Pension Spending - Archive

Yesterday marked the 25th anniversary of the California Legislature’s passage of SB 400, a retroactive pension increase for public employees that constituted the largest single issuance of public debt in California history.

One of the first things I learned after Governor Schwarzenegger appointed me to the board of the California State Teachers’ Retirement System (CalSTRS) in 2005 is that public employees only contribute to their pensions upfront but taxpayers contribute upfront and are on the hook for 100 percent of any funding deficiencies.

When launching GFC in 2011 it was my hope that we would see meaningful pension reform by 2020, but we have failed to achieve that objective and the negative consequences for public services and taxpayers have been enormous. As evidence, just look at the four-fold explosion in annual pension spending by the Los Angeles Unified School District this year compared to ten years ago:

Earlier this week we virtually attended a State Senate hearing about SB 868, a bill to provide a retroactive pension increase to some long-retired public employees. This isn’t the first time lawmakers have considered a retroactive increase. As I explained in a Wall Street Journal op-ed in 2010, the last retroactive pension increase was the largest issuance of debt in state history.

Last night the La Habra City Council was scheduled to approve the issuance of debt the proceeds of which would be deposited in the city’s pension fund. But that’s not what they disclosed. Instead, they said the city was seeking approval “to exchange higher cost variable rate debt with lower cost fixed rate debt.” But no such exchange is taking place. Even the name of the instrument — “pension obligation bond” — is a lie, as explained in POB = Wall Street Snake Oil. Worse, La Habra plans to invest the proceeds into a pension fund managed by CalPERS, which itself is adding debt leverage to a portfolio that’s boosting its allocation to private equity that uses additional debt leverage to acquire businesses that employ their own debt leverage.

Under SEC rules, investment advisors who do work for state and local pension funds can be disqualified if they make political contributions at certain levels to elected officials or candidates for those offices who have a say in the public pension decisions to contract with investment advisors. That’s a good thing because public pension funds such as CalPERS and CalSTRS enter into money management contracts the objectives of which should be to protect pension beneficiaries and taxpayers, not to enrich Wall Street.

It was 22 years ago today that Senate Bill 400 granted a retroactive pension increase to CA state employees that amounted to the largest non-voter-approved issuance of debt in state history. One result has been a nearly 10-fold increase in pension contributions.

The principal job of states in our federalist system is to provide domestic services such as education, health and public safety. California executes some services well (e.g., Covered California) but generally residents are served poorly, students are treated more like captives than customers, insufficient value for money is obtained from healthcare providers, and public safety employees are excessively compensated. All that is fixable.

Dear Elected Officials,

We keep hearing about cities considering a Wall Street proposal to issue debt to fund supplemental pension contributions to city pension funds. They should not do so.

In 1999, California’s Legislature and Governor enacted SB 400, a retroactive pension increase pushed by government employee unions. At that time, the state pension fund (CalPERS) based pension contributions from employees and employers upon an expected annual return of 8.25 percent. (The higher the expected return, the lower the required upfront contributions.) Advocates for the retroactive increase claimed that, because CalPERS could be expected to earn at that rate, the retroactive increase would not cost “a dime.”

Few California officials have tried harder than San Jose Mayors Chuck Reed and Sam Liccardo to rein in pension costs. Sadly, a recent report by a San Jose task force undermines those efforts and promises more problems for city residents.

Dear Legislators,

Wall Street specializes in fancy names for old fashioned financial schemes. Eg, as the Archegos scandal demonstrated, “Total Return Swaps” are nothing more than a way to exceed margin limits. In the government world, the most misleading phrase is “Pension Obligation Bond,” which has nothing to do with pension obligations. Here’s how they work:

There’s a wolf knocking on San Jose’s door.

San Jose has $9.6 billion of un-prepayable pension obligations that require payments every year. To help fund those payments, the city uses investment earnings from $6.1 billion of stocks and other investments held in a pension fund. Because pension obligations exceed pension assets by $3.5 billion, the city also has to dip into its budget to make the payments, which crowds out funding for citizen services.

