Posted on 01/07/2009 4:34:45 PM PST by SmithL
When the city of Vallejo filed for bankruptcy last year, it made national news. Among claimed reasons for this financial debacle was, as usual, Proposition 13. Same urban myth, different city.
Recall that Proposition 13 was also blamed when Orange County went bankrupt, in spite of clearly documented evidence of the Orange County treasurer's criminal wrongdoing and the fact that he used an astrologer to assist him in making investments. In some quarters, it is always Proposition 13's fault when government runs short of money.
Nor is Proposition 13 culpable in Vallejo's budget shortfall. During more prosperous times, Vallejo promised its employees compensation packages it cannot now afford to pay. And that is just the good news.
Vallejo's predicament is not unique and may be the harbinger of many community bankruptcies.
The California Public Employees' Retirement System is now warning California's cities that they may have to cough up more money to cover retirement and other benefits that CalPERS provides for 1.6 million state workers, reports the Wall Street Journal. Some cities are already cutting municipal services, and they are blaming CalPERS, not Proposition 13.
"CalPERS could bankrupt us faster than anything else," Dan Cort, mayor of Pacific Grove, has been quoted as saying.
According to the Journal, CalPERS has lost almost a quarter of the $239billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund's distress, but less well known is that CalPERS makes extensive investments in real estate - investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money.
Now that real estate has tanked, CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year that will end in June.
"The use of debt is unconscionable," county Supervisor John Moorlach told The Orange County Register in commenting on CalPERS' mismanagement. Moorlach is the former county treasurer who predicted that the unsound investment practices of his predecessor would result in bankruptcy.
Essentially, CalPERS officials rolled the dice and lost, but the burden will fall on the taxpayers.
Currently, the average employer contribution rate for public entities is 13 percent of payroll. However, if CalPERS' assets are down just 20percent at the end of the fiscal year, it would trigger an increase in payroll costs of 2 percent to 5 percent, the Journal reports. This could have a major impact on city, county and state budgets already out of balance.
Of course, this train wreck has been predicted for decades. When politicians sell out to public employees' unions by guaranteeing a generous, defined-benefit retirement - when any retirement fund shortfall must be made up by the taxpayers - the disastrous results are easy to predict. Haven't any of these people ever heard of economic cycles? There is a compelling reason why the private sector has transitioned from providing a defined contribution to individual retirement accounts each month. (Except, of course, the American auto industry, and look how well it's done).
When governments are in crisis, the Proposition 13 critics always ignore the elephant in the room: the cost of public employee compensation, benefits, and especially costly pensions - something Internet blogger Jack Dean calls the "pension tsunami" due to the problem's size and onrushing consequences.
So next time someone blames Proposition 13 for the problems of struggling governments, that person is using the wrong "p" word.
The correct word is "pensions."
If taxpayers can not pay taxes for the pensions, perhaps they can be forced to work for free for state employees as their personal slaves for, say, 6 months out of year.
After that ‘citizens’ will be ‘free’ to do as they please until the next ‘voluntary slavery’ period.
Fur Shur, their buddies with the ash and trash, paving, and maintenance contracts are sure not going to suffer any changes ("white graft" is what it's called).
In recent decades they've avoided raising taxes by rolling forward the payout to the employees for work performed by assigning the additional costs to the retirement system.
As Obamasama's buddy, Reverend Wright would say "The chickens come home to roost"!
Your post implies that public employees have earned these outrageous pensions. Public employee unions and pension agencies have duped the public into believing that past contribution rates were sufficient to fund these pensions. The public has been mislead about the compensation value of the pensions. Public employees are receiving huge windfalls that the taxpayer can no longer afford. Public employees have highly subsidized early retirement. Public employees need to work to normal retirement age (65+) just like most private sector workers.
The highest priced pensions are not determined by pension boards or in negotiations with employee unions.
Your run of the mill staff people, firemen, police, public health nurses, school teachers, and so on constitute the overwhelming majority of (non-federal) public employees.
Their pensions are usually quite in line with private sector pensions for people in the same broad economic zone, plus consideration of risk and use of "youth and vigor".
To a considerable degree their contributions pretty much end up paying for their own pensions ~ which are not inheritable! When you get right down to it a lot of public pension plans, from the viewpoint of the so-called "beneficiaries", are not a really good deal ~ simply buying t-bills in a 401(k) would be worth far more in the end.
The thing that kills these pension plans falls in two categories ~ (1) improper, and sometimes even criminal, investment of the funds used to back them up. (2) payment of very high pensions to people at the top who may well have the shortest time in grade, or even in the system.
BTW, none of the really well managed pension plans ever take the "surplus" earnings and refund them to the employees.
Adhering to the principle that your employees came there for the total compensation package, which includes the pensions, it is certainly unconscionable if the employer fails to fund the pensions. That's just like not paying the agreed salaries or wages.
It is equally unconscionable for a town board to dip into the employee pension plan to promise a top executive a juicy pension for which no additional payment has been made by the town board. It's called "theft" and their left hands should be severed, and their heads mounted on polls in front of the town hall of course.
What we need first is enforcement of current law regarding fiduciary responsibility, followed up with prosecutions and executions as required. Then we can get around to what's going on with the rank and file.
same thing happened here in NY when the dot com bubble burst. Since state employee pension fund is guaranteed to grow, any loss is covered by new taxes. I believe Carl McCall could explain further. The only way to get by in this state is to work for the state or not work.
You are misinformed perhaps intentionally. Are you a recipient of a public employee pension?
Public employee pensions are far more generous than the typical private sector pension. Almost every private sector pension that is close in benefit levels to public employee pensions has failed. In addition, defined benefit pensions have almost disappeared from the private sector because the pensions are too costly. The auto worker pensions are technically in default but the rats will not let the pensions fail.
