Unions’ Assault on Reason Continues

Last month, San Jose’s Democrat mayor Chuck Reed filed paperwork for a statewide ballot measure that would bring some sense and fairness to California’s crazy public employee pension disaster-in-the-making. His idea, co-endorsed by a half dozen other mayors of large California cities (five of them Democrats), is a simple one: Treat public employee unions like private employee unions.

Cities on the brinkSpecifically, his measure, if approved, would lock in benefits already received but would open the door to negotiate changes moving forward. What we’re stuck with may be enough to sink us – about a half trillion dollars of unfunded liability by some accounts – but Reed’s measure could keep us from heaping more and more debt onto our state’s perilous financial condition.

In a bit of diplomacy, Reed asked the unions to meet to discuss the measure. Maybe he thought they would spare California voters the trouble of petition signing and the pain of listening to millions of dollars worth of distorted union commercials opposing the measure. If he thought for a moment public employee unions were ready to start acting responsibly, he couldn’t have been more wrong. In response to his offer, a letter signed by representatives of 17 public employee unions said:

Meaningful dialog can only occur in an environment of trust and sincerity. Your choice, to first introduce this draconian and flawed measure and then invite dialogue, shows a lack of both.

In other words, “Drop dead, Reed!”

What is so flawed about the measure? Well, let’s see what the unions have to say:

As you are well aware, there is a retirement crisis in California.

Yes, we knew that. Over-generous public pensions and benefits are indeed a crisis. A big,  hairy, no-end-in-sight crisis. But that’s not the crisis the unions see.

A study released just this week noted that 42 percent of Americans say that saving money for retirement and paying their bills is not possible; 37 percent say they will never be able to retire, continuing to work until they are sick and die.

Rest assured that not one of those respondents had a CalPERS or CalSTERS pension coming his or her way. No, our public servants masters will be able to retire at 55 or 60 (younger if they’re cops or fire fighters) with a pension that averages over $60,000 a year. The rest of us may work until we get sick and die, but not public employees. Nearly all of them will work until the day they’re fully vested and not a day more.

The unions’ response to reasonable and much-needed curtailment of their gold-plated gravy train is to say they’d like to see all society as loony as they are. They have no plan for attaining this goal, and they are not likely to present a plan anytime soon. they figure all they need, given their history of being able to dupe California’s millions of low-information voters, is a mere flimsy puff of smokescreen just thick enough to divert attention from their greed.

Hopefully even low-information voters are getting smart enough to understand destructive self-interest when they see it. If you know any who aren’t, please send them a copy of Crazifornia.

 

Pension Oblivion

NBFD FerrariMy friend Shawn Dewayne, a financial planner who often includes tax-free municipal bonds in his customers’ portfolios, is concerned about the impact of out-of-control city/state pension costs is having on munis. When he saw this car recently near his Newport Beach office, it pretty much summed up the whole pension mess for him, as it does for me.

The plate translates as “Ex Newport Beach Fire Department” and it’s affixed to a 2013 Ferrari California 30, a car that retails for $208,000 before all the VERY costly extras and options Ferrari offers.  Shawn tells me that a week earlier he saw another very expensive car – a Shelby Cobra 427 – with the license plate “I (heart) STERS,” as in CalSTERS, the California teachers’ retirement fund. And keeping up the car/pension theme, he told me of a retired water district general manager who recently spent $200,000 on a professional rebuild of his 60′s supercar, an Olds 442. (Oh, how I lusted after that car in my youth!)

Sure, these three well off ex-public servants could have had lucrative side businesses, but more likely they’ve just got great retirement benefits. A retired fire chief, for example, can relax and buy a Ferrari on the $200,000+ annual pension benefit that’s common for that job, along with Cadillac (or Ferrari) medical coverage.

The Death of CalPERS?

There’s one thing – and only one thing – I like about California’s out-of-control retirement pension and benefit programs:  I get to throw back on the Left the word they love to over-use so much: Unsustainable!

The programs are so unsustainable that CalPERS just announced its going to hike the amounts municipalities who are enrolled with them must pay by … get this … 50 percent. Sure, they’re going to phase it in, but a 50 percent hike is still a 50 percent hike – and when you multiply it by 1.6 million, the number of California government workers covered by it, you’re looking at some very serious bucks.

Canyon LakeTo see how this hits home, look at the small town of Canyon Lake, a party town of a place in Riverside County. CalPERS already has increased the town’s contribution rate from 12.8 percent of an employee’s salary to 17.9 percent over the last three years, and the City Council was looking it going to 26.8 percent this summer – before the 50 percent rate hike starts to kick in. So they did what any logical person would do.

They decided to quit CalPERS. According to news reports, it’s going to cost Canyon Lake $660,000 to say farewell. That’s the amount of unfunded liability CalPERS is carrying on Canyon Lake’s small employee base, and the city figures the cost of financing the payment will be less than the cost of putting up with CalPERS jacking up rates instead of paring down benefits. Cities with more employees, especially those who have been shorting CalPERS because of their own financial unsustainabilities, will be looking at much bigger divorce settlements.

But they’re looking, nonetheless. I know of one special district that is trying to figure out how to raise the money needed to divorce itself from the system and I’m sure the upcoming rate hike will swell the numbers. If American business ingenuity kicks in as I suspect it will, you’ll see new financing tools to fund CalPERS split-ups. When that happens, the move toward sustainable pensions could become a stampede, leaving the nation’s biggest and baddest pension plan crushed in the dust.