Dear Legislators,

As a shareholder, CalPERS has been pressing corporations for better disclosure of environmental sustainability risks, yet CalPERS has been a leader in not disclosing financial sustainability risks, as I explained a decade ago in Dow 28,000,000. The consequences have been terrible, especially for our state’s most vulnerable residents whose programs get crowded out whenever governments have to make up for CalPERS’s failures. Here’s what that looks like:

Early GFC supporters will recall that I expected pension reform to happen by now. I was way off.

Dear Legislators,

Last week the City of Chula Vista paid big fees to Wall Street firms and lied about the consequences of the transaction.

Here’s something Assembly Members Luz Rivas, David Chiu, Richard Bloom and Buffy Wicks don’t want their constituents to know:

LA and SF face large budget deficits because their mayors won’t face up to police unions. The consequences for residents are terrible and there’s an easy solution. LA and SF spend hundreds of millions of dollars per year on extravagant subsidies for retired employees, the most expensive of which are retired police who can retire early. But those subsidies aren’t necessary. That’s because of Covered California, where even retired police with large pensions can get federal and state subsidies:

Pension Obligation Bonds (POBs) do NOT reduce pension obligations. They increase pension assets, which produces an accounting benefit (more assets — the same liabilities = a lower unfunded liability).

Prison guards are the most expensive category of California’s state pension expenditures, which have exploded.

Yesterday a GFCer wrote me to encourage immediate action on pension reform. In response I wrote,

A recent article in the New York Times about election results in California included the following sentence (italics added by me): “A measure that would have raised taxes on commercial landlords to raise billions for a state that sorely needs revenue also seemed on track for defeat.” The reporters did not provide support for their assertion — which they expressed as a fact — that California “sorely needs revenue.” They should do so. Meanwhile, here are six potentially relevant facts (sources in parentheses).

Investment banks are encouraging cities to issue “Pension Obligation Bonds.” They should be avoided. POB’s are expensive and risky accounting schemes. It would be different if cash obtained from such a bond was used to reduce pension obligations. But POB’s are used to increase pension assets, which just produces an accounting benefit at the cost of interest and fees. They also boost risk. That’s because a POB issuer is renting cash with which to gamble on investment markets on which the issuer is already betting existing pension assets. Cities should avoid investment banks bearing expensive and risky accounting charades.

Annual cash spending by the City and County of San Francisco on pensions and other post-employment benefits increased 146 percent from 2010 to 2019, to $864 million per year.

In 2012 California raised the state’s top income tax rate nearly 30 percent to 13.3 percent to boost education funding. Proposition 98 spending on K-12 jumped accordingly:

I had several inquiries yesterday about the latest problem at CalPERS, this time the resignation of a CIO who allegedly wasn’t vetted for conflicts of interest.

For too long, California’s schools have operated on deficits.

As Congress considers a $100 billion Covid-related financial-support package to help states and localities gear up for the coming school year, California should act quickly to plug leaks that will cost its own schools their likely share of that aid. The San Francisco Unified School District (UFUSD), for example, which serves 60,000 students, received more than $1 billion in revenues last fiscal year. Even before the pandemic—and despite a 30 percent gain in revenues over the previous five years—SFUSD reported a deficit because spending on retirement costs rose more than 100 percent over the same five-year period. Indeed, the district now spends more than $100 million per year on retirement costs, equivalent to $1,750 per pupil. To make matters worse, that $100 million doesn’t even include accrued-but-unpaid retirement costs for which debt is issued—and the balance of which now exceeds $1 billion.

After we wrote about CalPERS’s plan to employ debt leverage to improve its chances of earning its investment return assumption of 7 percent per annum, some of you asked if earning that return would close the gap (“unfunded liability”) between the assets CalPERS manages to meet pension liabilities owed by the employers for whom CalPERS administers pension obligations.

Joel Black will succeed David Vaudt as chair of the Governmental Accounting Standards Board on July 1. He was appointed by the Financial Accounting Foundation six months ago and will be the first GASB chair without experience serving as a state auditor.

