Last month an article entitled “Pensions as Economic Stimulus” was posted to Fox & Hounds Daily. The author, Charles Beckwith, is a former CalPERS senior financial manager. Beckwith’s article, while thoughtful, invites a response. Because California’s pension systems may stimulate the economy in some ways, but equally significant ways, they are killing the economy.

Beckwith’s primary argument is this: California’s pension systems pay out over $3.0 billion per month to retired state and local government workers, who go out and spend this money, “at auto repair shops, home improvement centers, tuition for grandchildren, hair salons, rent, and at a thousand other small and large businesses.”

The problem with this reasoning rests on a fundamental assumption Beckwith makes, which is that all the money taken from taxpayers to fund these pension investments would not have created a similar economic stimulus if they had been free to spend it themselves. Mr. Beckwith goes on to extol the virtues of professional financial managers placing pension fund investments around the world, then pouring the returns back into California’s economy, but when he does this, he ignores the actual cash flows in and out of California’s state and local pension systems.

To dive deeper into the cash flows of California’s pension systems, unfortunately we must rely on the scandalously outdated, yet most recent available consolidated financial report for California’s pension systems, the Public Retirement Systems Annual Report for the fiscal year ended 6-30-2011, released over two years ago. But the proportions have probably not changed all that much in the last four years. And as can be seen on page xxii, figures 12 and 13, during that fiscal year taxpayers contributed $27.6 billion to California’s state and local government pension funds, and retirees collected $36.2 billion. This is a net benefit of $8.6 billion per year – IF you assume 100% of retirees still live in California.

A May 2015 analysis conducted by the Sacramento Bee on CalPERS retiree payments showed that 15% of their participants live outside California – if we assume that percentage is true for all California’s state and local government retirees, then that $36.2 billion shrinks to an in-state total of $30.8 billion. This more likely net benefit, $3.2 billion per year, represents a mere 0.14% of California’s $2.3 trillion economy.

That’s nothing, Mr. Beckwith. In the most recent year for which we have consolidated numbers, pension funds took $27.6 billion from taxpayers, then gave 30.8 billion back to retired government workers living in California. That’s $3.2 billion, net, that trickled down to private sector participants in an economy over 700 times larger.

With benefits come costs, and in this area, Beckwith, along with virtually every other defender of state and local government pensions, skirts the unpleasant realities. A California Policy Center study completed earlier this year, “California City Pension Burdens” used State Controller data to compile the employer pension contributions as a percent of total revenue from taxes and fees for every city in California. It estimated that pension fund contributions in 2015 for all California’s cities would amount to 6.9% of ALL revenue into those cities – including cities who run their own utilities – water, power, waste management. Equally significant, using figures provided by the pension systems, it showed that on average, these pension contributions would increase by 50% between now and 2020, to eventually constitute 10.3% of all revenues to California’s cities. These estimates do not take into account the current and projected funding for retirement healthcare, certain to add additional costs. Nor do they take into account the inadequate funded status of CalSTRS, or the many independent pension systems serving California’s counties, which are also supported by taxpayers in those cities.

In many cities, of course, pension burdens cost far more than 6.9% of all revenues. In San Jose, the total is 13.9% of all revenue. San Diego, 9.3%. And the already announced 50% increase to these employer pension contributions depends on a perilously weak assumption; that markets will continue to deliver 7.5% average annual returns on investment for the next several decades. Good luck with that.

At what percent of total revenue will everyone agree that funding public employee retirement benefits are “crowding out” other services and constitute the hidden agenda behind ALL proposed increases to taxes and fees? 10%? We’re already there. 20%? That’s reality already in many cities and counties. 30%? That’s where we’re headed.

Mr. Beckwith goes on to defend the defined benefit, writing that “the structure and strategy of a defined benefit plan cannot be debunked. It is a social benefit that should be available to all Americans in both private and public employment to assure a stronger American economy and social stability.” But he doesn’t explain what he means by “structure and strategy,” providing yet another frustrating example of why most reformers have given up on the defined benefit and almost universally advocate moving state and local workers onto individual 401K plans.

Constructive solutions to California’s state and local government worker defined benefit plans would include a “structure” that permits reductions to benefits – such as a suspension of retiree cost-of-living increases, or a reduction in rates of future annual benefit accruals – when market returns fail to meet expectations. And they might include a “strategy” that would return to the financially sustainable system that existed prior to Prop. 21, passed in 1984, which greatly loosened restrictions on investing in stocks, enabling much higher and much riskier rate-of-return projections, and before SB 400, passed in 1999, that started the process of retroactively increasing pension benefit formulas for what eventually became nearly all of California’s state and local government workers.

