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Day of Reckoning on California Pensions?
The LA Times posted an editorial, Day of reckoning on pensions:
The
housing bubble and subsequent Wall Street collapse wreaked havoc on
the nation's retirement savings, as many pension funds and 401(k) plans
suffered losses of 30% or more. State and local governments are now
facing huge unfunded pension liabilities, prompting policymakers to
scramble for ways to close the gap without slashing payrolls and
services. But a new report from the
Little Hoover Commission in Sacramento makes a more troubling point:
Many state and local government employees have been promised pensions
that the public couldn't have afforded even had there been no crash.The
commission's analysis of the problem is hotly disputed by union
leaders, who contend that the financial woes of pension funds have been
overblown. The commission's recommendations are equally controversial:
Among other things, it urges state lawmakers to roll back the future
benefits that current public employees can accrue, raise the retirement
age and require employees to cover more pension costs. Given that state
courts have rejected previous attempts to alter the pensions already
promised to current workers, the commission's recommendation amounts to a
Hail Mary pass. Yet it's one worth throwing.A bipartisan, independent agency that promotes efficiency in government, the Little Hoover Commission
studied the public pension issue for 10 months before issuing its
findings Thursday. Much of the 90-page report is devoted to making the
case that, to use the commission's blunt words, "pension costs will
crush government." Without a "miraculous" improvement in the funds'
investments, the commission states, "few government entities —
especially at the local level — will be able to absorb the blow without
severe cuts to services."The problem is partly demographic.
The number of people retiring from government jobs is growing rapidly,
and longer life expectancies mean that a growing number of retirees will
collect benefits for more years than they worked. But the report
argues that political factors have been at least as important in
driving up costs, starting with the Legislature's move in 1999 to
reduce the retirement age for public workers, base pensions on a higher
percentage of a worker's salary and increase benefits retroactively.
The increases authorized by Sacramento soon spread across the 85 public
pension plans in California.Compounding
the problem, the state has increased its workforce almost 40% since
the pension formula was changed and boosted the average state worker's
wages by 50%. Local governments, meanwhile, raised their average
salaries by 60%. Much of the growth came in the ranks of police and
firefighters, who increased significantly in number and in pay.There's
nothing inherently wrong with generous pension plans. Pensions, after
all, are just a form of compensation that's paid after retirement, not
before. The problem, particularly for local governments, is that the
plans are proving to be far costlier than officials anticipated or
prepared for. By their own reckoning, the 10 largest public pension
systems in California had a $240-billion shortfall in 2010.When
the funds don't have enough money to cover their long-term liabilities,
state and local governments are compelled to increase their
contributions. In Los Angeles, the report says, the city's retirement
contributions are projected to double by 2015, taking up a third of the
city's operating budget. It projects that governments throughout the
state will have to raise their contributions by 40% to 80% over the next
few years, then maintain that higher rate for three decades.The
more tax dollars governments have to devote to pensions, the more
they'll have to take from other programs or from taxpayers. That means
more layoffs or pay cuts for public employees, higher taxes, fewer
services, or all of the above.
The situation won't be so dire
if the plans earn more on their investments than expected. But with the
plans typically counting on annual returns near 8%, or twice the
"risk-free" level suggested by some analysts, it seems just as likely that they'll earn less than that, forcing local governments to contribute even more.The
Legislature and some local governments have sought to ameliorate the
situation by reducing benefits for new hires and persuading current
workers to contribute more to their pension funds. The commission's
report, however, argues that these moves aren't sufficient. The savings
from the lower pensions for new employees won't be realized for many
years, and the increased contributions aren't nearly enough to close the
funding gap.The only real solution, the report contends, is to
reduce the benefits that current employees are slated to earn in the
coming years. That's hard to do. California courts have held that
pensions for current employees can be increased without their approval,
but not decreased unless they're given a comparable benefit in
exchange. Nevertheless, the commission calls on the Legislature to give
itself and local governments explicit authority to trim the benefits
that current employees have not yet accrued, without touching the
amounts they have already earned. It also calls for a hybrid retirement
plan that combines a smaller pension with a 401(k) plan and Social
Security benefits, as well as the elimination of a variety of loopholes
used to inflate pensions.The commission is right about the
importance of reducing the liabilities posed by current employees. And
though picking a fight with unions over unilateral reductions in
pensions probably isn't the solution, the report should persuade both
sides to do more at the negotiating table to prevent pension costs from
swamping state and local budgets. As the commission notes, public
employees in California enjoy some of the most generous pension plans
in the country. Those plans won't do them much good, however, if their
employer can't afford to keep them on the payroll.
