Sunday, December 29, 2013

How Does This Make Sense?

I understand that the author is using the English language, but I don't understand the meaning as he's strung them together and drawn a conclusion:
On average, cities and counties in California pay about 35% of every police and fire salary dollar as the employer contribution to CalPERS. Employees themselves contribute an additional 8% to 12%. This is why California's pension system is not in a crisis, despite what the anti-union critics say. Our local governments and their employees are making contributions totaling 40% to 50% of salary to keep the state's pension system solvent.
What percentage of salary are such employees retiring with?  I'll bet it's over 40-50%.  How is the shortfall being dealt with?  Answer:  it's not.  That's why it's a shortfall.

Anonymous said...

The writing is poor.

What they are trying to say is something like one of the following:

A) If the salary for the police/fire critter is \$100, then \$35 gets put into CalPERS by the city/country. Additionally, \$8 to \$12 from the employee salary gets put into CalPERS, so the employee only sees \$88 to \$92 of the \$100. The upshot here is that for every ~\$90 that the employee sees, about \$40 is placed in the pension fund (and invested) Or ...

B) If the *total compensation* for the police/fire critter is \$100, then \$35 of that gets put into CalPERS by the city/country, leaving \$65 for salary plus other benefits (e.g. health care). For purposes of illustration, we'll assume that \$15 of this is other benefits, so the salary component of compensation is \$50. Of the \$50 that the employee sees, 8% to 12% also gets diverted to CalPERS (so \$4 to \$6). Here for every \$50 that the employee sees, we have about \$40 sent to the pension fund. This would be *VERY* high ...

[The wording here makes it pretty clear that the author means (A) ... but since most of these calculations are done starting with total compensation rather than salary I'm not so sure that this is correct ...]

In any event, the point here is that lots of money budgeted to police/fire compensation is being shipped to CalPERS to pay for retirement benefits down the line (unlike Detroit), so the retirement accounts are pretty solvent (unlike Detroit) (*).

And we don't have a missing 60%. No one expects the contributions to a pension to match the salary (e.g. \$50K of salary equaling a \$50K lump sum contribution to the pension fund).

I haven't checked the numbers myself, so I have no opinion on this ... but note that this claim is only for police/fire. I don't think the teachers are in quite as nice a position.

-Mark Roulo

(*) Note also that the police/fire pension funds in Detroit are actually in pretty good shape. Worst case is that the retirees probably see 90 cents on the dollar, which isn't good, but looks to be a lot better than the other city retirees.

Anonymous said...

Only slightly related, but one problem seems to be that cities are having to dump more and more money in to the pension funds to keep them solvent. In some respects, this is VERY VERY GOOD. It makes the costs clear *now* to the taxpayers (rather than letting everyone pretend that things are fine and then discovering in 20 years that the money simply isn't there ... much like Detroit).

But this money has to come from somewhere. And that somewhere is taxes. So, either taxes go up for the same services or taxes stay the same, but services go down.

To illustrate: "Glendale, a Los Angeles suburb, watched its annual pension bill rocket from \$1.3 million in 2003 to \$13.7 million in 2007—nearly a tenfold increase. San Jose’s tab almost doubled, from \$73 million in 2001 to \$122 million in 2007, and then rose even faster over the next three years, hitting a jaw-dropping \$245 million in 2010. San Bernardino’s annual pension obligations rose from \$5 million in 2000 to about \$26 million last year. The state budget took a massive hit, too, its pension costs lurching from \$611 million in 2001 to \$3.5 billion in 2010."

http://www.city-journal.org/2013/23_1_calpers.html

So San Jose now has ~\$180M per year less to spend on services than it did in 2001 (assuming the same tax base). This is probably something that can be made to work, but what happens by 2020? A \$300M/year hole. And what happens after that?

Again, much better than Detroit because the costs aren't getting ignored until they blow up, but the money still has to come from somewhere ...

-Mark R.

maxutils said...

My understanding ... and I may be wrong ... is that the contribution to both CalPERS and Cal STRS is basically the same set up as the FICA tax...8% employer (about) and 8% employee. The way they generate revenue to pay is through investment...which, if done even relatively well is sustainable. Unlike, say, social security, which is a Ponzi scheme. Obviously, stock market crashes make the system look worse, but only temporarily.

allen (in Michigan) said...

The way they generate revenue to pay is through investment...

That's the way it's supposed to work but political expediancy's required CalPERS, and CalSTRS, to assume ridiculously high rates of return. When the investment returns aren't there the municipalities are on the hook to make up the difference.