Yesterday we wrote about the multiple levels of leverage implied by CalPERS’s plan to borrow to invest more capital into private equity. We neglected to include a level (subscription line leverage) that the Financial Times illustrates in an article entitled “Financial wizardry breathes magic into private equity returns” linked here and attached here.

After we wrote last week about CalPERS’s plan to borrow to invest more capital into private equity, some readers asked how employers who issue Pension Obligation Bonds (POB) to make contributions to CalPERS would be affected. The answer is that POB issuers would then be employing four levels of leverage:

On Sunday the Financial Times printed a disturbing article about a plan by California’s largest pension fund, CalPERS, to borrow to invest more into private equity. See Top US pension fund aims to juice returns via $80bn leverage plan.

Long time GFCers know of our disdain for people who whine about California’s political problems but sit on the sidelines and do nothing to help solve those problems. Among them are those who assess the state’s problems as the consequence of Democratic control of state governance and that efforts at reform are futile so long as Democrats remain in the majority. Both assessments are wrong.

Some legislators inquired about the legal and moral grounds for making the changes to pension and OPEB obligations I set out here.

The Washington Post’s masthead reads “Democracy Dies in Darkness” but sometimes democracy dies in plain sight in Sacramento, where unverified assertions are often employed to justify billions in spending, cover up accounting frauds, shift blame for undue political influence, and more.

San Francisco Unified School District’s revenues are 40 percent higher than five years ago yet the district just announced a $32 million deficit. That’s because spending on retirement costs went up more than 100 percent.

Some Americans yearn for what they believe were the good old days of journalism when — so it is believed — citizens could rely on journalists to uncover lies. But for every Watergate, multiple events went undiscovered.

Imagine you are a donor to a non-profit organization whose board members receive gifts from employees to whom the board, without your consent, promises retirement benefits. Now the organization is asking you for larger donations to cover surging retirement spending but not disclosing the real reason more money is needed.

Accounting for state and local governments is determined by the Governmental Accounting Standards Board (GASB), which has a too-cozy relationship with the governments it is supposed to regulate. GASB doesn’t stop state and local governments from treating borrowings as revenues, avoiding cost recognition by simply not paying expenses, or claiming balanced budgets that often are nothing of the sort.

New Haven Unified School District students finally returned to school this week after the district and teachers reached agreement on a new contract. But a close vote and angry words are signs no one is happy. The settlement is temporary, just as in LA and Oakland earlier this year. That’s because the district and the teachers want more money but the state already boosted school spending, already raised taxes, and already moved higher among US states in per pupil funding.

The New Haven Unified School District teachers’ strike has moved into its third week. We are troubled this subject is not dominating discussion in the legislature.

The New Haven Unified School District teachers’ strike has moved into its second week, surpassing the duration of the Oakland and Los Angeles teachers’ strikes earlier this year.

A number of you have asked for our view of a California Supreme Court decision announced earlier this week about a pension reform case entitled Cal Fire Local 2881 v. CalPERS.

Rolling up big paper profits on stocks and other capital investments during 2017 and most of 2018 was very easy, and the California Public Employees Retirement System, the nation’s largest pension trust fund, took full advantage of the opportunity.

Its strong earnings, particularly in 2017, narrowed a yawning gap between its assets and future liabilities for pension payments to state and local government workers.

But it was short-lived and CalPERS has not only regressed but could actually be underwater because of a new way of calculating its liabilities.

Those of you interested in state, local and school district pension obligations should add an esoteric phrase to your vocabularies: “Accretion of Discount.”

LOS ANGELES (AP) — Strike or no strike, after a deal is ultimately reached on a contract for Los Angeles teachers, the school district will still be on a collision course with deficit spending because of pensions and other financial obligations.

School systems across California are experiencing burdensome payments to the state pension fund while struggling to improve schools.

The problem is especially acute for districts like Los Angeles Unified that will see a financial hit in part because of steadily declining enrollment.

