Pensions in America
In Corporate America, large companies like General Motors and United Airlines are paying the price for baby boomers who are about to retire. That price tag may eventually destroy those public companies. In the public sector, the costs of generous benefits benefits are not accounted for like a business. As a result, elected officials at all levels of government have increased benefits without understanding the true cost. As a result, taxpayers in the future will be stuck with ever increasing bill for public sector baby boomers. The possible solutions are not easy but the later elected officials the larger price tag (i.e. increased taxes). In response to the Governor Schwarzenegger's 2005 Reform Proposals related to public employees pensions, the Legislative Analyst Office prepared an detailed analysis of public employees pensions. One Southland legislator battles to keep the pension issue alive in 2006 with a new proposal to standardize pensions statewide. Even the Los Angeles Times, has come around to recognize that something is amiss. In April, 2006, a quirk in the law allowed certain firefighters retire with a pension greater than their salary.
A citizens taxpayer assocation issued a report on the rising pension costs in 2007. In Arpil, 2007, the Legislature considered legislation to ban investments by CALPERS and CALSTRS from "terrorist countries". CalPERS listened to recommendations on how to keep health insurance premiums from raising. In 2007, CALSTRS was looking at a $19,600,000,000 deficit with legislative proposal to increase contributions of all parties (employees, the State and school districts). In addition, CALSTRS is examining the rising cost of retiree health care. In 2013, the Legislative Analyst Office issued this report about the current condition of STRS.
In June, former Assembly member Keith Richman announced an ballot initiative to restructure future pensions for governmental employees and that revised in January 2007. Here is an analysis of the initiative from the California School Board Association.
In July, 2007, the National Education Association faces a lawsuit accusing it of breaching its duty to members by recommending a high-cost retirement plan in exchange for millions of dollars from the managers of the plan.
The Orange County Board of Supervisors voted in July 2007 to consider taking back a pension increase granted to public safety employees in 2001..
At the end of 2008, a staggering economy triggered a $80+ billion loss in CalPERS.
In 2009, local examples of how pensions are unsustainable appeared in the Contra Costa Times.
In 2011, the Legislative Analyst Office issued a report on Retirement Options for Public Employees while the Little Hoover Commission issued a report that called for reducing pension benefits. Another report was issued at the end of 2011 detailing the five principles for dealing with public sector pensions.
In 2012, Governor Brown was able to begin modest pension reform. Here is a review of the legal structures for pensions across the country and a review of teacher pensions in 2012.
In 2014, a federal judge ruled that Federal bankruptcy law overrules state law. The decision is being appealed. If the ruling stands, a fundamental protection of California pensions could be in jeopardy. In October, a Federal bankruptcy judge ruled CALPERS pension obiligations can be cut in bankruptcy like other debt.
In 2016, An initial ruling has weakened the "California Rule" and the California Supreme Court will have to ultimately decide the fate of the "California Rule". Unfortunately for employees of teacher's union, CTA, do not have the same guarantees as teachers, as CTA struggles to funds the pension for its employees.
In 2017, a Stanford study reviewed the impact of pensions on cities, counties and school districts. The study showed how much contributions would have to rise if an alternative rate of return was used.
STRS Trustees Call for Review of Pension Shortfall
By Gilbert Chan, Sacramento Bee, July 9, 2004
Trustees of the California State Teachers' Retirement System on Thursday called for a new review of its projected $23.1 billion pension fund shortfall. Buoyed by a rebounding stock market, trustees want to determine if recent investment gains have narrowed the gap and would allow them to raise less than the additional $1 billion that is needed to help wipe out the shortfall.
The new study was authorized after trustees approved a biennial actuarial report that blamed stock market losses and subpar investment returns from 2001 to 2003 for putting the fund in the hole.
Other pension plans across the country face similar funding shortfalls.
Consulting firm Milliman said CalSTRS - as of June 30, 2003 - was producing only 82 percent of the income necessary to pay future retirement benefits.
The shortfall doesn't affect retirement benefits for CalSTRS' 735,000 members because their pension is guaranteed by law.
