STUMP » Articles » Public Pensions Watch: California, There Ya Go » 17 August 2015, 22:43

Where Stu & MP spout off about everything.

Public Pensions Watch: California, There Ya Go  


17 August 2015, 22:43

I don’t only cover Chicago and Illinois pensions. That’s just where the action has been.

But look who’s back on the radar.

California and yet another attempt at pension reform through ballot initiative:

Pension reformers Chuck Reed (former Democratic Mayor of San Jose) and Carl DeMaio (former Republican San Diego City Council member) introduced a new ballot initiative in June that would amend Caifornia’s constitution to give citizens more control over the pension and benefit obligations taken on by their own governments and offered to public employees.

Democratic Attorney General Kamala Harris, who also happens to be running for the Senate to replace retiring Barbara Boxer, put out a title and summary of the initiative this week. Needless to say, initiative proponents are not happy. Here’s how Harris formally summarizes what Reed and DeMaio call the “Voter Empowerment Act of 2016”:

PUBLIC EMPLOYEES. PENSION AND RETIREE HEALTHCARE BENEFITS. INITIATIVE CONSTITUTIONAL AMENDMENT. Eliminates constitutional protections for vested pension and retiree healthcare benefits for current public employees, including those working in K-12 schools, higher education, hospitals, and police protection, for future work performed. Adds initiative/referendum powers to Constitution, for determining public employee compensation and retirement benefits. Bars government employers from enrolling new employees in defined benefit plans, paying more than one-half cost of new employees’ retirement benefits, or enhancing retirement benefits, unless first approved by voters. Limits placement of financial conditions upon government employers closing defined benefit plans to new employees. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Significant effects—savings and costs—on state and local governments relating to compensation for governmental employees. The magnitude and timing of these effects would depend heavily on future decisions made by voters, governmental employers, and the courts.”

A layperson might read the beginning of that description and conclude that current government employees could have their pensions and healthcare benefits stripped from them if this referendum is passed. That is not, in fact, what the initiative does. It does have several components to give voters more control over how its governments pay for public employees by:

-Giving voters the power to use ballot initiatives to determine compensation and retirement benefits for employees.

-Requiring governments to get voter approval in order to either enhance existing pension plans or to add new employees to pension plans. It also requires governments to get voter approval to pay more than one half of an employee’s retirement benefits.

It also specifically states it doesn’t alter any existing benefit agreements or reduces the benefits for work already performed.

I dunno, what if voters think it means that public employees will be stripped of their pensions… and they’re just peachy with that?


Didn’t think all those cutesy-poo Pension Envy barbs wouldn’t come back to bite, eh? (tee hee. Aren’t we clever? Pension envy sounds like penis envy! tee hee)

If public employee pensions and other benefits soak up more taxpayer money to the detriment of current services (and they have been), guess who is going to be just fine with retirees soaking up some of that pain?

Hey retirees: you can’t strike. Many of you don’t even live in the state any more, so you can’t vote there (legally).

Let me know what political leverage you have, mmkay?


Here is one guy not happy with this proposal: Michael Hiltzik.

Along with taxation and immigration, one political issue that never seems to go away is the cost of public employees, especially their pensions.

Public retirement plans are consistently blamed for local and state budget woes. Any time a community runs into fiscal trouble, its workers are among the first to be demonized, and often bear the brunt of the remedies. After all, pension obligations are typically among the largest liabilities any government entity must bear, so why not hack away?

In California, pension overhaul proposals have become a perennial feature of state and local ballot campaigns. Failed proposals were aimed at the statewide ballot twice in the last four years, and the proponents of the last effort, in 2014, have started the ball rolling for a new measure.

Like so many voter initiatives, the “Voter Empowerment Act of 2016” has a few reasonable-sounding nuggets buried within a landscape of bad ideas. Atty. Gen. Kamala D. Harris gave the measure its formal title and summary last week. So its proponents, former San Jose Mayor Chuck Reed, a Democrat, and former San Diego Councilman Carl DeMaio, a Republican, can shortly start collecting signatures to place it on the November 2016 ballot. As one can tell from their name for it, the measure will be pitched merely as a way to give taxpayers a direct vote on the pension plans of their public servants.

I’m going to cut in here to tell you who Michael Hiltzik is, if you’re not familiar with him. He was notorious for pretending to be other people praising his own writing. (this is also known as sockpuppeting)

Iirc, he’s also written a bunch of stupid stuff about pensions.

Hey Hiltzik — you seem like the kinda guy to have a google news alert on his own name. My blog doesn’t take comments.

Don’t bother emailing me, unless you want me to post your email on this blog.


