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Thursday, February 24, 2011

CA - The Little Hoover Commission

To cover the story that the press isn't covering, here is The Little Hoover Commission's report on CA public pensions. The Little Hoover Commission was founded in 1962 and has statutory responsibilities in CA; by law it is bipartisan.

Their recommendations are to cut pensions for current retirees to make up the shortfall and stop stupid practices such as using short-term gains as a reason to stop the pension contributions. The report is 106 pages, so I am just going to post their main recommendations:
Recommendation 1: To reduce growing pension liabilities of current public workers, state
and local governments must pursue aggressive strategies on multiple fronts.
- The Legislature should give state and local governments the authority
to alter the future, unaccrued retirement benefits for current public
- State and local governments must slow down pension costs by
controlling payroll growth and staffing levels.

Recommendation 2: To restore the financial health and security in California’s public
pension systems, California should move to a “hybrid” retirement model.
- The Legislature must create pension options for state and local
governments that would retain the defined-benefit formula – but at a
lower level – combined with an employer-matched 401(k)-style
defined-contribution plan.
- The 401(k)-style component must be risk-managed to provide
retirement security and minimize investment volatility.

Recommendation 3: To build a sustainable pension model that the public can support,
the state must take immediate action to realign pension benefits and expectations.
- To provide more uniform direction to state and local agencies, the
Legislature must:
- Cap the salary that can be used to determine pension allowances,
or cap the pension, at a level that is reasonable and fair. Once
the employee exceeds the threshold, employees and employers
could make additional retirement contributions into a riskmanaged,
401(k)-type defined-contribution plan.
- Set appropriate pension eligibility ages to discourage early

retirement of productive and valuable employees.
-Set a tight definition of final compensation, computed on base

pay only, over a five-year average to prevent and discourage
pension “spiking.”
- Set uniform standards for the maximum hours that retirees can

return to work and continue to receive public-sector pensions.
- Set uniform standards and definitions for disability benefits.
- Restrict pension allowances to exclude service in an elected office.
- Eliminate the purchase of “air time.”
- Strengthen standards for revoking or reducing pensions of public
employees and elected officials convicted of certain crimes
involving the public trust.
-To minimize risk to taxpayers, the responsibility for funding a
sustainable pension system must be spread more equally among
- The Legislature must prohibit employees and employers from

taking contribution “holidays,” except under rare circumstances.
- The Legislature must prohibit retroactive pension increases.
- The Legislature must require employees and employers to
annually adjust pension contributions based on an equal sharing
of the normal costs of the plan.
- State and local governments must explore options for
coordinating pension benefits with Social Security.

Recommendation 4: To improve transparency and accountability, more information
about pension costs must be provided regularly to the public.
- The Legislature must require government retirement boards to
restructure their boards to add a majority or a substantial minority of
independent, public members to ensure greater representation of
taxpayer interests.
- All proposed pension increases must be submitted to voters in their
respective jurisdictions.
- The ballot measures must by accompanied by sound actuarial
information, written in a clear and concise format.
- The Legislature must require all public pension systems to include in
their annual financial reports:
- The present value of liabilities of individual pension funds, using
a sensitivity analysis of high, medium and low discount rates.
- The government entity’s pension contributions as a portion of the
general operating budget and as a portion of personnel costs,
trended from the past and projected into the future.
- The State Controller must expand the Public Retirement Systems
Annual Report to include the above information. Administrative fees
to pension systems should be considered as a funding source to
support actuarial expertise and the timely production of the report.
- The Legislature must require pension fund administrators to improve
procedures for detecting and alerting the public about unusually high
salary increases of government officials that will push pension costs
Some of this is just pure dynamite, especially the part about submitting pension increases to a vote. You think WI unions are upset - this will produce a reaction akin to that which would occur if the Japanese air force poured acid on Godzilla.