But it could mean teachers, school districts and the state may be required to increase their contributions in the future.
"It's a situation that has to be dealt with," Jack Ehnes, CalSTRS chief executive officer, told trustees.
Ehnes said CalSTRS, the nation's third largest public pension fund with $116 billion in assets, can't count on generating steady, double-digit returns necessary to bridge the gap.
Officials estimate annual increases would have to be in the 20 percent range for several years - a rate of return the fund never achieved even during the height of the unprecedented bull market during the 1990s.
"Investing our way out of it is not the solution," Ehnes said.
In the coming months, CalSTRS will talk with teachers, school districts and lawmakers to develop a plan.
The Legislature must approve any increase in pension fund contributions.
"It would be easy to say we need more contributions and people go off thinking where's that going to come from," Ehnes said. "We haven't gone through the different scenarios."
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Liabilities foreshadow bankruptcies
By Troy Anderson, Los Angeles Daily News, September 22, 2005
Years of bestowing lavish pensions and benefits on public employees has left dozens of the state's largest agencies with billions of dollars in unpaid liabilities that experts warn could start a cascade of bankruptcies, service cuts and tax increases.
According to a Daily News review of agencies in Los Angeles and across the state, California's largest public agencies face setting an extra $108 billion aside in the coming years to pay for promised retiree pensions, health care and workers' compensation claims.
That's a tenfold increase over the $10 billion the state Legislative Analyst's Office calculated among hundreds of public agencies statewide just three years ago.
"It's absolutely stunning," said Steven B. Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College. "We're just seeing the beginning of this. It's going to get worse, not better.
"Californians will suffer economically tremendously. Schools, roads, highways, bridges, sewers, water systems and expenditures of these kinds will have to be curtailed and more and more money will be channeled into these huge retirement obligations.
"It's one of the more stunning transfers of wealth in the history of the human race."
The unpaid bills, although they won't materialize all at once, are the result of generous benefits, mismanagement by elected officials, pressures from employee unions, stock market losses, and the longer life spans and pending retirements of tens of thousands of baby boomers, experts say.
And experts say the $108 billion is conservative, estimating it could soar as cities, counties, school districts and other agencies fully calculate the costs - especially retiree health care liabilities - under new federal accounting rules.
Los Angeles County alone currently has a total unfunded liability of $16 billion; Los Angeles city government, $3.2 billion; and Los Angeles Unified School District, $6.9 billion.
Then there's CalPERS - the state's public employee retirement system - with a total unfunded liability of $22.3 billion and the California teachers retirement system with $24.2 billion.
The debts represent the amount by which the liabilities of the retirement plan exceed its assets at any given time - which one expert describes "like an ever-growing family credit card balance."
"The bottom line is that many of these agencies are going to go bankrupt in the future," said former Los Angeles Mayor Richard Riordan, who in the 1990s helped reverse an unfunded liability in the Department of Fire and Police Pensions - now one of a handful of pension systems statewide with a surplus.
"It all goes back to the 1990s when we had the high-tech bubble and they improved the pensions for the bureaucrats in cities, counties and state government. It's ridiculous what we did.
"If you look at the dire predictions of the future of California and our tax revenues, you are going to have total fiscal disaster throughout the state."
In a series of interviews, elected officials, pension system administrators and pension experts agreed that some public agencies may face bankruptcy and will join San Diego - facing a $1.4 billion pension debt - in increasing fees and cutting services to cover ballooning costs.
"It's going to break the bank," said Bob Stern, president of the Center for Governmental Studies in Los Angeles. "There is going to have to be a whole review of this. Future contracts will have to be changed.
"When the money starts flowing to these retirees, as it will, it's sort of like the levees in Louisiana. We know it's going to happen, but are we planning for the future?"
And the debt is likely to come due soon as about half of all federal government employees and a third of California and Los Angeles County employees are expected to retire in the next five years.
Some agencies are expected to fare better with the issue than others, according to county Chief Administrative Officer David Janssen.
While the Board of Supervisors voted last week to further sweeten the health benefits package for current employees, Janssen said the unions agreed to some concessions including co-pays for hospital emergency room visits and medications.