In an otherwise nuanced article, Beckwith’s one foray into demagogy was when he characterized investment setbacks as the result of the “Wall Street induced economic recession.” Because ever since Prop. 21 passed over 30 years ago, pension funds and “Wall Street” have been joined at the hip. When you’ve got nearly $4.0 trillion in state and local government pension funds chasing 7.5% annual returns, with no consequences other than to cut services and increase taxes to cover your shortfalls, you are indelibly part of the problem with financial special interests in America.

Pensions as they are today, Mr. Beckwith, are an economic burden to everyone in California who doesn’t have one, but has to pay for it anyway.

*   *   *

Ed Ring is the executive director of the California Policy Center.

54 Responses to California’s Pensions Are An Economic Burden, Not Benefit

  1. Tough Love says:

    Quoting … “And as can be seen on page xxii, figures 12 and 13, during that fiscal year taxpayers contributed $27.6 billion to California’s state and local government pension funds, and retirees collected $36.2 billion. This is a net benefit of $8.6 billion per year – IF you assume 100% of retirees still live in California.”

    Me never one to miss an opportunity to make the beneficial effect EVEN GREATER ……….. using Mr. Beckwith’s logic, CA’s taxpayers would be tickled pink and the benefit to the economy would far greater, not be the $8.6 Billion DIFFERENCE, but the FULL payout of $36.2 Billion if the taxpayers simply contributed NOTHING next year. Voila !

    Of course I’m being sarcastic, but it demonstrates the absurdity of the self-interested arguments such as that of Mr. Beckwith.
    ——————

    And of course, your LAST 2 brief paragraphs hit the nail on the head, quoting:

    “When you’ve got nearly $4.0 trillion in state and local government pension funds chasing 7.5% annual returns, with no consequences other than to cut services and increase taxes to cover your shortfalls, you are indelibly part of the problem with financial special interests in America.”, and

    “Pensions as they are today, Mr. Beckwith, are an economic burden to everyone in California who doesn’t have one, but has to pay for it anyway.”

  2. john m. moore says:

    Right on. Note that the use of “total revenues” instead of operating revenues made the burden study appear more favorable to agencies. Here in Pacific Grove, your study showed total revenues of about $27M, but operating revenues for budget purposes was only about $17M. The gap is from grants, trusts etc where the city was simply a pass through. The Burden is much much greated than the study showed.

    • Ed Ring says:

      John – thank you for calling attention to that crucial distinction between total revenues and operating revenues. The study makes quite clear that the burden of pensions on budgets is, if anything, understated, because we include TOTAL tax/fee revenue for ALL of a city’s operations including pass-through funds and revenues for ancillary operations as our denominator.

      It is the policy of our organization to make conservative assumptions at all times in order to earn credibility with analysts, journalists, observers, activists, politicians, and anyone else following this issue who is looking for information they can rely on. As a result, we often understate the problems.

  3. Robert says:

    There’s always been one thing that’s bothered me about the California public benefit and compensation issue. I’m not sure why so much attention is given to this topic. This is the proverbial flea on the “elephant’s back”.

    Two things: At least there is some money that’s been pre-funded. Whether you use the actuarial discount rate or some risk adjusted rate, a substantial amount of money has already been set aside and it is earning interest (although at a variable rate). Second, the folks that are/will be receiving this benefit won’t be a burden to society in the future.

    To me the real issue here is social security. The California public pension issue will pale in comparison to the outcome of that mess. Folks having to work into their seventies and shutting out jobs for some that are coming out of high school and college. Society having to take care of the millions that haven’t saved enough to augment their social security. This story will become a burden to society at some point in ways that will suck up much much more resources than the California public pensions are.

    Why do we continue to allocate our scarce resources to cleaning up problems that are merely a blip on society’s radar and not focus on the issues that will create burdens of such magnitude later on that we may not be able to pick up the pieces?

    • Equal Time says:

      It could be because legions of writers, researchers, “Fellows” and pundits have found that focusing on the pension issue is a way to make a pretty good living.