You can read the Little Hoover Commission's report
for details. It basically sounds the alarm on pensions and states
outright: "pension costs will crush government". From the report:
The
problem, however, cannot be solved without addressing the pension
liabilities of current employees. The state and local governments need
the authority to restructure future, unearned retirement benefits for
their employees. The Legislature should pass legislation giving this
explicit authority to state and local government agencies. While this
legislation may entail the courts having to revisit prior court
decisions, failure to seek this authority will prevent the Legislature
from having the tools it needs to address the magnitude of the pension
shortfall facing state and local governments.The situation is
dire, and the menu of proposed changes that include increasing
contributions and introducing a second tier of benefits for new
employees will not be enough to reduce unfunded liabilities to
manageable levels, particularly for county and city pension plans. The
only way to manage the growing size of California governments’ growing
liabilities is to address the cost of future, unearned benefits to
current employees, which at current levels is unsustainable. Employers
in the private sector have the ability and the authority to change
future, unaccrued benefits for current employees. California public
employers require the ability to do the same, to both protect the
integrity of California’s public pension systems as well as the broader
public good.Freezing earned pension benefits and re-setting
pension formulas at a more realistic level going forward for current
employees would allow governments to reduce their overall liabilities –
particularly in public safety budgets. Police officers, firefighters and
corrections officers have to be involved in the discussion because
they, as a group, are younger, retire earlier and often comprise a
larger share of personnel costs at both the state and local level.
Public safety pensions cannot be exempted from the discussion because of
political inconvenience.
There is no doubt that pension
reforms are needed in California and elsewhere in the US. But all
stakeholders need to do their part. It's not just about cutting
benefits. How about amalgamating all these dinky underfunded city plans
into one large defined-benefit plan and introducing better governance on
existing large plans, including better compensation for pension fund
managers.
Finally, I invite readers to carefully go through a recent presentation by Jean-Claude Ménard,
Chief Actuary of Canada, to the Board of Directors of the Canada
Pension Plan Investment Board. I quote Mr. Ménard: "Overall, the
results confirm that the current legislated rate of 9.9% is sufficient
to sustain the Plan over the long term, with assets projected to
accumulate to $275 billion by the year 2020."
If US states want to bolster their public pension plans, I urge them to contact the Office of the Chief Actuary of Canada.
I consider this to be one of the best departments in the federal
government of Canada made up of truly top-notch professionals who take
great care in researching their findings. Moreover, they are transparent
and welcome exchanges with actuaries from around the world. There is no
reason why US public pensions can't be fixed. All the doomsayers who
want to scrap public pension plans are just peddling fear and nonsense.
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Not really, let them burn the state down, eat shit, and die. Starting over may be the best thing to do.
Why do you think so much money has been pumped into the markets? Can you imagine how chaotic the US would be right now if the markets had continued to deteriorate and everyone’s pension and 401K continued to mount losses? The psychological damage would be irreversible to the nation's sheeple. Unfortunately, the day of reckoning is coming, and the can can only be kicked up the hill so far. The size of the coming shock will be even worse than if they had let the system untangle itself naturally; but we have a government of enablers that are too stupid.
"Can you imagine how chaotic the US would be right now if the markets had continued to deteriorate and everyone’s pension and 401K continued to mount losses? "
He he he, wait till they're confiscated. It's gonna give "chaos" new meaning :)
Oh noes....who will save us from the angry boomers and geriatrics slowly weaving their way toward Washington in RVs?