Oh, and a footnote:
It is important to note that the Commission did not examine retiree health care costs as part of its pension study. The Commission would like to acknowledge the extensive work of the state Public Employee Post-Employment Benefits Commission, which stressed the need of current workers and employers to share in the responsibility of pre-funding retirement health care costs.
The report is not all unfavorable to the workers, though. It is worth reading to see the games that politicians have played:
During a weak economy that cut into state revenues in the early 1990s, Governor Pete Wilson proposed using $1.6 billion from CalPERS’ accounts to help balance the state budget. Wilson also called for giving the Governor the authority to appoint a majority of CalPERS board members, as well as to control actuarial projections, which are used to determine liability levels and state payments into the pension fund. The Legislature agreed to the changes in 1991 with AB 702.10
That move was blocked by Proposition 162. I thought I'd just throw that in to show that the referendum system in CA has been used at times to address governmental irresponsibility. As the report notes, CA's public retirement system is overall much better off than that of some other states. Still, CalSTRS is going broke around the original SS break time - 2040. And some of the cities are in deep, deep trouble.

Just for fun and because I'm evil, CA set up a website so that concerned citizens can look up salary and compensation for local officials. And here is a DU thread on this report.

Trillions for banks, but not one cent for workers.
Gut pensions, gut SS, assault the minimum wage,
and increase the cost of living. Good thing free trade
has brought us so many benefits.
California serfin'
- All proposed pension increases must be submitted to voters in their
respective jurisdictions.

I wonder how the government employees would vote.

" California serfin' "

is bumper-sticker material!!!
I read the Little Hoover report some time ago and thought it was a good read. Yet it fails to talk about the overall public sector debt levels and how the alliance of corporate interests merged so easily with public and private unions creating the current problems and it certainly did not touch upon the role of powerful forces such as Stanford University and other esteemed public and private members of the economic hierarchy in creating the illusion of endless California growth. The creation of large public pension plans was based on rosy investment and tax schemes pushed along by financial service advisors, commercial construction industry, and rural land owners. Central to these schemes was the idea that a tax base could be created that would support not only public pension payouts but carry the bond debts for the massive suburban/urban housing expansion that would led to new jobs and of course forever rising home values all combining to generate some sort of super duper economy.
The end results of this California dreaming will be more then public pension shortfalls as the continued decline in tax revenue will at some point spark a panic in the bond market. The forces that created most of this mess are still busy pushing various public-private growth schemes such as green energy or high speed rail or more housing tracts in the boondocks so the fat lady has yet to made an appearance but clearly there are more to this story then public sector Unions dipping into the public pocket.
I notice one commenter pointing out on the DU thread you linked that during the boom years, the state and many local governments ceased paying into the pension funds at all, because of stock market growth.

Government workers feel that they're being blamed for the incompetent decisions of their political masters, and to a large degree they're right. Too many politicians have made promises and deals they can't back up, in the knowledge that by the time the reckoning came, they'd be long out of office.

How we stop this from happening now and in the future — that's the trick.
Matthew - I think I linked another report on this blog before, but maybe not. Anyway, the way the CA system works is weird even for a pension system. They stop contributing when things are booming and then contribute much more during the inevitable pullbacks.

The government side would have contributed less overall if they had just made a steady contribution, and the result would have been better.

There's a problem and a pending reform of government pension accounting. It's been stalled (wonder why) for quite a while. Instead of going for the higher returns (8%? on pensions) the idea is to go for lower, far more certain returns and to calculate funding more realistically (basically to come a lot closer to the private standards).

It seems as if big parts of our economy were predicated on a never-ending boom.

I sat down and did some basic math on CALPERS. Using a reasonable rate of return, neither the employees nor the government made contributions large enough to generate the fund needed to support the last big step-up in benefits.

The irony is that California is in better shape than many states. Maybe it's just that CA is so large that people focus on it.

The other, much larger, problem for CA is medical and long-term care benefits for public retirees.

Another issue is the very simple one of demographics. Defined benefit schemes really only worked with a rapidly expanding population and a rapidly expanding base of employment. As soon as the working base stabilizes they are pretty much all in trouble unless the promised individual benefit is quite low and the contribution rates are high.
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