      • Equal Time is an Idiot says:

        Yes, these legions of writers, researchers, “Fellows” and pundits are becoming multi millionaires writing about pensions, it is a growth industry, got it trough feeder.

    • Tough Love says:

      In short, your thinking is all wrong ….

      You state this …. “the folks that are/will be receiving this benefit won’t be a burden to society in the future.” ….. but offer no follow-up commentary.

      If they are paid their pensions as promised, indeed, very few will become a financial burden on society (due to BOTH a generous pensions and subsidized retiree healthcare), but did they not get into that very desirable position as a result of the collusion between their Unions and our elected official, (specially, the trading of Public Sector Union campaign contributions and election support in exchange for our elected official’s favorable votes on Public Sector pay, pensions, and benefits), collusion that resulted in the granting of pension & benefits always multiples greater in value at retirement than those of your Private Sector counterparts?

      So yes, as a group Public workers won’t be a burden on society once retired …. but only because by taking FAR MORE than a fair share while working (in the form of their promised pensions and benefits), to the extent that those promises were fully funded, they were indeed a HUGE burden on society during all of their working years.

  4. Charles Sainte Claire says:

    Pensions and benefits are are part of total compensation. Period.

    • S Moderation Douglas says:

      Thank you again, Charles.

      In other words “Total compensation ( Pensions …..AND pay) “as they are today, Mr. Beckwith, are an economic burden to everyone in California who doesn’t have one, but has to pay for it anyway.”

      As if “everyone in California who doesn’t have one” derives NO benefit from what they pay.

      • Douglas is an Idiot says:

        The only one who derives a “benefit” are the trough feeding leeches.

        • SeeSaw says:

          Oh, look–Rex, Surf Puppy, and Wild Gurl have added another handle–there is no way for you to disguise your very own, unique hate-rhetoric, so why not just stick with one handle.

        • Big Dawg says:

          Those blogger names, and a few others, are associated with the Center for Public Policy and its affiliates, Union Watch and Pension Tsunami. Could be just one person.

          • Ed Ring says:

            Big Dawg – You are incorrect. Apart from those who identify themselves by name, such as Richard Rider and John Moore, we have no idea who the people are who make comments supportive of our position. For example, Tough Love has never revealed his real name to us, nor has Rex the Wonder Dog. Those of us affiliated with the CPC always comment under our real names.

            In a sincere attempt to return this forum to our goal, which is to foster intellectually honest dialog, I checked the IP address of the person who recently assumed multiple identities while commenting on this post. Rex – enough already. Big Dawg and Equal Time – ditto.

            Much of the comment dialog here is quite informative. It would be ideal if that were true for all of it. Solving the policy challenges relating to achieving financially sustainable retirement security for all Americans is a big topic. Trading insults or ignoring facts and logic that don’t agree with our preexisting beliefs (or agendas) is not helpful.

          • Rex the Wonder Dog! says:

            Ok…Ok already…but why ruin my fun 🙂

          • Big Dawg says:

            There is a correlation between tho frequent postings of those anonymous people and the articles posted on Pension Tsunami and Union Watch – this is a coast to coast correlation. That is the reason some people suspect a conspiracy of sorts. Check it out, the pattern is pretty obvious. Perhaps you should adopt a policy of not allowing fictitious names as it seems to have gotten out of hand, especially the name calling. Your call, just a suggestion toward achieving the intellectual dialogue you say is your goal.

          • SeeSaw says:

            @Big Dawg: The one who is using the proper screen names to say each is an idiot is one and the same person. If you don’t realize that, you haven’t seen enough comment forums. He is just a disgruntled citizen who hates public employees. It should not be a reason for CWD to require the rest of us to use our real names. Mr. Rider and Mr. Moore are public activists and would have no advantage, good or bad, for their, respective positions unless they use their real names.

          • Rex the Wonder Dog! says:

            He is just a disgruntled citizen who hates public employees.

            Seesaw, your hate oozes out of every post you put up, it is off the charts. You will do anything to keep your scams and corruption operating at 100%.

          • Big Dawg says:

            Thank you See Saw. If that is indeed one person I would categorize him or her as mentally ill. In fact, even if several people. Sad commentary. As for the link with Pension Tsunami et. al it sure looks to me like that person or persons trolls the daily Pension Tsunami article listing to then launch numerous shrill and name calling postings on many of those listed articles, coast to coast. Thus it appears Pension Tsunami is enabling such behavior. That is what I meant by saying there appears to be an association between this person/people and pension tsunami and its affiliate organizations.