What do you give the Government that's taken everything?
"Dreams Come Due, Government and Economics as if Freedom Mattered",
ISBN: 0-671-61159-3, by John Galt
The book is dated, but many of the things it talks about are still valid today.
"who is John Galt?" ;-)
- Ned
Unions and America’s Ill’s by Ed Ring | Union Watch | 02.10.11
EXCERPT :
[W]ealthy individuals are split relatively evenly in their political affiliations in America. For every billionaire who backs Republicans, there is a billionaire who backs Democrats – for every Koch, there is a Soros.
At the grassroots, however, something very different occurs. Because labor unions, which still command over 16 million members in the United States (ref. U.S. Census, Bureau of Labor Statistics), nearly always give money to union-friendly Democratic candidates and issues. If you estimate the average annual dues of a union member at $500 per year, this means unions in America have over $8.0 billion per year that they can spend any way they please. There is simply no source of grassroots political fundraising that comes anywhere close to the financial power of unions, and unlike every other grassroots political fundraising entity in America, union compel their members to pay union fees, which in effect means they compel their members to support their political activity. Our own analysis, Public Sector Unions and Political Spending, estimates that public sector unions in California spend over $250 million per year on political activity. The idea that any competing interest comes even close to that is absurd.
(President of the International Brotherhood of Teamsters, James) Hoffa goes on to suggest that “government employees did not blow a hole in any state budget…” He points out as an example that “the typical public employee’s pension is only $19,000 per year.” This is all simply inaccurate. Using California as an example, here is the true figure for pensions as reported by Daniel Borenstein in his February 5th column in the Contra Costa Times entitled “Public employee pensions much higher than advertised:”
“In fact, CalPERS data shows the average career public employee, who put in at least 30 years of service and retired in the 2008-09 fiscal year, collected a starting pension of $67,000 a year, or 2.5 times the advertised figure. The higher number is buried deep in the retirement system’s financial statement and never makes it to the promotional material CalPERS hands out.”
As for compensation, as noted in our post of February 9th, entitled “What Percent of California’s State Budget is Employee Compensation?” the average total compensation for a worker employed by the state of California is $106,000 per year, before increasing their pension contribution to reflect the higher contributions necessary to keep those funds solvent under the current benefit formulas. At least two-thirds of California’s state budget is to cover personnel costs…
American ills today may not be entirely attributable to unions, but to suggest that the drive to reform unions, public sector unions in particular, is nothing but “payback” to special interests who oppose unions is to ignore where the money is spent in politics, where the money is spent in the public sector, and how union control of public policy is distorting our financial markets and bankrupting our government.
http://unionwatch.org/
For every ActBlue or <job here> Workers Union, there is an AT&T, Goldman Sachs, NRA, or Natl Assoc of Realtors.
Pretending this is a one-sided fight is disingenuous at best. It's too bad the people who actually wanted to put limits on this crap from both sides were voted out in favor of TeaParty fools owned by the Koch-suckers who are very much interested in profiting from the ensuing privatization this union-busting crusade will bring.
Yeah, overly powerful unions are bad, but politicians sold out to the bailout receivers are even worse. Well done TeaPotDomeExpress: you've got your Warren G. Hardings in place now.
False comparison. If unions can give $8 billion (a questionable figure in its own right, since that assumes the entire amount of union dues can be used as political contributions, and nothing is needed to actually run the union itself), how much more can corporations contribute? Take any group of companies - say, IBM, XOM, GE, GS - and total their contributions. $8 billion would look like small potatoes, I'd guess.
