already paying this price.

Barring pension reform, Stockton – where one in five tax dollars will soon go to pensions – is a harbinger of things to come for other California cities that find themselves at some point on Stockton’s adverse pension spiral: Big pension obligations mean fewer tax dollars for services like safety and infrastructure, driving away taxpayers and increasing pension burdens further. Hence the need for yet more tax increases.

But taxpayers are having trouble keeping up: California pension funds are currently only 74 percent funded. And this is an optimistic estimate given that pension funds assume a very high rate of return of about 7.5 percent per year, an ambitious goal in this investment climate. For every 1 percent this projection drops, California taxpayers must contribute $10 billion more per year to maintain the same funding level, according to a recent analysis by the California Policy Center, using investment formulas provided by Moody’s Investors Service.

The entire column can be read here.

Omaha Hit With Credit Downgrade As Pension Liabilities Increase

Moody’s downgraded Omaha’s credit rating from Aa1 to Aa2 on Thursday, citing “pension costs” as a major driver of the downgrade.

Moody’s did give the city a “stable” outlook, but admitted that pension costs are “not expected to moderate in the near future.”

Factors that played a part in the downgrade, according to the Moody’s report:

CHALLENGES

– Large and growing unfunded pension liabilities, persistent underfunding of ARC

– High fixed operating costs arising from pensions, debt service, and OPEB

– Protracted union negotiations likely to require retroactive expenses

Factors that could drive the city’s rating up, or further down, from the report:

WHAT COULD CHANGE THE RATING- UP

-Significant progress to reduce the city’s long-term pension and OPEB liabilities

-Reduction in fixed cost burden to the city’s budget

WHAT COULD CHANGE THE RATING – DOWN

-Failure to achieve significant progress towards reducing long term liabilities

Omaha Mayor Jean Stothert released a statement addressing the downgrade. From WOWT News:

“Omaha’s bond rating is still better than 80% of all US cities,” reads a news release from the Mayor’s Office.

[…]

“This bond rating shows we still have a lot of work to do in reforming our public employee pensions,” says Mayor Jean Stothert. “Our unions must realize the severe consequences of delays, inaction and failure to accept reasonable contract offers.”

Photo credit: “Omaha skyline humid day” by Mawhamba. Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons

CalPERS May Have Approved Special Pay Items Without Doing The Math On Cost

CalPERS recently approved a list of 99 “special pay items”, or bonuses given to workers whose jobs meet certain requirements.

But a report from the Los Angeles Times suggests that CalPERS approved the items without knowing how much they would cost.

From the LA Times:

CalPERS repeatedly told The Times it didn’t know how much the bonuses were adding to the cost of worker pensions even though cities submit detailed pay and bonus information that is used to calculate retirement pay.

Even a small bump in salary can cause a public agency’s pension costs to soar. An increase of $7,850 to a $100,000 salary can amount to an additional $118,000 in retirement if the employee lived to 80, according to an analysis by the San Diego Taxpayers Assn., a watchdog group that scrutinizes city finances.

Fitch, a Wall Street rating firm that weighs in on the financial health of governments, warned that the pension fund’s vote would burden cash-strapped cities.

“Cities and taxpayers will undeniably face higher costs,” said Fitch analyst Stephen Walsh. “Pensions are taking a bigger share of the pie, leaving less money for core services.”

[…]

At The Times’ request, CalPERS analyzed salary and bonus costs for Fountain Valley — one of hundreds of cities and public agencies that award pension-boosting bonuses to workers.

CalPERS found the Fountain Valley perks could hike a worker’s gross pay as much as 17%. About half the city’s workforce received the extra pay that will also increase their pensions, most of them police and fire employees.

CalPERS’ response to the report:

CalPERS executives said they don’t understand the anger caused by the board’s vote. The action simply clarifies the 2012 reform law, which was designed to stem rising pension costs, said Brad Pacheco, a spokesman for the agency.

CalPERS always assumed that new employees would continue to benefit from bonuses just as those hired earlier did, Pacheco said. The reform law is still estimated to save taxpayers $42 billion to $55 billion over the next 30 years, he said.

“It’s far-stretched to say this is a rollback of reform,” Pacheco said. “We implement the law as it was written, not how others wish it were written.”