Steve Malanga over City Journal does a better job of explaining things - http://www.city-journal.org/2013/23_1_calpers.html

Mike Thiac said...

Max:

If you're in a qualified pension plan, you are right. And you are not in the Social Security system for retirement (although a lot of cops, firemen, etc (like I did for years)) pay into second employment like the military reserves. But we don't get full retirement payments based on our payments into the system because we are members of a qualified pension plan.

I believe the numbers are closer to 6% each and you sill made Medicaid and SSI payments. And you are as wrong as hell in describing Social Security as a Ponzi scheme. Ponzi has nothing on Social Security, who's assets encompass two safes of federal notes in an office in West Virginia (named after Bobby Byrd I'm sure).

maxutils said...

allen ... for starters, I agree with you ... it should be a plan based on investment and return ... the mistake you make is not that CalPERS and CalSTRS made wild claims. For a very long time, they made well above average rates of return, and the government officials in charge of making contract decisions assumed they would continue. But, a market crash hurts. Which is why, I also agree, communities should err on the side of caution in negotiations. But-- PEOPLE DON'T VOTE FOR CANDIDATES THAT WILL DO THAT. It really makes me want o claw my face off.

Mike Thiac, I'm pretty sure you're right about the breakdown, save that teachers (Cal STRS) do not pay into SSI; they have their own plan. I'm entirely right about Social Security being a Ponzi scheme, however. The thing that typifies a Ponzi scheme is that you get a whole bunch of people at the bottom of the 'pyramid' to pay for something for which you put in virtually nothing ... which is exactly what social security did. How much did the first recipients of social security pay in to the plan? virtually nothing. They were paid for by current workers, who expected future workers to pay for them ... and who then expected even later workers to pay for them. That works fine until you have a situation where you don't have enough workers to support the bottom of the pyramid ... which is exactly what is happening now with the increasing number of retirees due to the baby boomer generation. Had you come up with the exact same plan as a non-governmental entity, you would be in jail. Or should be.

maxutils said...

Mike Thiac: I just re-read your comment, and must admit ... I totally missed the sarcasm. My apologies.

Anonymous said...

Allen: "That's the way it's supposed to work but political expediancy's required CalPERS, and CalSTRS, to assume ridiculously high rates of return. When the investment returns aren't there the municipalities are on the hook to make up the difference."

The municipalities are on the hook either way. If CalPERS assumes a more conservative rate of return going forward, then the municipalities have to come up with the extra money *NOW*. If CalPERS assumes an optimistic rate of return and reality comes in somewhat lower, then the municipalities have to come up with the extra money some time in the future (when the current folks are probably out of office).

In any event, this optimism is across the board. CalPERS is assuming 7.5%. From a 2012 Wall Street Journal article: "The median expected rate of return on pension-plan assets at companies in the S&P 500 has dropped from 9.1% a decade ago to a still-high 7.8%, Mr. Zion says." This optimism isn't just driven by political expediency ... it is driven by expediency for whoever is in charge today and letting whoever is in charge tomorrow deal with the mess.

A lot like Detroit and Greece.

-Mark Roulo

allen (in Michigan) said...

The municipalities are on the hook either way

Well yeah. But they're much more likely to find themselves on the hook for plenty, like now, if the investment assumptions are unreasonably optimistic.

But those unreasonably optimistic assumptions made the pension agreements politically salable. If more reasonable assumptions had been used when the pensions were being negotiated the payments into the system, to get the defined benefits, would have been too large to make the agreements politically feasible. So the unions and the politicians who signed onto the agreements punted by assuming historically unlikely rates of return and let their successors deal with the issue.

The zero-sum nature of political spending means you get while the getting is good and you don't look too closely at the details nor consider too greatly the consequences.

allen (in Michigan) said...

Umm, what would the municipalities be on the hook for if the assumed, and ridiculous, rate of return occurred? The reason they're paying is because those rates of return weren't maintainable so there's a shortfall. It's that shortfall that's causing the financial problems for California, and lots of other state's, municipalities.

A lot like Detroit and Greece.

And a lot of other governmental entities wherein the unions were powerful enough, the politicians compliant enough and the electorate inert enough.

But it's an ill wind that blows no good and just like union waivers helped undercut Obamacare the ongoing municipal bankruptcies will undercut the political power of the municipal unions.

maxutils said...

I don't see why the public employees unions should be singled out... most people rely on a social security system that a does't even pretend to invest.