      • SeeSaw says:

        And, of course, they don’t receive any public services in exchange for that do they……………

        • SeeSaw is an Idiot says:

          For every $1 of public torugh feeder cash compensation the public gets 5 cents of service. It is the government method of operation, super inefficient. ..how else do you explain a seesaw getting a million dollar pension for having an unskilled government workfare job! The seesaw pension is almost double the per capita income for WORKING Californians.

    • Charles Sainte Claire is an Idiot says:

      Retroactive pensions are illegal. Period.

      • SeeSaw says:

        And another one! Not being very clever–fooling nobody.

      • Equal Time says:

        I thought so too, but thanks to John Moorlach who convinced Orange County to go to court to get a ruling that a retroactive pension enhancement was illegal, the California Court of Appeals ruled otherwise. So now we are left with an expenditure of several millions of taxpayer dollars devoted to a failed court battle that resulted in a precedent setting Appeals Court decision.

        • SeeSaw says:

          The, then, AG Jerry Brown filed an Amicus Brief with the Court, in the OC vs. OC Deputy Sheriffs case, on behalf of over 900,000+ CalPERS beneficiaries who would have been impacted if OC had won. In the Brief, AG Brown explains that retroactive pension upgrades (prior to PEPRA 2013) had been standard procedure throughout the life of the DB pension systems in CA.

          • Equal Time says:

            Thanks. I assume then that even though the reformers label PEPRA as shallow and inadequate, it did fix this retroactivity issue going forward. One reform goal addressed, apparently.

          • Tough Love says:

            And “standard procedure” …. the granting of significant value (the retroactively applied increases) in exchange for NOTHING ……… is justifiable?

          • SeeSaw is an Idiot says:

            Thank you Perry Mason Jr.

        • Equal Time is an Idiot says:

          The ONLY thing “precedent setting” is your intelligence greed trougher.

      • Tough Love says:

        Retroactive pensions increases are illegal NOW in CA, but that’s a recent occurrence. They NEVER should have been allowed …. as retroactive increases (increasing pensions associated with work provided for years in the PAST) is nothing but a THEFT of taxpayer wealth.

        At the top of the list for reneging on the grossly excessive Public Sector pensions should be the share resulting from retroactive pension increases.

  5. S Moderation Douglas says:

    “the reformers label PEPRA as shallow and inadequate,”

    Another reform goal; “roll back pension formulas to pre – SB400 levels.”

    Done. Actually, the new formulas are lower than pre SB400.

    ” In the CalPERS policymaker report, the example is a worker with a starting salary of $46,000 who retires after 20 years at age 62. The pension for the pre-reform or “classic” worker is $2,140 a month, compared to $1,705 for the new hire — $435 less.”

    For new workers in my bargaining unit (12), the pension contributions will double (from 5% to 10%)..

    Double the contributions, AND a 20% reduction in pensions.

    That is not shallow.

    • Tough Love says:

      No, NOT DONE, the roll-back should have been applied to the future service of all CURRENT (not just new) workers.

    • S Moderation Douglas says:

      Half a loaf is better than none, especially when the “whole loaf” would be tied up in courts for years, before losing.

      Apparently reduction in future accrual for current workers is the brass ring of some pension “reformers”. Is it a symbolic thang?

      You can achieve the SAME reduction in an employees pension by restricting pay increases that you can by reducing the formula.

      75% of $50,000 is the SAME as 90% of $41,667.

      And, according to the Santa Clara County Superior Court, it’s legal.

      “Pensions for city workers can’t be cut, but pay can, judge rules in major San Jose case” San Jose Mercury News. Dec 23, 2013
      —————————————-
      By the same principle, “retroactive pension increase” in many cases becomes almost moot. SB400 nominally increased my pension by about 3%. The exact same pension would have resulted from a 4% salary increase.

      $50,000 x 75% = $37,500

      $50,000 x 78% = $39,000

      $52,000 x 75% = $39,000

      Unfortunately for me, the opposite occurred. Given the sporadic pay increases in relation to the CPI, I and many others would have been much better off if, in 1999, instead of SB400, the legislature had passed automatic annual COLAs.

    • Douglas is an Idiot says:

      Dougie, your spin is legion!