The special pay items passed a vote from the CalPERS board, but some board members have voiced their displeasure for the rules, according to the LA Times:

State Treasurer Bill Lockyer and state Controller John Chiang both complained about the pension boosters but said they had little choice but to approve them.

“Many of the items on this premium pay list are absolutely objectionable,” said Tom Dresslar, a spokesman for Lockyer. But frustration, he said, “needs to be directed to the proper place, which is the public agencies that negotiated the perks through collective bargaining agreements.”

All of Pension360’s coverage of CalPERS’ special pay items can be read here.

Does Investment Return Affect Pension Costs?

Does Investment Return Affect Pension Costs? Larry Bader, who worked as an actuary for 20 years before moving to Wall Street, tackled that question in the latest issue of the Financial Analysts Journal.

An excerpt of his answer:

Answer: It doesn’t.

Yes, a higher return on plan assets reduces the funding requirements for the pension plan and the expense that the sponsor must report. But the plan’s true economic cost is independent of the investment performance of the plan assets.

To see why this is so, suppose that you establish a fund to pay for your child’s college education and I do the same for my child. We make equal contributions to our respective funds, and we both face the same tuition payments. But being a smarter, bolder, or luckier investor, you grow your college fund to twice the size of mine. Can we now say that your child’s education costs less than my child’s education? Surely not. Our tuition payments are the same; it’s just that you have a larger education fund available to help pay your child’s tuition.

Or think of it this way: Suppose that your college education fund performed miserably and a similar fund that you had set up to buy a small vacation home struck it rich. Would you now say that college tuition has become very expensive but vacation homes very cheap? Can you now afford to buy a vacation mansion — or private island — but not to send your child to college? Behavioral economics suggests that you might think along those lines, but common sense says, “Get over it.”

Similarly, a higher pension fund return does not lower the economic cost of the plan. The economic cost reflects solely the amount and timing of the pension payments, which are unaffected by the size or growth of the assets.

To read the full answer, click here.

Missouri Audit Reveals Systems In “Most Trouble”

Missouri’s auditor released an all-encompassing audit yesterday of Missouri’s 89 public pension systems. The auditor, Tom Schweich, said the good news was that some systems were performing much better than their peers across the nation.

But the audit also revealed 15 plans that were in the “most trouble.” From MissouriNet:

“We consider them to be a problem if their funding ratio is either below 70 percent, so it’s ten points below what’s considered reasonably safe,” says Schweich, “and anything below 95 percent of required contributions, because we think they should be funded at 100 percent … if it’s anything below 95 percent, that’s a downhill trend.”

Those 15 plans include the Missouri Department of Transportation and Highway Patrol employees’ retirement system and plans covering police and firefighters in Columbia, Joplin and Springfield, and plans covering Kansas City transportation authority and public school employees. Other plans on that list cover some employees of St. Louis County, Bridgeton and nonuniform employees of University City.

Missouri’s plans were 78 percent funded collectively, lower than the 80 percent cut-off that typically marks a “healthy” plan.

But Schewich said the audit showed many of Missouri’s pension systems to be healthier than their peers in other states. That doesn’t mean, however, that those systems are out of the woods by any stretch. From MissouriNet:

Schweich says the survey found that in funding ratio, annual contributions toward solvency, and pension costs as a percentage of payroll, “Missouri is above average but in none of these areas is Missouri safe.”

Missouri recorded a 94 percent contribution rate but the survey found 34 of Missouri’s plans didn’t receive the full contribution recommended by actuaries. The percentage of payroll costs devoted to pension plans rose between 2003 and 2012 in Missouri and nationally, but again Missouri fares better than the national average.

Schweich says the main reason some plans are below an “acceptable” fund ratio is the recession of 2008 and 2009. He says some had high investment return assumptions and some didn’t have employees contributing.

This report marks the first wide-reaching audit of Missouri’s pension systems in 30 years.

Photo by Paul Sableman

Fitch Downgrades Pennsylvania; “Weakened” Pension System Drives Demotion

Credit rating agency Fitch has downgraded Pennsylvania’s general obligation bonds one notch, from AA to AA-.

What’s more, Fitch changed the state’s outlook from “stable” to “negative” – meaning another downgrade could be coming if Pennsylvania doesn’t address the structural problems that led to this recent demotion.