Better to look at the Canadian system. About 10 years ago, outgoing PM Jean Chretien, in a fit of pique aimed at undermining his long time rival, Paul Martin (whose cabal spent years plotting for Chretien's exit, and not because Cretin (sic) had any interest in the public good) made some stunning changes to the electoral contribution progress. No more contributions from any organization - union, corporation, PAC, whatever - would be accepted. Only individuals could contribute, and only to a limit of $1,100 per year. That $1,100 was a total cap, which the individual could divide between the individual riding association, the national party, or a candidate as he/she saw fit. All parties receive a federal subsidy of about $2 Cdn per year per vote they received in the past election. For some parties, notably the separatist Bloc Quebecois, this federal subsidy provides the bulk of their funding.
The results didn't pan out quite the way Cretin had intended (quel surprise!). As readers here might have expected, the Conservative party proved much better at outreach and effectiveness, and have risen considerably more money than any of their counterparts. The socialist NDP, which used to depend heavily on union donations, now bumps along. The then-ruling Liberals (who classify themselves as "centrists", but would be perceived to be to the left of the Democrats in the US) depended on fat contributions from corporate Canada, who expected to be repaid in the form of government work and/or the maintenance of their oligarchies (e.g. Cdn banks, telecom providers, media, etc.). Those contributions have now disappeared, and it appears that grass-root Liberals have neither the funds or the inclination to support their party (or, as many Conservatives snicker, the Liberals are so inept that their fundraising is amateurish and not cost-effective).
Broken free from union/corporate funding, the Cdn electoral finance scene shows the Conservatives, with most donations received less than $200, raising a whopping $17 million (Cdn population is about 33 million), while the Liberals raised $6m and the NDP $4m. I suspect in the US you'd see the same results in unions/corps/PACS were left out of the process - about 60% of money raised from individual Americans would go to Republicans, about 40% to Democrats.
KB:
well, we know that GE (Immelt), GS, GOOG, AAPL etc. are already on the Statist side of the discussion, so your comparison fails a bit. GE et al. align well with your e.g. Cdn banks etc.
N'est ce pas?
- Ned
Ed Fine of Union Watch writes :
“Yesterday (February 9, 2011) the Detroit News, as part of its “Labor Voices” series, published a guest editorial by the President of the International Brotherhood of Teamsters, James Hoffa, entitled American ills not caused by unions. In this editorial Hoffa made many statements that require a rebuttal, starting with this: ‘Across the country, new governors and new legislatures are demanding cuts to jobs, pensions and concessions from public employee unions. Their demands are nothing more than payback for the billions of dollars that the ultra-rich have poured into political campaigns.’
“What Hoffa ignores is the political fundraising reality in America, which is that corporations are split relatively evenly between those who will back union reformers – usually Republicans -- and union protectors – usually Democrats. Corporations hedge their bets. Very few large corporations openly challenge the union agenda, or even have reason to, since unionization drives off emerging competitors.”
++
An eight percent real return is impossible in the next ten years. Attempts to take on extra risk to up the returns by using an all stock portfolio with heavy doses of emerging market stocks will likely backfire and make the problem worse.
You have given us the most optimistic scenario possible with an 8 percent expected real, not nominal, return. It will be more like
6.5 percent realistically.
Why were they either incredibly stupid or incredibly cynical to leave california this ticking time bomb? These promised benefits cant be paid. It doesnt matter if the courts order them paid.
I suspect very few people in california know this, and the people who do such as jerry brown wont.come out and say it.
pensions could do much better than 8% by buying gold, but the criminal syndicate of bankers would have a fit, ie not allow it; and i've heard as little as 50 Billion could buy all the privately held above ground gold in the world
You mean -6.5% right? I'm talking real returns, purchasing power. If the market goes up 6.5% and inflation hits 10% how well did your pension fund do?
Any positive returns absent high inflation is a rosy scenario.
Gov. Moonbeam was handed an exploding cigar; actually, he packed some of the explosives into it himself!
so after years of people paying into those pensions, now, all of a sudden, the government can't afford to pay out the benefits ! ? didn't they know for years that this day of "pay out" was coming ? ........ or is it the fact that WALL ST. DELIBERTELY TARGETED & LOOTED PENSION FUNDS / DUMPING THE RISK WITH THE PENSION FUNDS / SELLING THEM WORTHLESS PAPER ! GOLDMAN .
enough said.
