Growth in teacher pay dwarfed by soaring health, retirement benefits

A rapid rise in the cost of retirement and health benefits is dwarfing wage growth at many California school districts, according to an analysis of newly released 2017 public pay data from TransparentCalifornia.com.

Last year, the Los Angeles Unified School District spent $1.3 billion on health and retirement benefits for its employees, which represents a 25 percent increase from 2014.

The $4.2 billion the district spent on wages, however, represented only an 11 percent increase from 2014.

Both Fresno Unified and San Diego Unified also saw their cost of retirement and health benefits grow by more than twice their wage growth, as shown in the table below:

Growth in wages and benefits from 2014-2017 for California’s largest school districts

School District

Wages Benefits Benefits/Wages

Los Angeles Unified

11% 25% 2.20
San Diego Unified 10% 25%

2.50

Long Beach Unified 17% 29%

1.71

Fresno Unified 20% 44%

2.20

San Francisco Unified 22% 36%

1.64

As health and retirement costs consume an increasing share of school funds, there is less available for things like raising teacher pay. Making matters worse, most of the increase in benefit costs are for pension debt, which means current and future teachers are being penalized for past funding failures, according to Transparent California Executive Director Robert Fellner.

“For years, experts have warned that California’s government-run pension plans would one day foist the cost of their funding failures onto future taxpayers and public workers. Unfortunately, that day has now arrived. Tax dollars that should be spent on improving education will instead go towards pension debt, which obviously provides no value of any kind to current and future students.”

To explore the individual data sets further, please click here or on the name of the school district listed in the table above.

Top LAUSD earners

Former LA Unified Superintendent Michelle King received $410,497 in pay and benefits last year, the most of any LAUSD employee. The next four highest compensated LAUSD employees were:

  1. Assistant General Counsel Terry Cheathem: $350,025.
  2. General Counsel David Holmquist: $345,885.
  3. Chief Facilities Executive Mark Hovatter: $327,888.
  4. Chief Academic Officer Frances Gipson: $308,993.

The average full-time, year-round LAUSD teacher received $80,102 in wages and $103,420 in total compensation last year, according to the data.

Transparent California will be continually updating the site with new, 2017 data from the remaining school districts in the coming weeks. Be sure to follow our blog and Twitter accounts, or sign up for our mailing list, in order to receive the latest updates.

For more information, please contact Transparent California Executive Director Robert Fellner at 559-462-0122 or via email at 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. The website is used by millions of Californians each year, including elected officials and lawmakers, government employees and their unions, government agencies themselves, university researchers, the media, and concerned citizens alike. Learn more at TransparentCalifornia.com.

Ignoring risk hides pension costs from policymakers

A new rule currently being considered by the Actuarial Standards Board would finally require public pensions to meaningfully account for risk. In a commentary for the Voice of San Diego, I explain how this would benefit all stakeholders.


Future Taxpayers and Public Employees Are Paying for Past Pension Mistakes

As San Diego County sues its own pension fund for the right to slash benefits for new hires, and while taxpayer costs continue their ascent to record-high levels, understanding the true cause of the county’s pension crisis is more important than ever.

While some blame the stock market crash of 2008-09, the real culprit was an explosive growth in the size of promised pension benefits, and the flawed accounting practices that encouraged such recklessness.

Over the past 30 years, the accrued liabilities of the San Diego County pension fund, SDCERA, increased by nearly 1,300 percent — almost four times more than the growth in the county’s total personal income over that same time period.

The willingness to make such large pension promises stems from accounting practices that understate their cost by ignoring risk entirely.

Specifically, by treating assumed future stock market returns as certain — despite acknowledging their investments will underperform expectations roughly 50 percent of the time — SDCERA can “discount,” or minimize, the estimated cost associated with safely funded employees’ future pension benefits.

Of course, ignoring risk on your balance sheet doesn’t make it go away in the real world, which is why this approach is outlawed in the private sector and rejected by public pension plans in more than 100 countries worldwide, with U.S. state and local public pension plans being the only exception from that consensus.

This also reveals why blaming San Diego County’s soaring pension costs on the Great Recession is so misleading. The cost was created when the promises were made, as indicated by SDCERA’s nearly 1,300 percent increase in accrued liabilities, not when they were exposed by a market downturn.

But because defraying costs to future generations is so politically attractive, there has been little interest in reform, despite the urgings of those like Warren Buffet, Nobel Laureate William F. Sharpe and what seems like the entirety of the economics profession.

Thankfully, after years of fierce criticism by prominent actuaries worried about the harm that would befall their profession as a result of its continued silence, the Actuarial Standards Board proposed a new rule that would finally require pension plans to meaningfully account for risk.

