An easy solution to the teacher shortage

In today’s Washington Examiner I highlight the unfair burden public pension plans impose on today’s teachers and students.

A slice:

CCSD could boost teacher pay, at no extra cost, if lawmakers allowed it to modernize its retirement system — the Public Employees’ Retirement System of Nevada (PERS).

While CCSD pays PERS directly, teachers pay their share through salary reductions.

Consequently, as PERS costs skyrocketed — up over 36 percent since 2007 — to today’s all-time highs, CCSD was unable to raise salaries as much as they, and teachers, would like.

What’s most frustrating about this rate hike, however, is that it provides no additional benefit to the current teacher paying it. Instead, almost all is spent on paying down PERS debt — a function of a system which was designed to transfer the cost for the previous generation onto present-day teachers and taxpayers.

In other words, current teachers are receiving lower wages to pay for PERS past funding failures.

Be sure to read the whole thing here.

Teachers’ Unions Profit at Students’ Expense

At RealClearPolicy.com, I argue that reforming California’s terrible tenure laws will require understanding what created it, not merely wishing legislators act against their own self-interest.

Because experts cite teacher quality as the most important factor in student-learning, even those who are normally supportive of government unions have criticized their inflexible opposition to reform — as was seen in recent editorials from both The Los Angeles Times and The Sacramento Bee.

But simply to ask legislators to oppose one of California’s most powerful special interest groups is to ignore the very forces that got us here in the first place.

Read the full piece here.

Government unions profiting at the expense of others: California’s teacher tenure rules

Here’s a letter to the editor I sent to the Sacramento Bee in response to Teacher tenure debate ends with too little noise, August 23.

California’s teacher tenure rules — so harmful to students’ well-being that it “shocks the conscience” according to a Superior Court judge — is a truly shameful example of how government unions profit at the expense of others.

These terrible laws are the result of the special-interest effect: lawmakers serve those who can provide the most support to them — government unions like the California Teachers Association — over the public interest.

The basis for government unions rests on shaky ground as it is: the original labor movement was created to prevent the exploitation of workers by profit-hungry corporations. Because the government has no profits over which to negotiate, the case for unionization remains dubious. In California, elected officials are actually forced to sign union contracts.

Political self-interest guarantees that lawmakers serve special-interest groups. Instead of wishing this wasn’t so, Californians should ask themselves which is more important: government unions or their children?

Edited version of the above ran in today’s paper.

Don’t wait for next bankruptcy wave

A new op-ed published in the Vallejo Times-Herald highlights the devastating effects that the public pension crisis can have on communities. A slice:

When public pension systems miss their investment target, taxpayers are required to make up the difference, and the actions described above represent some of the hard choices that are facing local governments. Soaring pension costs have already forced many agencies to cut core services. In 2011, for example, the city of Stockton announced it was going to lay off 116 police and fire employees, before eventually filing for bankruptcy the following year.

Making the problem worse, the weakening market comes at a time when many agencies are already paying record-high contribution levels.

Presently, Vallejo is paying CalPERS a staggering 60 cents per dollar of police and fire officers’ salary in retirement costs, which is projected to rise to 75 cents in the next five years — in large part to help fund average $125,000 pensions for recent, full-career retirees, according to data from TransparentCalifornia.com.

Experts across the ideological spectrum have sharply criticized U.S. public pension systems for utilizing a funding strategy that is heavily reliant on investment returns. Scholars from the Brookings Institute, the American Enterprise Institute, the Federal Reserve Bank, the Federal Reserve Board, the Congressional Budget Office and Moody’s Investors Service all agree that public pensions are using inappropriately high discount rates that promote excessive risk-taking. Nobel-laureate professor William F. Sharpe was particularly blunt, describing the use of a 7.5 percent rate as “crazy” and based on “idiotic accounting.”

Public pensions prefer higher investment targets because they make their debt appear smaller. The downside is that they must average annual investment returns at that rate in order to be fully funded — a gamble far too risky to fund a guaranteed pension.

Be sure to read the full piece here.

Vallejo’s 2015 CalPERS pension payouts can be found here.

Unfunded liabilities in Marin County top $1 billion

Update 8/22/16: We have learned that the City of Larkspur adopted OPEB reforms earlier this year which were not reflected in the most recent annual financial statements used for this analysis. As such, they would no longer fall under the “room for improvement” category and, instead, move into the “best actors” category.