Los Angeles Unified School District collected $7.2 billion in revenues in its 2017–18 fiscal year. That translates into $298,000 per teacher, 42 percent more than four years earlier…

On September 20 the Federal Reserve recognized a truth long covered up by California’s public pension funds.

In its latest quarterly Financial Accounts report the Fed revised its measure of unfunded pension liabilities owed by state and local governments to $4.1 trillion, more than double the amount previously reported.

For the 12 months ended June 30, 2018, the S&P500 returned >14 percent but California’s State Teachers’ Retirement System (CalSTRS) earned <9 percent. Some of the underperformance results from the difference in allocation to equities (the S&P500 is 100 percent invested in equities while CalSTRS is not), but CalSTRS’s underperformance (37 percent) is more than twice its allocation to non-equities (14 percent).

<20 percent went to citizen services.

In January 2012 California Governor Jerry Brown announced he would ask California voters to approve temporary sales and income tax increases. Later that year his proposal was embodied in Proposition 30, projected by the Legislative Analysts Office to raise $6 billion per year for four years and smaller amounts for three years (ie, $42 billion or less). 40 percent of P30 revenues were to be provided to schools and community colleges*, the balance to the state. Marketed as “Temporary Taxes to Fund Education,” P30 passed. Seven budget years later, the results are in.

Triggered by recent earnings reports from CalPERS and CalSTRS, some readers have asked why California’s pension funds are underperforming the overall stock market. Eg, for the fiscal year just ended June 30, 2018, CalSTRS and CalPERS earned only ~two-thirds the stock market. While the question is best asked of their Chief Investment Officers, one reason might be portfolio construction designed to minimize contribution volatility. CalSTRS’s most recent CAFR discusses volatility on page 29 here.

Yesterday my political party (Democratic) incorrectly tweeted that California was “paying down debt.” Nothing could be further from the truth.

One giant leap for the next generation.

Earlier this year the City of Palo Alto’s Finance Committee hired an independent actuary to produce a budget scenario reflecting a more realistic return on pension assets than the unrealistically-high return assumed by CalPERS, the city’s pension fund manager. As explained here, unrealistically-high assumed rates of return allow governments to artificially suppress upfront (“Normal”) pension costs for current services at the expense of larger costs for citizens down the road who didn’t receive the benefit of those services. The independent actuary reported that a realistic assessment of Palo Alto’s Normal Cost is $8 million higher than CalPERS’s assessment.

Classrooms should be fully staffed with adequately compensated teachers. But that is not the case in California despite a >50 percent increase in spending since 2010. The principal reason is the diversion of school dollars to pensions and other retirement costs. Governor Brown reports annual spending of $16,000 per student but only about half reaches students.

Gov. Jerry Brown’s revised budget for 2018-19 predicts general fund revenues will be 30 percent greater than 10 years ago yet key services will receive less money than they did back then.

San Francisco Unified School District recently published its 2017 Financial Report and Second Interim Reports for 2017–18 here and here. The results are startling…

The pro- and anti-reform houses of education land are prepping for the next big battle between charter schools and teachers unions. The great houses in philanthropic foundation land are deciding where to place their bets. But winter is coming, and no one can avoid it.

Everyone must chip in to solve pension and OPEB crises.

It’s not news that exploding spending on pensions and retiree health care is crushing public services in California. It’s a problem that didn’t have to happen, as explained here. But it did — and the result is $1 trillion being diverted from schools and other public services in CA.

A public university president in Oregon gives new meaning to the idea of a pensioner.

Joseph Robertson, an eye surgeon who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension.

It is $76,111.

Per month.

That is considerably more than the average Oregon family earns in a year.

Retirees subsidized at expense of active teachers.

School funding in California is at record levels…

General Fund tax revenues in Governor Jerry Brown’s proposed budget for 2018–19 are expected to be 32 percent higher than ten years ago yet the same budget proposes only 9 percent more spending for California State University than ten years ago.

Inevitable unless the Big Diversion is ended.