The "looting" of pensions had little to do with Wall Street. The public sector pension scam is a money-laundering system, between the politicians who benefit, and the unions. The politicians agree to outrageous payments and conditions, the union members pay dues, and the dues contribute to the politicians re-election campaign. Couldn't be much simpler.
Well, no, it can't.
It's sort of a like a private company, that had a pension plan, that had a corrupt board that ran it, that looted the retirement plan, to make the company look more profitable.
This is what happens when nobody does any work to oversee the government. It's the public service employees fault - after all, I have to make certain the companies I work for have a future before I consider working for them long term.
and for the case study of how wrong things can go, look at Illinois, they are up to 1 year late paying most of their bills, medicaid, medicare, contractors....pensions will be next
so after years of taxpayers paying into those (government) pensions ...
Fixed it.
Public sector jobs have morphed into a political force. It's not about jobs anymore. The social contracts they've carved out for themselves can no longer come true. The sound from Wisconsin and Europe is the sound of the Utopian promises of the social welfare state being broken.
Right to collective bargaining? What about the more basic plain Jane "Right to Work" without being forced to join a union? Make public union membership voluntary and don't make the states collect the dues for the unions. Let the unions collect their own dues and, if the unions are so great, people will stay in the unions and they'll be fine.
The real killer in the collective bargaining agreements they don't want to give up is the cost of the esoteric union demands: controlling room temperatures, color of classrooms, classroom sizes, number of copy machines, gaming the overtime and substitution rules, etc. We have to spend extra billions on new schools (w/ union labor) just to accomodate strict union imposed class sizes. Big bucks. Detroit is now closing 50% of their schools -- it's all waste now, which could have helped the pension situation in MI.
The question is, who really runs these public systems? The people or the self interested unions?
"Con men understand that their job is not to use facts to convince skeptics but to use words to help the gullible believe what they want to believe. No message has been more welcomed by the gullible, in countries around the world, than the promise of something for nothing."
-- Thomas Sowell, 2010
and it's a good thing detroit closed half of there schools, cause they lost more than half of their population in last 15 years, so if they didn't i'd really be wondering what's going on!
I read there will soon be 60 kids per classroom. Try to imagine. I wouldn't go near one of those schools without a military escort.
There is no reason why US public pensions can't be fixed. All the doomsayers who want to scrap public pension plans are just peddling fear and nonsense. This closing seems to negate the original thesis
Sure, they're more concerned about room colors than healthcare benefits. Do you actually believe this retarded bullshit?
I think you miss the point. Unions, you see, are representative democracies. The Union Leaders, as the incumbents, have the primary objective of getting re-elected. So they must constantly promise more for the union members, and constantly seek more for the union, in order to continue to get re-elected. Whether its wages, health benefits, or control over interior decorating, its all about trying to appease the masses to get re-elected. This is a microcosm of Representative Democracies everywhere.
They were actuarily unsound to begin with. The california unions and politicians did this to themselves.
canaries fly out of coal mines and are ignored all the time...
http://www.ppic.org/content/pubs/rb/RB_498MBRB.pdf
The pressure to take excessive risk rather than honestly talk to the unions will result in more examples like you have shown. Eventually if the courts do not allow recission of benefits all the municipalities will have to declare bankruptcy. It only takes basic math skills to make.this conclusion.
Businesses are leaving CA and so are people; 2nd highest national unemployment rate; tiny fish more important than farmland that could feed millions; illegals cost the state billions; Parts of LA, Oakland are war zones.
California is the poster child for the Progressive entitlement society; going the way of failed Keynesian policy, its incestuous 1st cousin. The progeny of their mating has been and will be as ugly as Greece and Weimar combined.
The coming LA bankruptcy will result in a MENA situation in the US. The pampered in Westwood, Brentwood, and BH may have to, God forbid, arm themselves.
I've been putting together a list of predictions on what's gonna happen after the Great Implosion. Please feel free to contribute your own predictions:
No prediction seems too far out to me at this point in time!