But back to Hiltzik’s piece, because here’s something:

But there’s much more to it than that. The Wall Street Journal described the measure as one that would “end defined-benefit pensions and save taxpayers billions of dollars.” The measure would end defined benefit plans for new public employees as of Jan. 1, 2019, unless voters affirmatively continue them. But the second part of the phrase is arguable, as the cost of terminating plans could be high.

Here’s the deal with terminating pensions under Calpers (and probably Calstrs).

The basis for valuing the liabilities differs hugely based on whether you are trying to exit the system, or if you will keep chugging along, accruing ever deeper pension debts.

Funnily, they might use a 7% – 8% discount rate to value pensions when you stay in, but if you want to leave, the rate drops to risk-free rate type valuation. As if you had to buy a group annuity to cover the benefits…. a valuation rate closer to 4%, say.

Why would the exact same cash flow pattern be worth a vastly different amount because you’re cutting off accruing even more benefits?

Tis a puzzlement.

(No, it’s not a puzzlement at all.)


Let’s go to a different story for a short period

Proponents of a California pension initiative said Tuesday that state Attorney General Kamala Harris is once again favoring labor unions by using the same words she used to describe their previous failed bid to limit taxpayer spending on public pensions.

“The first sentence is a repeat of the first sentence from the initiative two years ago,” said former San Jose Mayor Chuck Reed. “It’s been certainly poll-tested by the unions and fed to the attorney. It’s inaccurate and misleading.”

Reed and former San Diego Councilman Carl DeMaio say they will conduct a legal review of the attorney general’s title and summary language before they begin collecting the 585,407 voter signatures needed to qualify for the November 2016 ballot. They said voters will want to review retirement benefit decisions made by elected officials.

Facing a Tuesday deadline to release her description of the initiative, Harris wrote the proposal would eliminate constitutional protections on pension and health care benefits for public employees, “including those working in K-12 schools, higher education, hospitals, and police protection.”

Constitution can’t actually protect public employee benefits.

Going back to the Hiltzik piece:

Who would lose? Government employees. When the Central Valley city of Stockton filed for bankruptcy in 2012, city workers were quickly blamed. One of Stockton’s creditors, the investment firm Franklin Templeton, asserted that its employees had routinely “spiked” their salaries to make their “lavish benefits” even richer. The truth was that the average retiree received $24,000 a year and that the workers had sustained waves of furloughs, given up years of cost-of-living increases, and lost virtually all their retiree health benefits during the struggle to keep the city afloat.

Let me see if I understand Hiltzik’s logic.

The California state constitution would need to be amended, as per this ballot initiative, for pensions to be whacked.

And yet, without the constitution being amended, the Stockton city employees were whacked when the city went through bankruptcy.

How, exactly, did the state constitution protect the workers?


The statewide pension shortfall likewise flowed from the top down. When state pension funds fattened up on rich stock market returns in the 1990s, lawmakers bestowed retroactive pension increases on state workers, while CalPERS and the other major public pension funds gifted government employers with contribution “holidays.” CalPERS told the Legislature that these arrangements would be almost cost-free, thanks to “the booming stock market.” But when the markets crashed, the pension funds landed deeper in the hole than anyone had anticipated.


The stock market collapse in 2000 was nothing. By the way, we’re due another market correction.

Back to Hiltzik:

The burden of making up for their mistakes is borne by employees — especially newly hired workers, who are relegated in almost every pension “reform” to a lower-cost second-tier retirement system with skimpier benefits than their seniors. That’s the remedy embodied in a 2013 statute that instituted less-generous pensions for new employees and raised their contributions to at least half the costs of their pensions. The Legislature also barred retroactive benefit hikes and set CalSTRS on course to eliminate its entire unfunded liability over the next 30 years.

Wellll, if the old employees would be allowed to get their benefits whacked, there might be something there for the new employees, eh?

Okay, let’s do bottomline: when the money runs out, as per Stockton, the state constitution does bullpuckey for making sure those pensions get paid.

So why not have the employers contribute more?

They have been contributing more. Don’t tell me 6.2% of payroll to pay into Social Security is scary – if they whack pensions, 6.2% comes easily out of the current contribution rate.

Hell, if they paid 6.2% into SocSec, and then the 12.6%-ish balance into a DC plan, the employees would be sitting fairly pretty.

Of course, with DC plans, they couldn’t get away with the bullshit contribution holiday as you see with the contribution history from 2001 – 2003. There is no excuse for that.


With DC plans, the costs are predictable, and while fund management fees can get onerous, there is more transparency than ever for 401(k)s and the like. Personally, I pick ETFs with very low management fees for my savings. I don’t pretend to be able to beat the market.

And yet, DB plans do.

Any puzzlement?

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