While the proposal would simply require plans to disclose the level of risk associated with their funding strategy, government unions are nonetheless howling in displeasure at the idea, terrified at the consequences of making the full cost of their pensions known.

But this reflexive opposition to honest accounting is short-sighted and destructive. As the experience of San Diego County so aptly demonstrates, the damage caused by overpromising is often borne by government workers themselves, particularly future hires.

After having been lulled into a false sense of security by numbers that overstated the health of the fund while understating the cost of increasing benefits, the County Board of Supervisors in 2002 passed a 50 percent benefit enhancement for all county employees.

But when the inevitable market downturn hit — a certainty for any long-term investor like SDCERA — paying the full cost of the 2002 enhancement fell to today’s taxpayers and public employees, who never received any of the benefits they are now being required to pay for.

In addition to forcing both groups to pay more, while getting less, the county also repeatedly cut the benefits offered to new hires to get its soaring retirement costs under control.

After reducing the retirement benefits offered to new hires in 2009 and again in 2013, the county earlier this year approved a plan to cut new employees’ benefits to the lowest level allowable under law, which are worth roughly half as much as those received by pre-2009 employees.

The current lawsuit that has delayed the implementation of this new, bare-bones retirement plan focuses only on how and when that plan will be implemented, not if.

This makes clear that all groups — including government employees — are harmed by the status quo.

Had the Board of Supervisors been informed of the true cost of the excessive and unnecessary 2002 benefit enhancement — and the degree of risk associated with relying on stock market returns to pay for it — this whole mess could have been avoided.

Requiring public pension funds like SDCERA to meaningfully account for risk will make it much harder for policymakers to force future generations to pay for their past funding failures.

And that’s good news for everyone concerned with the fiscal health of the county and the fair treatment of all its citizens — taxpayers and public employees alike.

Robert Fellner is executive director of Transparent California. This commentary was first published by the Voice of San Diego.

Marin County promised pension benefits up nearly 1000%, dwarfing rate of economic growth

The total pension benefits promised by Marin County increased 982 percent from 1986-2016 — a rate 58 times greater than the cumulative increase in the county’s population, according to a just-released analysis from Transparent California.

Last week, Transparent California released Nearly 900% increase in CalPERS benefits dwarfs economic growth, taxpayers’ ability to pay, which analyzed the state pension fund.

Marin County, however, belongs to the Marin County Employees’ Retirement Association (MCERA), and is thus separate from CalPERS.

Applying the same methodology as used in the CalPERS analysis reveals that promised Marin County benefits grew even faster than CalPERS, as shown in the chart below:

MCPensionGrowth2

The below chart reflects the cumulative growth in Marin County’s promised pension benefits (accrued liabilities) alongside a variety of Marin County economic metrics:

Marin County Indicators Growth from 1986-2016
Promised Pension Benefits 982%
Personal Income 377%
Median Household Income 167%
Inflation 139%
Population 17%

Data sources:

  • Promised pension benefits reflects the growth in accrued liabilities for the County of Marin and related Special Districts, as reported by the Marin County Employees’ Retirement Association (MCERA).
  • Marin County personal income “is the income that is received by all persons from all sources,” calculated and reported by the U.S. Bureau of Economic Analysis.
  • Median Household Income data was provided by the U.S. Census Bureau. The Excel Trend function was used to fill in years in which data was unavailable.
  • Inflation is derived by calculating the growth in the Consumer Price Index for All Urban Consumers: All items in the San Francisco-Oakland-Hayward, CA region.
  • Population data was provided by the U.S. Census Bureau.

For more information, 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. The website is used by millions of Californians each year, including elected officials and lawmakers, government employees and their unions, government agencies themselves, university researchers, the media, and concerned citizens alike. Learn more at TransparentCalifornia.com.

2018 a decisive year for reining in pensions

A great column by Jody Morales on the impact court rulings in 2018 might have for public pensions:

Many noted reporters and columnists proclaim that every new tax is a pension tax. We of Citizens for Sustainable Pension Plans agree.

The city of San Rafael is struggling to continue services without new taxes, but it seems both unlikely and impossible that they can do so.

The Transportation Authority of Marin is revving up to once again raise the sales tax cap.

The Marin Municipal Water District initiated rate increases to occur over the next few years, shifting pension costs onto its customers.

These are but a few local agencies turning to taxpayers to pay more to maintain an unsustainable system.

Whether or not our local agencies, including city councils and the Board of Supervisors, have the courage to put an end to ever-increasing taxes, rates and fees, coupled with reduction or elimination of services, is yet to be seen.

Read the rest at the MarinIJ.com website.

 

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.

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.