  6. Idiot is in the eye of the beholder says:

    RECENT COMMENTS

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    SeeSaw is an Idiot …………….on California’s Pensions Are An Economic Burden, Not Benefit

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  7. Richard Rider says:

    The most sensible reform in the Golden State is to contract out every possible state and local government department ASAP. Privatize — it’s the only effective way to end/freeze the current defined benefit Ponzi scheme.

    It will be VERY expensive to do so, because of existing obligations. But that expense obligation is on taxpayer shoulders regardless what policies we adopt now or in the future.

    Private firms can do provide most government functions better for lower cost — and can be fired for not meeting contractual obligations. MOST IMPORTANT, using private firms ends any future unfunded liability problems — a universally abused option for politicians.

    Extra benefit: Gut the public employee labor unions — the single most harmful force in California.

    • Big Dawg says:

      You need to meet the pack of lobbyists who represent private sector businesses seeking county and city contracts in Orange County, California. Many are former elected officials or their aides. They bankroll the fundraisers of office holders, contribute to their “birthday celebrations” and other money laundering influence avenues. Even the Orange County Taxpayers Association is primarily made up of these lobbyists, not your average taxpayer. Turning to the private sector while dismantling a municipality’s internal capacity to provide basic services feeds this corrupt system, eventually erodes public service and is in many cases therefore no avenue for better, more cost effective services in the long run. You may find this 2014 article enlightening. http://www.salon.com/2014/05/20/5_ways_privatization_is_fleecing_american_taxpayers_partner/

    • Tough Love says:

      Your 1-st paragraph (massive outsourcing) hits the nail on the head …. given the very one-sided court decisions and the “California Rule”.

      Short of a freeze of all DB pensions (or 50+% reduction in the pension accrual rate) for the future service of all CURRENT workers, NOTHING else will work.

      I have been advocating for both options for a very long time.

    • SeeSaw says:

      It does not always work out. My municipality has gone back and forth over the years on using in-house custodians vs. contracted. They went back to contracting two years ago and now are back in-house. Kinda shows that being in control of your own processes is best. The public employee unions are responsible for that sector being in the middle class in CA. The public employee unions are legal in CA and the people of CA are not so stupid that they are going to overturn Acts passed by both Reagan and Brown. Its been 47 years! Get over it!

  8. S Moderation Douglas says:

    Someone is not reading the original article, therefore responding to the wrong question.

    Mr. Beckwith mentions in the article that whether public workers are overcompensated is a valid question and should be answered, of course. But most comments are reacting to just one portion of the total compensation. Pensions.

    All the major studies have determined that, on average, public workers make 10-12% less in wages than equivalent private sector workers. They differ somewhat on the value of pensions and benefits.

    The basic question is, would we be better off closing the defined benefit plan and paying these workers 12% higher wages (on average), or paying 9% higher wages, with a 3% defined contribution match, as is typical now in private industry?

    The answer, he says, and I agree, is …..no. Because of greater efficiency, and mortality risk sharing, the DB plan has more bang for the buck. It is a win/win for the employee AND the taxpayers.

    It is not true that “….every dollar handed out in a pension benefit is a dollar less that the taxpayers in the town have to spend.”

    Most of those dollars came from returns on investment. Some of those dollars were deducted from the employees wages while working, and the remainder were actually taxpayer dollars, but they were not “handed out”. They were quid pro quo ….deferred compensation.

    There is absolutely no doubt that, on average, public workers earn less while working, ……in exchange for…… a pension higher than most private sector workers.

    Also no doubt that at the lower paid, less educated level, the total compensation of public workers is higher than their peers in the private sector. Higher pensions more than make up for lower pay.

    Also, no doubt that at the highest level, public workers make much less than private: pensions and benefits are NOT enough to make up for lower pay. Even the most conservative studies verify this.

    The man from Fram says “You can pay me now, or you can pay me later.

    • Tough Love says:

      Quoting S Moderation Douglas …

      “It is not true that “….every dollar handed out in a pension benefit is a dollar less that the taxpayers in the town have to spend.” Most of those dollars came from returns on investment. ”

      Baloney, Investment earnings are NOT a “source” of funds to pay for Public Sector pensions, ONLY employee and taxpayers contributions are ….. ask any financial economist.

      If not for the need for taxpayers to fund the grossly excessive pension promises made to Public Sector workers the investment earnings on THEIR pension contributions would have stayed in THEIR pockets ….. perhaps to fund their much SMALLER retirements.

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