Here is a simple comparison to demonstrate the difference between public and private pensions. My dad retired at age 60 from GE in 1986 after working 33 years. His last salary was more than $40,000. His highest average salary calculation (over the last 3 years) would have been about $38,000. He received a pension of $15,000 for life. GE does provide annual bonuses if the pension fund does well. He probably typically received $17,000. If he had retired as a Colorado PERA member, he would have been entitled to 77.5% of his highest average salary, about $30,000. PERA provides a 3.5% inflation adjustment. Over 20 years the pension would have more than doubled. He would have had annual pension of $60,000 or more after 20 years of retirement. The present value of the two pensions at retirement is not even close.
If you have an open mind, please read my studies. I have collected the best data sets in the world about public employee pensions. You can find my most recent study at the Independence Institute website (http://www.i2i.org/main/page.php?page_id=55).
My Dad was a public school teacher for his entire adult life. He retired early at 55, and has been living on his full pension for 35 years, longer than his entire teaching career !
My father in law's employer was forced to replace their pension plan with buyout packages way back in 1975. He, unfortunately, was at the end of his very successful career, and took the buyout. He also retired at 55, due to severe diabetes.
My father in law died a few years later, basically penniless, as the government inflated the value of his buyout away. He contributed way more in his lifetime in terms of value to society, taxes paid, and put in way more hard work than my Dad, who basically sucked off the government teat for his entire life.
The system now rewards government patronage, and discourages productive work. As such, it cannot stand.
An aside, but worth mentioning, was the pure courage and refusal to ever give in to what many would call a well-deserved bitterness over this maltreatment by my Father-in-Law. He never once complained nor demanded his due, but simply prayed that he would be able to give everything with love as Jesus did.
He was truly a great man.
As you know FEDERAL employees, if not others, have always contributed a substantial percentage of their salaries to their pension fund. If I'd done nothing but take that money and put it in T-bills over the period of my employment, I'd have a fund sufficient to pay my current pension(s) as well as finance increases to meet cost of living increases and any foreseeable inflation.
At the same time my agency paid money into that fund, but my own contributions by themselves have been sufficient to carry the entire load.
That pension is not inheritable. It doesn't become part of the family's wealth ~ just mine.
What that means is that there's a surplus somewhere and it's paying for somebody else's pension.
As best I can determine the surplus derived from investment of my contributions, as well as the agency contribution, goes to pay for Congressional pensions, and for the pensions of people at the top end of the federal civil service ladder. After all, it is easy to demonstrate that those in the SES and appointee levels of pay could not have possibly contributed sufficiently to pay their own way, so it has to come from somewhere ~ and that somewhere is the CSRS and FERS systems, not out of the General Revenues.
Your father's pension doesn't appear to have the UAW clause in it so beloved of the automotive industry ~ that's the one where you get a company pension that is offset by the amount you receive from Social Security.
The federal retirement plan (FERS) is much different that the plan for many states. I have not analyzed FERS so I do not have any conclusions about the deferred compensation in FERS. The benefit rate (1% to 1.1%) makes it appear that FERS benefits levels are much lower than many state plans with a 2 to 2.5% benefit rate. However there are some additional benefits for federal employees that moderate this perception:
- Federal employees contribute only 0.8% to FERS. In Colorado, public employees contribute 8%.
- FERS provides an additional retirement amount until age 62 for the amount of early retirement social security benefits.
- FERS provides a cost of living adjustment with an unlimited upside inflation adjustment for inflation above 3%.
- The federal government provides a 5% match for the federal 401K plan. Thus federal government employees receive both a defined benefit plan and a defined contribution plan with large employer funding.
- A number of states do not tax federal pensions.
Unfortunately, federal pensions are not funded. The federal government funds pensions from current tax revenues. In this sense, federal pensions are much worse than state and local government pensions.
On the other hand, private pension funds with substantial holdigs in T-Bills are not usually referred to as "unfunded".
Note that the current FERS system that replaced CSRS requires a lower contribution level. This is because Social Security was made mandatory for federal employees covered by FERS AND, lo and behold, the 2% annuity computation factor was replaced with a 1% annuity computation factor. FERS, technically speaking, isn't as good as CSRS. At the same time the government substituted a government equivalent to a 401(k) plan as part of the reduction in federal pension costs.
You do realize that the actuaries determined that FERS was a dramatically less costly retirement system than CSRS and it saved the government billions of dollars.
BTW, the bit about some states not collecting taxes on federal pensions applies to only part ~ right now it’s about $10,000 per annum in Virginia. At the same time the federales do not tax state pensions.
State pensions are tax deferred not tax exempt. Retirees must pay federal income taxes on their pension benefits. Most states have opted out of Social Security however. I wish the rest had the same option.
Things went fine for years and no one paid any attention to the deal and then some federal employees discovered that Virginia and North Carolina were taxing them improperly on their pensions.
Court cases were created, someone one, laws were changed, and now states that don't tax their own pensioners don't tax the federales to the same extent.
Everyone is happy except the employees (now that they know what the law was "way back when").
Is there a requirement that the federal fund could only hold TBills?
You do realize that the actuaries determined that FERS was a dramatically less costly retirement system than CSRS and it saved the government billions of dollars.
I am not aware of the details of CSRS. I accept your assertion that FERS is less costly to the employer. Still, the replacement for CSRS costs the employer 16.2%. In addition, the federal government must pay the employer share of Social Security tax. Compare the 16.2% to the average of 4% that private workers receive for their 401Ks. The ERISA law allows private employers to siphon a hefty asset charge (0.5%) for administrative fees, not fund management. Your TSP and my 403B do not suffer that administrative asset charge.
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