Jerry Brown’s budget for 2018–19 predicts revenues will be 32 percent greater than ten years ago yet that same budget proposes 14 percent less for the Judicial Branch and only 8 percent more for the University of California.

Agonizingly slow progress in fast changing times.

In 1968 Latino students walked out of public high schools in East Los Angeles in protest of unequal educational conditions. 50 years later what has changed? CA’s Latino graduation rate has improved but unequal conditions and poor educational outcomes persist and graduating students are often unprepared for college. That’s in significant part because billions of dollars are being diverted from classrooms, too many under-performing teachers are spared from dismissal, and pay and support isn’t differentiated for teachers in high poverty schools.

CA pension funds didn’t “lose money” in the Great Recession

Bernie Madoff used deceptive accounting to steal $50 billion. California’s pension funds used deceptive accounting to steal $1 trillion. How that deception occurs is explained here. The motive is explained here.

David Crane, a lecturer at Stanford and a former adviser to Gov. Arnold Schwarzenegger, is the bringer of bad news. For more than a decade, Mr. Crane, a San Francisco Democrat and former investment banker, has been forecasting a disaster in California’s pension system. He was removed from the board of directors that oversees benefits paid to California’s teachers after repeatedly warning that the fund’s investment assumptions were too rosy, and since then has continued to scream about a coming financial reckoning.

In June San Francisco’s school board wants voters to approve a new “parcel tax” of $298 per parcel of real property. They claim the money — $50 million per year — is needed to provide teachers with living wages. That’s a worthy objective but it’s not the real reason behind the proposed tax. The real reason is buried deep in SFUSD financial reports from 2012 and 2017:

City takes two steps towards transparency.

On February 26 the Palo Alto City Council voted 9–0 in favor of a proposal to uncloak negotiations with the city’s public employees. The next step is to meet and confer with public employee unions, which is required under current state law. (You read that right. As explained here, under current state law the taxpayers of Palo Alto are not permitted to observe negotiations about their largest expenditures without the consent of the recipients of those expenditures.) Stay tuned.

Transparency gets a chance.

In 1968 California Governor Ronald Reagan signed legislation granting collective bargaining rights to local and county public employees and enabling confidentiality of collective bargaining negotiations. A decade later Governor Jerry Brown signed legislation extending those rights to K-12, state and higher education employees.

It’s the lie that gets you.

Recently the California Public Employees’ Retirement System (CalPERS) reported that its investments in 2017 outperformed its “benchmark” by 0.25 percent. But whether CalPERS beats or lags its benchmark has little impact on pension costs, which are exploding because of explosive growth in pension liabilities. See for yourself…

But who has hurt California kids more?

Apparently the board of the California State Teachers’ Retirement System (CalSTRS) worries that Apple’s smartphones negatively impact child development. Presumably there will now be a lot of research on that subject. But no research is needed to prove this point: Child development in California is being negatively impacted by exploding pension costs that prevent school districts from hiring enough teachers and paying them sufficient wages. Look what has happened to the San Francisco Unified School District…

The 2018 Bipartisan Speaker Series, hosted by Assemblywoman Catharine Baker (R-San Ramon) and State Senator Steve Glazer (D-Orinda), kicked off with a full house in San Ramon on Monday night, as locals turned out for a discussion on pension reform.

This afternoon, I spotted a tweet from a San Diego parent: 

There’s something particularly wrenching about being asked what services should be cut at your kid’s school to pay for increased employee pension & healthcare costs, when most working parents don’t have pensions. https://t.co/Vs6uMojuSt cc @sdschools

— Ashley Lewis (@AshleyJPL) January 12, 2018

I followed the link to the survey, and a message from the San Diego Unified School District said it was seeking input on how to resolve a growing budget shortfall due to “increases in costs outside of the district’s immediate control, such as healthcare costs, utilities expenses, and state retirement contributions that are all expected to rise for the foreseeable future.” 

The real reason CalPERS hasn’t recovered.