The structural problems in question are largely linked with the state’s pension system. From the Fitch report:

CONTINUED FISCAL IMBALANCE DRIVES DOWNGRADE: The downgrade to ‘AA-‘ reflects the commonwealth’s continued inability to address its fiscal challenges with structural and recurring measures. After an unexpected revenue shortfall in fiscal 2014, the current year budget includes a substantial amount of one-time revenue and expense items to achieve balance and continues the deferral of statutory requirements to replenish reserves which were utilized during the recession. The commonwealth’s rapid growth in fixed costs, particularly the escalating pension burden, poses a key ongoing challenge, although Fitch expects budgetary planning and management to mitigate these pressures in a manner consistent with the ‘AA-‘ rating.

PENSION FUNDING DEMANDS: The funding levels of the commonwealth’s pension systems have materially weakened as a result of annual contribution levels that have been well below actuarially determined annual required contribution (ARC) levels. Under current law, contributions are projected to reach the ARC for the two primary pension systems by as soon as fiscal 2017, but the budgetary burden will increase, crowding out other funding priorities.

INCREASING BUT STILL MODERATE LONG-TERM LIABILITIES: The commonwealth’s debt ratios are in line with the median for U.S. states. However, the commonwealth’s combined debt plus Fitch-adjusted pension liabilities is above-average, and will likely continue growing given the current statutory schedule of pension underfunding for at least the next few years. Fitch views Pennsylvania’s long-term liability burden as manageable at the ‘AA-‘ rating so long as the commonwealth adheres to its funding schedule, or enacts reforms that do not materially increase liability or annual funding pressure.

[…]

Without structural expense reform, or broad revenue increases, pension costs will consume a larger share of state resources and limit the commonwealth’s overall fiscal flexibility. In fiscal 2015, commonwealth contributions will increase over $600 million from the prior year to $2.7 billion on a $30 billion general fund budget (9.1%). Based on the statutory framework and the pension systems’ historical data and actuarial projections for contributions, Fitch anticipates increases for fiscal 2016 and 2017 will be similar though somewhat lower. While substantial, Fitch views the anticipated increases in annual contributions and unfunded liabilities laid out in the current statutory framework as within the commonwealth’s capacity to absorb at the ‘AA-‘ rating level.

Moody’s downgraded Pennsylvania in July.

Scranton Levies Commuter Tax, Considers Selling Sewer System to Cover Pension Debt

The Pennsylvania city of Scranton is scrambling to avoid bankruptcy brought on by its mounting pension costs, and in the process is turning to some less-than-conventional sources of revenue.

The city has already levied a commuter tax on non-residents who drive into Scranton for work. Now, the city is considering selling its sewer authority. From Bloomberg:

The former manufacturing community will tax commuters starting next month and may sell its sewer system to buttress its retirement funds. The city has 23 cents for every dollar in retiree obligations, down from 47 cents in 2009, according to state data. Without a fix, Scranton may go bankrupt in less than five years, said Pennsylvania Auditor General Eugene DePasquale.

[…]

Scranton’s pension costs are rising. The city’s contribution next year will reach $15.8 million, from $3.4 million in 2008, data from the city and the auditor general show. Pension expenses will take up 16 percent of the budget in 2018, from 9 percent in 2006, according to a July presentation by Hackensack, New Jersey-based financial consultant HJA Strategies LLC.

The seat of Lackawanna County, Scranton passed a 0.75 percent income tax on nonresident commuters effective Oct. 1. The measure would generate at least $5 million annually, based on county data on tax collections, and the funds would go toward pensions, [city business administrator David] Bulzoni said.

[…]

Another option is to sell the sewer authority, which has started a review of the proposal, Bulzoni said. In addition, municipal officials this month met with union representatives to discuss contract features that are depleting pension assets, Bulzoni said. He declined to elaborate because he said some solutions will involve bargaining.

The city’s pension funds were collectively 23 percent funded in 2013.

Critics, Unions Bash Phoenix Pension Proposal

Labor groups and others in Phoenix are expressing outrage over a pension reform proposal – titled Proposition 487 – that would shift all new hires by the city into a new, 401(k)-style plan as opposed to the traditional pension plan that workers currently belong to.