The combined debt of Marin County’s municipal governments is just over $1 billion, according to the most recent financial and actuarial reports provided by each Marin city and the County of Marin.

While clearly a tremendous burden, that number would have likely been even higher, were it not for the 2012/2013 Marin County Civil Grand Jury report, Marin’s Retirement Health Care Benefits: The Money isn’t Therethat thrust this issue into the public spotlight.

In compiling 2014 and 2015 figures to provide an updated assessment on the fiscal health of Marin governments, it was clear that several Marin governments had begun taking their retirement health care liabilities, or “OPEB” as they are often called, more seriously.

This analysis only focuses on the city and county levels of government, with the one exception of the Novato Fire District, which is also included. As such, the per capita unfunded liability numbers are much lower than they would be if the Marin school districts, special districts and other state governments were also included.

The below table provides a snapshot of where each Marin government stands as of their most recent financial report for the year ending June 30, 2015. The unfunded actuarial liabilities (UAL) reflects data from the most recent actuarial valuation, which was June 30, 2014 for the Marin cities enrolled in CalPERS and 2015 for the MCERA agencies. As the Novato Fire District primarily serves the city of Novato, despite being an independent agency, their figures were added to the City of Novato’s numbers.

Unfunded Pension and OPEB liabilities of Marin County governments

City Pension UAL OPEB UAL Pension Bonds Cont rate (FY17) Debt/Pop Debt/Tax Revenue
Mill Valley $21,571,747 $20,156,488 $4,730,000 24% $3,342 207%
Sausalito $17,240,592 $4,014,799 $0 38% $3,010 210%
San Rafael $140,800,000 $21,044,000 $4,490,000 61% $2,882 269%
Marin County $243,600,000 $294,375,000 $103,195,000 27% $2,540 284%
Corte Madera $12,648,198 $9,704,000 $0 40% $2,416 128%
Larkspur $8,958,418 $12,308,419 $0 27% $1,783 148%
Novato plus NFD $45,516,118 $15,940,690 $19,052,218 23, 49% $1,551 141%
Belvedere $2,440,678 $656,924 $0 19% $1,498 59%
Ross $3,009,265 $311,000 $0 26% $1,375 71%
San Anselmo $9,359,478 $1,628,827 $2,629,000 40% $1,104 101%
Fairfax $6,223,179 $835,400 $0 41% $949 97%
Tiburon $4,584,236 $3,470,787 $0 21% $899 124%

Glossary of Terms

  • Pension UAL: The unfunded liability as of the most recent valuation available (2015 for MCERA agencies and 2014 for CalPERS agencies.)
  • OPEB UAL: The unfunded liability for other post employment benefits (OPEB) — mainly retiree healthcare — as of the most recent valuation.
  • Pension Bonds: The amount outstanding on any pension bonds taken out by the respective government to pay down their pension debt.
  • Cont rate (FY) The aggregate contribution rate spent on pension costs for the current fiscal year ending June 2017. For example, an agency with total payroll of $100,000 and a 50% contribution rate must pay an additional $50,000 on pension costs to either CalPERS or MCERA.
  • Debt/Pop: The sum of the first three columns divided by the agency’s population, also known as a “per capita unfunded liability.”
  • Debt/Tax Revenue: The sum of the first three columns divided by the agency’s tax revenue.

Notable findings

Transparency: It was refreshing to find that all Marin cities make a tremendous amount of financial information readily available on their site. Given how small many Marin cities are, this is even more noteworthy, as many of their similarly sized peers statewide lag behind in this area.

A growing problem: Many Marin governments explicitly mentioned pension or OPEB liabilities as a growing strain in their annual financial statements, which is unsurprising given the size of these liabilities. Unfortunately, pension liabilities are set to climb higher, the result of both the Marin County Employees’ Retirement Association (MCERA) and the California Public Employees’ Retirement System (CalPERS) significantly missing their investment target last year.

Reforms tend to occur only when the problem becomes massive, increasing total cost: The Marin governments that took the largest steps towards addressing their liabilities were those with the largest amounts of debt. Naturally, this results in higher overall costs, as compared to if reforms were implemented earlier.

While most governments historically operated under a “pay as you go” system for their OPEB liabilities — this is similar to paying only the minimum amount due on a credit card debt — many have recently adopted a pre-funded approach, like what is required for traditional pension debt.