"Los Angeles County, I think, is fully capable of dealing with the costs of these benefits," Janssen said. "The board has held the line all along on salaries and retirement benefits."
Still, the county grand jury recently said the debts will pose significant financial challenges in the years ahead.
And a Los Angeles city official, who requested anonymity, said the soaring annual contributions already have resulted in service cuts in the last two years.
"Certainly we're not in the shape of San Diego or other horror stories out there," he said. "The city may choose to start looking at some of these issues. On the health side, we may decide to limit subsidy increases. That hasn't been on the table yet, but it's something in our office we've kicked around a little bit."
Other public agencies around the state have already begun taking steps to reduce the unfunded liabilities.
In February, the Legislative Analyst's Office warned that the LAUSD's $6.9 billion unfunded retiree health and workers' compensation liabilities threatens its future ability to operate.
David Holmquist, LAUSD director of risk management and insurance, has presented a plan to the board to set aside $14 million annually for the next 30 years to offset the workers' compensation deficit.
He has also recommended the board hold a two-day retreat next year to come up with ideas and establish a task force to address the retiree health deficit.
"We are trying to look at all of the solutions, but obviously it starts at the bargaining table," Holmquist said.
California is not the only state facing this situation. Nationwide, taxpayers are exposed to more than $366 billion in unfunded public pension liabilities, according to a 2003 analysis of 123 state retirement systems by investment consulting firm Wilshire Associates.
That's more than double a $180 billion shortfall that was estimated just the previous year.
Combined with underfunding in private pensions, the promises made to retirees are projected to cost $700 billion more than the assets available to support them.
Some government and pension officials place most of the blame for the huge unfunded liabilities on the sharp decline in the stock market beginning in 2000, arguing that the funding ratios - at least for pension systems - will bounce back as the markets rise.
"All those straight-line projections don't reflect the ability to earn returns in the capital markets and they assume that everything that is today is going to be in the future on a consistent basis," said Rich Goss, director of the board of the 40-member California Association of Public Retirement Systems.
"We know from history that's not true. If we had this conversation in the mid-1980s, we'd be having the same conversation. If we had the conversation in 1997, the system was swimming in assets then."
But in a Reason Foundation think tank report issued earlier this summer, George Passantino argues that while market losses certainly played a role, the declines only unveiled the weaknesses in government pension systems.
"The fact that a retirement system could turn so quickly from investment nirvana to debt nightmares should give taxpayers and lawmakers cause for major concern," Passantino wrote. "At the heart of the pension crisis is a set of incentives that encourages policy makers to make decisions for which they do not have to bear the consequences."
And while stock market gains in the years to come may reduce pension debts, experts say retiree health care costs pose an even more serious problem because of rapidly escalating medical costs.
Fiscal Crisis and Management Assistance Team Chief Executive Officer Tom Henry - who helps public agencies deal with fiscal crises at the request of the Legislature - said many school districts and public agencies have not calculated their unfunded retiree health liabilities.
Experts say those debts will likely be in the tens of billions of dollars.
Statewide, 70 school districts provide lifetime health benefits, 134 provide health benefits beyond age 65, and 554 provide retiree health benefits up to age 65, according to a survey conducted by the team.
"In all districts we surveyed, they are paying as you go," Henry said. "So the (annual payments are) growing exponentially. In some districts it's doubling year to year. That seems mind-boggling. This is starting to drive all other decision-making in important operational areas.
"That's resulting in cuts to programs and services. The LAUSD is a perfect example. But they are actually, and this is to their credit, ahead of a lot of school districts in addressing this. So far, we've just seen the tip of the iceberg."
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One lawmaker tries to keep pension issue alive
By Daniel Weintraub, Sacramento Bee Columnist, January 3, 2006
Keith Richman clearly is a man who doesn't give up easily. But the Republican assemblyman from Northridge might simply be ahead of his time in trying to bring attention to one of the biggest policy problems of the era: public employee pensions.