Many legislators don’t understand why massive gains in the stock market have barely improved the Funded Ratio of California’s principal pension fund, CalPERS. The answer is simple: massive growth in liabilities.

But CalPERS lets down local government employees.

California Governor Jerry Brown has filed a legal brief with the state’s Supreme Court arguing that pensions for government employees should work no differently than pensions for non-government employees. Students, citizens, taxpayers and future government employees would be better off if the court agrees.

During the next five weeks, the CalPERS board, custodian of $326 billion in assets needed to fulfill retirement promises for 1.8 million California public employees and beneficiaries, will make decisions affecting government budgets for decades to come.

The problem is, despite their fiduciary duty under the state Constitution to “protect the competency of the assets” under their absolute control, CalPERS is roughly $153 billion short of fully funding the retirement promises earned to date.

CalPERS’ actuary says the nation’s largest pension system should stop kicking the proverbial can so far down the road.

California’s recent fires reminded citizens that robust fire and police staffing levels are critical for public safety, including the safety of the brave Californians willing to serve in those roles. Fortunately for our society, a good number of young people growing up today hope to become firefighters and police officers. But less fortunately for those young people and our society, some California officials are eroding the ability of future governments to hire enough police and fire personnel while also maintaining public spending on other services.

Colorado Gov. John Hickenlooper has proposed a budget calling on existing government employees and retirees to bear the costs of proposed pension reforms because citizens and taxpayers have already contributed enough to the retirement system. The proposed changes include higher contributions by employees and lower post-retirement increases for retirees.

Two public pension plans started off in the same spot before the Global Financial Crisis and went through the same investment markets since then but ended up in very different spots.

The plans — let’s call them “O“ and “C” for now — reported nearly equivalent “funding ratios” (the ratio of pension assets set aside to meet pension liabilities; the higher, the better) before the crisis, both lost big in the crisis, and both participated in the subsequent stock market boom. But their funding ratios diverged, with B’s plummeting 16 percent and O’s improving 10 percent as of their most recent published annual reports. The difference arises largely from two factors…

Same recession, same stock market, different outcomes. Two public pension plans started off in the same spot before the Global Financial Crisis and went through the same investment markets since then but ended up in very different spots. The plans — let’s call them “O“ and “C” for now — reported nearly equivalent “funding ratios” (the ratio of pension […]

FAIRFIELD — Pension costs could run school districts out of business, a superintendent said Thursday at the State of Education in Solano County forum.

Schools may first reach a point where they do less for students because of contributions to the Public Employees Retirement System and the California State Teachers Retirement System, said Brian Dolan, superintendent of the Dixon School District.

California’s wine country fires delivered a vivid demonstration of the critical importance of governments being able to assemble armies of public safety workers when needed. Citizens expect their governments to provide public safety — but they also expect parks, animal shelters, transportation, road, sidewalk and tree maintenance, housing for the homeless, libraries and much more. What citizens don’t know is that some of their elected officials are systematically reducing the ability of their governments to both field adequate numbers of public safety personnel and fund other services.That’s because those officials refuse to acknowledge or address the explosive growth in pension and other retirement costs crushing their budgets.

Governor Jerry Brown just signed a bill requiring pharmaceutical companies in California to issue notifications at least 60 days in advance of a price increase that would be at least 16 percent over a two-year period and explain the reasons behind the increase. According to the San Francisco Chronicle, supporters of the legislation say it will discourage significant price increases.

SCHOOLS in Pennsylvania ought to be celebrating. The state gave them a $125m budget increase for 2017-18—enough for plenty of extra books and equipment. But John Callahan of the Pennsylvania School Boards Association says all the increase and more will be eaten up by pension costs, which will rise by $164m this year. The same happened in each of the previous five years; cumulatively the shortfall adds up to $586m. The pupil-teacher ratio is higher than in 2010. Nearly 85% of the state’s school boards said pensions were their biggest source of budget pressure.

California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic.  As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.

The teachers’ pension fund in Puerto Rico looks very much like a legalized Ponzi scheme — one that might hold a warning for teachers across America.