Best Actors

The two best actors in adopting these reforms were Sausalito and Corte Madera.

Sausalito spent $400,000 on a trust dedicated to paying down their OPEB debt, which immediately  dropped their UAL from $5.7M to $4.0M. Equally as important was the significant reforms to OPEB benefits by adopting a defined contribution plan for many employees.

Corte Madera also created a trust dedicated to funding OPEB liabilities, immediately dropping their UAL from $14.7M to $9.7M. Historic reforms implemented by the Town reduced costs for current members, while adopting a Health Savings Account plan for new members — an extremely efficient approach that other governments should seek to emulate, with both employees and employers likely to benefit from the switch.

The County of Marin also began pre-funded their OPEB debt and made reforms towards reducing the cost of promised benefits. Their use of a 27-year amortization period for OPEB liabilities is far too long, however, and encourages the practice of increasing overall cost while backloading that cost onto future generations.

San Rafael employs a 21-year amortization period for their OPEB debt and has been making the required payments over the past 3 years.

Mill Valley just began transitioning to a pre-funded approach, but failed to make the minimum required payment in earlier year. On 6/30/15 Mill Valley adopted a pre-funded approach with a payment of $867,000, which will significantly reduce their OPEB UAL when an updated actuarial report is released.

Fairfax has been paying over 100% of the ARC towards OPEB, a practice that will yield significant savings in the long-term, while Novato and the NFD have been consistently paying the full 100% as well.

Room for improvement

The remaining Marin cities — Tiburon, Larkspur, San Anselmo and Belvedere — are either still under a “pay as you go” plan or have not been paying anything close to the full ARC. More specifically, the contributions amount being made are either just the bare minimum required to pay that year’s promises, or when above, are significantly less than the growth in interest on the existing liability.

Of the four, Larkspur should move towards pre-funded as soon as possible, given the size of its current debt in relation both to population served and total tax revenue. By design, the “pay as you go” approach guarantees an increase in debt going forward.

Concluding Thoughts

There are several important takeaways to consider:

1. The single biggest driver of this debt is the excessive generosity of the benefits promised. Paying the full cost of health insurance for retirees and, in some instances, their spouse, without any explicit plan to fund this promise was extraordinarily reckless.

Indeed, Marin governments themselves readily acknowledge this as many adopted reforms that involved reducing the generosity of benefits provided to new hires. With pension costs alone costing Marin cities an extra 19 to 61 percent of pay (as compared to the 3% the median private employer pays) it should come as no surprise that exceptionally generous benefits, eventually, come at an exceptionally high price. Accordingly, those cities with comparatively less generous benefits, like Belvedere, find themselves in much better shape.

2. Political nature of governments makes them ill-equipped to provide defined benefit plans. The emphasis on the short-term at the expense of the long-term that is inherent to governments largely explains why reforms have only occurred in those areas worse off, while those cities in comparatively better shape delay reform — despite the multiple examples of what their future will look like presented to them by their neighboring cities.

3. Transparency makes governments more efficient. The combination of increased attention brought to these issues by improved reporting standards from the Governmental Accounting Standards Board (GASB 45, 67 and 68, specifically) and the Marin County Grand Jury Report directly resulted in most Marin governments improving their financial standing as it pertained to OPEB liabilities.


Appendix: A note on U.S. Public Pensions

U.S. public pension plans operate under a broken regulatory framework that masks the true size of liabilities and pushes these costs onto future generations. This is not a controversial observation. This view is shared by the regulatory bodies governing private U.S. pension plans and both public and private pension plans in Canada and Europe. Said differently, U.S. pension plans are alone in their approach.

The rejection of U.S. public pension plans’ approach is also shared by 98 percent of professional economists, Nobel Laureate William F. Sharpe, Warren Buffet, experts at the Federal Bureau of Economic Analysis, the Federal Reserve Bank of Cleveland, the Federal Reserve Board, the Congressional Budget Office, the Rockefeller Institute of Government at SUNY, the Stanford Institute for Economic Policy Research and Moody’s Investors Services, to name a few. It is also an area of agreement within think tanks on opposite ends of the political spectrum, with scholars at the left-leaning Brookings Institution and the right-leaning American Enterprise Institute both agreeing with the near-universal consensus.