Richman authored the proposal embraced by Gov. Arnold Schwarzenegger a year ago this week and then abandoned by the governor after critics said it would have eliminated death and disability benefits for the survivors of law enforcement officers killed in the line of duty.
And while that pension proposal never went to a public vote, Schwarzenegger's debacle at the polls Nov. 8 suggests that high-profile fights such as the one that would be needed to enact retirement reform are not on the governor's to-do list for 2006, a year in which he will be running for reelection.
But Richman is charging ahead without his powerful patron, hoping to keep the issue in the spotlight long enough for the public to weigh in. Polls suggest that if the voters ever do get a chance to tighten benefits for public employees, they will be receptive to the idea.
It's not hard to see why. Benefit increases first approved in 1999 at the height of the technology boom in the stock market have become difficult to sustain, especially for local governments. It is now common for police officers and firefighters to retire with a pension equal to 90 percent or more of their final salary shortly after they turn 50. In many cities and counties, desk-bound workers can quit at age 55 and get 60 percent of their final salary for life, plus Social Security when it kicks in.
The early retirement ages at a time when life expectancy is lengthening mean that taxpayers are being asked to pay for two parallel work forces, one still on the job and the other that is retired and living off a pension for almost as long as they worked.
A recent Sacramento Bee review of the county of Sacramento's retirement records showed that at least 30 employees, mostly sheriff's deputies, had retired in 2004 with pensions of more than $100,000. As its pension costs have increased, the county has been borrowing to keep up with the payments. The cost of retiring those bonds has climbed from about $21 million a year to more than $50 million and expected to double again by 2014.
Sacramento's experience is not unusual. The problem can be traced to the competition among government agencies for employees. As one agency increases pensions, others follow suit to keep up, with policymakers often not blinking at the cost because it will be borne mainly by future taxpayers who are not around today to complain.
Richman's latest proposal would help remedy that by standardizing pension benefits statewide for new employees hired after July 1, 2007, forcing local governments to compete on salary, which has to be accounted for up-front and is far easier for taxpayers to understand. Agencies that wanted to offer pensions richer than the standard benefit would have to get voter approval to do so. It is no coincidence that the one large public agency that has such a requirement already - the city and county of San Francisco - also has one of the most solvent pension funds in the state.
The standard benefit that would be offered under the Richman plan is not exactly ungenerous. It would consist of two parts: a basic guaranteed pension and an individual retirement plan with employee contributions matched by the employer.
The guaranteed portion would provide a pension equal to 1.75 percent of pay multiplied by the number of years worked. For someone who worked 30 years, that would be about half their salary. The other portion of the retirement benefit would match money the employee set aside each year, up to 4 percent of salary. The normal retirement age would be 65.
Public safety workers would get 2 percent of salary for each year worked - plus their individual account - and could retire with full benefits at age 55.
"This proposal is a very fair proposal for the employee and also for the government and the taxpayer," Richman says.
The keys to the proposal are the higher retirement age, which allows money invested for and by the employee to compound over a longer period of time, and the transparency provided by a standard formula that can't be tweaked after a backroom deal that voters never see and ends up costing millions. The individual accounts, meanwhile, would be a boon to employees who go into and out of the workforce or change jobs, giving them a benefit they could take with them rather than forfeiting much of their potential pension when they leave government service.
Public employee groups that prefer the status quo are already fighting Richman's plan, however, and they have the clout to stop it cold in the Legislature. But that won't make the problem go away. If and when it is ever addressed, Richman should get some credit for doing everything possible to keep the issue alive.
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By Steve Lopez, Los Angeles Times Columnist, January 23, 2006
Worried about your 401(k) tanking in your golden years?
You should become a cop.
Ticked off about your company yanking healthcare benefits in retirement?
Get a teaching job.
If you hadn't already noticed, while the rest of us watch our retirement benefits shrivel up and blow away, public sector retirement deals are sweeter than ever. And we're footing the bill.
Gov. Arnold Schwarzenegger tried to sound an alert last year. But the big gorilla killed any chance for a serious discussion by bullying cops, teachers and firefighters, making them out to be the bad guys.
Now there's even less of a chance for honest leadership, because it's an election year
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