The critics claim the new plan would cut benefits for disabled workers cut death benefits, as well. Reported by the Arizona Republic:

Opponents of a ballot initiative to end Phoenix’s employee pension system are raising concerns it could curb benefits for disabled city workers and the survivors of dead police officers and firefighters.

[…]

The message comes as Phoenix’s firefighter union has jumped full force into the effort to persuade voters to reject the initiative in the Nov. 4 election, putting up hundreds of “NO! ON 487″ signs across the city and campaigning door-to-door.

Fire Fighters Opposed to Prop. 487, a political committee, recently posted a photo of a fireman’s daughter on its Facebook page, saying, “If Prop. 487 passes and the unthinkable were to happen to her dad at work, Claire and her mom would receive nothing. Taking line-of-duty death benefits from firefighters and police officers is simply wrong.”

As it stands, the family of a city employee who dies prematurely can receive a portion of his or her pension as a death benefit. An employee who is injured can retire early and collect a portion of his or her pension.

Supporters of the reform initiative claim that critics are trying to distract voters from the real issue: the sustainability of the city’s pension system. From the Arizona Republic:

Supporters of the initiative, also known as the Phoenix Pension Reform Act, contend the arguments about disability retirement and death benefits for first responders is a red herring meant to distract voters who have the chance to stop a costly pension system. The city’s costs for the pensions of civilian workers have soared to $129 million this year, up from $27.8 million in fiscal 2002.

Voters will vote on the ballot initiative on November 4.

Audit Estimates Legal “Pension Spiking” by CalPERS Members Could Cost State $800 Million

The California Controller released an audit on Tuesday that found a particular brand of “pension spiking”, although perfectly legal, could cost California $800 million over the next 20 years. From California Healthline:

Dozens of public agencies that contract with CalPERS have engaged in a legal form of pension spiking, putting the state on the hook for nearly $800 million over the next 20 years, according to an audit released Tuesday by the State Controller’s Office, AP/KPCC’s “KPCC News” reports (“KPCC News,” AP/KPCC, 9/9).

The legal practice involves employers withdrawing commitments to cover employees’ pension costs in their final year of work and instead adding the value of the payment to the employee’s salary. The practice was legal under a 1993 law but has since been prohibited for new employees.

The audit found that 97 agencies that contract with CalPERS have amendments allowing them to engage in the practice.

The amendments increased CalPERS members’ compensation by $39.1 million in pensionable pay annually, which could result in as much as $796 million in such compensation over two decades.

The audit found that CalPERS doesn’t have the resources to audit the 3,000 agencies with which it contracts. CalPERS said it has hired more staff recently to combat that issue, but it’s not enough. From California Healthline:

The pension fund also has insufficient resources for auditing all of the 3,100 public agencies with which it contracts. For example, the audit found that a local government contracting with CalPERS would only be audited by the pension fund every 66 years. Since the audit was performed, CalPERS has hired more staff, but the agency is still only capable of performing audits on a contracting entity once every 33 years, according to the controller’s office.

In a release, Controller John Chiang (D) said the prevalence of such issues “invites abuse” and that the pension fund “must be more vigorous in protecting taxpayers from this form of public theft.”

View the Controller’s entire audit here.

Photo credit: Lending Memo

The Difference Between Tom Corbett and Tom Wolf on Pensions

Despite a lack of voter engagement on the issue, pension policy continues to play a large role in the Pennsylvania race for governor.

The candidates harbor very different views on how to handle the state’s pension system going forward, but the Associated Press did the service of clarifying where both candidates stand on the state’s pension issues:

PENSIONS

-Corbett says the burgeoning cost of Pennsylvania’s public pensions is a crisis that requires prompt, decisive action. Wolf argues that it’s a problem that can be resolved in the years ahead.

-Corbett wants to scale back pensions for future school and state employees as a meaningful step toward savings. He says the taxpayers’ share of the pension costs for current employees — $2.1 billion this year — is crowding out funding for other programs and helping drive up local property taxes.

-Wolf contends that the pension problems are partly the result of the state contributing less than its fair share of the costs for nearly a decade and that a 2010 law reducing pension promises to future employees and refinancing existing obligations needs more time to work.

Read the rest of the article for further clarity on where each candidate stands when it comes to taxes, education funding, and more.

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