Recently, even experts within the U.S. public pension community acknowledged this — as a joint task-force of the industry’s top experts argued that U.S. public pension plans should adopt the standards used by the rest of the world. Unfortunately, the governing bodies that created the task-force chose to bury the paper and disband the group, instead.

Accordingly, U.S. governments must endeavor to adopt sensible reforms. California governments within CalPERS are, for the most part, handcuffed. While CalPERS uses a 7.5% discount rate to calculate their liabilities in general, when a participating agency tries to leave CalPERS, it imposes the appropriate discount rate of 2-3%, functionally tripling the cost to do so.

Still, it couldn’t hurt for cities like Belvedere, who are small enough and in relatively strong financial shape, to explore the possibility of exiting the system.

If Marin governments used personal retirement-account plans, like what the Contra Costa cities of Danville, Lafayette and Orinda use, they would have never accumulated the combined $515,000,000 in unfunded pension liabilities they are currently burdened with, given that defined contribution plans are incapable of generating unfunded liabilities.

Said differently, the current pension system cost Marin governments and their taxpayers at least $515 million that could have otherwise been used for vital public services or to lower taxes.

 

Robert Fellner is the Director of Transparency Research at the Nevada Policy Research Institute, where he runs the TransparentNevada.com and TransparentCalifornia.com public pay databases.

Shining a light on the public pension crisis

In an exclusive op-ed for the RealClearPolicy website, I address the U.S. public pension crisis. A slice:

While underperforming investments receive the most attention, they aren’t the real reason for the tax hikes and cuts in government services needed to bail out public pensions. In reality, the culprit is the extraordinarily generous nature of the benefits themselves, whose costs are only now coming to the surface.

Take my home state of Nevada, for example. Like most U.S. plans, the Public Employees’ Retirement System of Nevada (NVPERS) outperformed its investment target over the past 30 years, yet costs soared anyway — totaling 12 percent of all state and local tax revenue in 2013, the second highest rate nationwide.

Be sure to read the whole thing here.

 

CalPERS $100k club for Highway Patrol up 15% as taxpayer cost hits an all-time high

The number of annualized pension payouts of $100,000 or more received by former California Highway Patrol (CHP) employees increased more than 15 percent last year, according to just-released 2015 pension data posted on TransparentCalifornia.com.

The over 625,000 records — obtained via a public records request to the California Public Employees’ Retirement System (CalPERS) ­— reveals that the average full-career CHP retiree collected an $88,773 pension.

Former assistant commissioner Ramona Murray De Prieto’s $201,727 annualized payout was the highest of any CHP retiree and marks the first time a CHP retiree collected an annual benefit worth over $200,000.

Meanwhile, the retirement costs for active CHP employees just hit an all-time high 50 percent of payroll.

Transparent California’s research director Robert Fellner believes soaring taxpayer-costs illustrate the importance of providing complete and accurate data.

“Defined benefit plans like CalPERS are inherently opaque, which limits the public’s ability to accurately assess its generosity and cost. Transparent California provides complete information so that taxpayers can have a better sense of how their money is being spent.”

Costs soar at the city of Chico

The City of Chico’s new 39% contribution rate for non-safety employees was the second highest statewide and represented a 25% year over year increase, also the second highest statewide. A list of all pension payouts to former Chico employees can be found here.

Fellner noted that Chico’s outsized costs for non-safety employees was likely due to the use of a rare, but extremely generous benefit formula known as “3% @ 60.”

Sacramento Valley

Top 3 payouts to Sacramento Valley retirees went to:

  1. Donald Gerth, former President of CSU at Sacramento: $317,324
  2. John Distasio, former CEO of Sacramento Municipal Utility District: $284,673
  3. Robert McDonell, former Woodland employee: $252,837

There was a more than 13 percent increase in the number of Sacramento Metropolitan Fire District retirees who received an annualized benefit of at least $100,000. The District currently sends 42 cents per dollar of pay to CalPERS, a more than 10 percent increase over last year’s rate.

To view the entire dataset in a searchable and downloadable format, visit TransparentCalifornia.com.

A full-career is defined as at least 30 years of service.

To schedule an interview with Transparent California, please contact Robert Fellner at 559-462-0122 or Robert@TransparentCalifornia.com.

Transparent California is California’s largest and most comprehensive database of public sector compensation and is a project of the Nevada Policy Research Institute, a nonpartisan, free-market think tank. Learn more at TransparentCalifornia.com.