How do you resolve high salary levels, pension problems, muni and treasury bond issues, housing values, goose the market AND institute austerity and higher tax rates with one easy policy? Inflation- 10 -20% over the next five to ten years will resolve everything and allow the wealthy to hedge against the losses in value.
If you are a salaried or by the hour worker, you will be screwed-repeatedly. SS and wages will be tied to the current CPI, that underreports inflation. TIPS will be a laughingstock.
I'm with you. Inflation will be the "deus ex machina". The sheeple will never figure it out. The dollar numbers on their paychecks and 401k's will LOOK good, so they'll be happy.
But we shouldn't pretend that the poor and working people are pure angelic beings. Yes, they are being victimized by the rich. But they refuse to learn about the world they live in, and they refuse to save or invest. As many wise observers of the human condition have pointed out, some people simply can't be saved from themselves.
No prediction seems too far out to me at this point in time!"
Ok, a great benign being comes down from the heavens and saves God's country ?
Is that one too far out, I noticed that You had not included it.
Quite the optimist, aren't you? :>D
That happens seven years after.
#6 Gun stores will be broken into and will be picked clean.
gun store owners have guns and employees with guns ...also unlimited ammo
most would LOVE to defend their store
target master even has full auto's on their racks
i could picture "every gun store sold out within a week...medium of exchange is gold,silver,canned food"
And when the molotovs set said establishments alight, they'll look hilarious fleeing from their ammo depot cum fireworks shows.
Imagine, 3 years ago you would be called a nut for saying stuff like this.
Now there are already a dozen examples that it's very well possible that this could happen.
""2. The prices for ALL commodities will double in less than a week.""
""5. Before a month has passed, riots in ALL major cities will break out as soon as food runs out in ALL the supermarkets and cannot be found""
...Revolution.....Starve the Government...Pay No Taxes....Citizens close everything down...
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/02/only-way-to-win-revolutionstarve.html
You would have been burnt at the stake under the Hapsburgs. As for the Vancouver tourist office agency you can be sure they will never renew their contract with you. You may even have to emigrate to the USA...
""You would have been burnt at the stake under the Hapsburgs. As for the Vancouver tourist office agency you can be sure they will never renew their contract with you. You may even have to emigrate to the USA...""
I thought i was a Hapsburg.
Unfortunately, Vancouver will likely need a Navy to protect access by millions of the World's Refugees.
10. During the second month, ALL Govt employees will become defacto targets of looted enraged private-sector taxpayers.
Fixed it.
Excellent! analysis of California. It has been said that if all states were family relatives, California would be known as "weird old Uncle Frank."
“The $1 million to $2 million in annuity value that more than a million non-public safety employees in California will receive through their pension programs in their middle fifties to early sixties similarly makes most California public employees de facto millionaires by their middle to late fifties. Frequently, California public employees, particularly in public safety, pay less than half or even nothing toward the employee’s portion of retirement programs for the benefits they will receive.”—California Center for Public Policy
http://www.californiacenterforpublicpolicy.com/Reforming-Public-Employee...
California will be the first state to go Greek on us. It is.going to be pitiful watching that great state bankrupt itself with recurrent rioting and the productive population fleeing. At least voting with your feet is the ultimate check on out of control government.
When the voter-with-his-feet leaves California for fiscally conservative North Dakota, he may find that he doesn't like the weather so much. Maybe the best solution is a Doug Casey one. Live in the good climate. Citizenship and "residency" in a second location, and assets in a third location. Caution -- the local authorities may not approve.
Sucks for CA, but the reason they're the poster child for this mess is because some people are simply pussies about the weather. The frog doesn't stay in the pot nearly so long when it's -40 outside, or the mosquitoes are the size of dinner plates.
""California will be the first state to go Greek on us.""
..."The federal government's current authority to spend money expires on March 4. If Congress does nothing, it can't spend money"....
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/02/its-certain-us-govt-shuts-down-in-two.html