That’s just the sort of “rebuilding California one catastrophe at a time” I predicted in Crazifornia, so don’t be surprised if it happens.

 

 

The Seventh Day of the Twelve Days of Crazifornia

“On the seventh day of Crazifornia,
Gov. Moonbeam gave to me seven-ty percent underfunded pensions,
Six billion in debt
Five fleeing comp’nies,
Four bankrupt cities,
Three falling bridges,
Two super-majorities
And a tax hike on millionaires.”

Let’s imagine a California utility that installs 30 percent of the required air scrubbers on its power plants. Or a California manufacturer that disposes of 30 percent of its hazardous waste materials correctly, but dumps the other 70 percent in a nearby river. Do you think the state would let them get away with it? Of course not!

Then why are the voters of the state letting the state get away with promising its employees the moon, but never getting around to funding 70 percent of those promises?

The managers of the state’s pension programs and the legislators who oversee them would quibble with my analysis. They would say they don’t need to fully fund the pensions because investment income will fill the gap before the employees all retire. I could easily draw another “imagine a California company that” analogy, but you all are quick and don’t need it.

The falseness of the pension income claim – a deliberate falseness, also know as a lie – is that the pension funds lost money on bad investments during the recession, and have not yet made that money up. They’re continuing to estimate their return on investments will be over seven percent, when the actual return is now one or two percent.

The Little Hoover Commission – California’s Grand Jury – reported in 2011 that, “California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and unwillingness to plan prudently.”

Brown’s pension reform plans are deemed by taxpayer organization leaders to be about 25 percent of what’s needed. And those are only plans. As they move through the pack of wolves at the California Legislature, most hungry for the next wad of cash doled out by the public employee unions, they will be watered down. And if anyone sues over this mismanagement, the case will be heard by judges awaiting their pensions, who won’t do anything to jeopardize their promised pot of gold.

Besides, the proposals are mostly directed at new hires and ignore the vast and growing sums due those hired before even the current meager reforms go into effect. Here’s what I write about that in Crazifornia’s chapter on the budget and pensions:

The major problem is that most current public employees are guaranteed defined-benefit plans, under which their benefits are guaranteed no matter how well, or badly, the underlying pension investments perform. Reforms include, at a minimum, a shift to defined contribution plans for new hires, under which employees contribute a certain amount, usually with matching contributions from the taxpayers. The final pension payout then is not guaranteed, but depends on how well the investments perform. The taxpayers are not on the hook for poor investment performance.

Jack Dean, proprietor of Pension Tsunami, a website that has succeeded in raising journalists’ awareness of the public-employee pension crisis, explained to me over lunch why the public employee fat cats will continue to present a problem no matter what the younger employees do, or what sort of lesser pension plan they are forced to accept.

“I do talk radio shows,” he said between bites of his sandwich, “and people will call in and ask, ‘What can we do to stop this right away?’ and my answer is, ‘You can’t stop it.’

“We’re stuck with what’s in the pipeline right now – all the current employees with contracts that spell out their pensions, and judges who rule those contracts cannot be breeched. So, all we’re left with is switching to a defined-contribution plan for new hires, instead of the defined-benefit plan the earlier employees have.”

I said that would help in 30 or 40 years when the new-hires retire with fully vested benefits, and wondered if the state could survive the long and well-paid retirements of the current generation of workers.

“You’re right,” he said. “We’re going to have to live through something that’s like the Deepwater Horizon oil leak in the Gulf. You can cap it off so there’s no more oil coming out – but then you have to deal with everything that’s floating around in the Gulf, and you say, ‘What in the Hell do we do with all this stuff now?’ What do we do with all the liabilities from the current employees’ defined benefit plans, which we’ll have to pay on from when they retire until they die?”

California’s Crippling Brain-Drain

Three articles caught my eye this morning in the Orange County Register, and what a tale they tell!

The first article said that Donald Lamm, 57, has announced his retirement as City Manager of Westminster, an Orange County city of 88,000, where he was taking down a $207,000 a year salary.  Lamm complained about the hours required to manage the city – which is hardly a Newark NJ or Los Angeles – and said he was going to start his own business.  As the owner of a small business myself, I’m not sure he’ll be happy about the hours required for his new endeavor.

The second article said David Freeland has announced his retirement as Deputy Police Chief of Irvine, which is routinely rated as one of the safest large cities (pop. 208,000) in America.  We can therefore guess that his 32 years with Irvine PD have probably not been rife with high-risk situations that are used to justify earlier retirement ages for public safety workers – although he did suffer severe injuries from an on-duty car accident and headed the SWAT squad for awhile.  Freeland, 59, appears to have been paid close to $200,000 a year.  Now he plans to teach martial arts, write a book and of course spend time with his family.

Freedland and Lamm are something of anomalies in California’s public sector, since the deputy chief worked four years longer than he to in order to get his maximum pension, and the city manager stayed an extra two years.

Or to put into the terms of the entrepreneurial private sector, Freedland left at least 11 good, productive years on the table, and Lamm left at least 13 – assuming entrepreneurs retire at 70, which is generous given what’s typical nowadays, which I’ll get to in a moment.  The cities had invested much in their expertise, not just paying their salaries year after year, but also spending generously to train them.  They were at the top of their games, in a position to pay Irvine and Westminster back handsomely on their investments, but instead they took their chips and left their cities.

And they had plenty of chips to take with them, given the generous public employee pensions, which currently have mounted a half-trillion-dollar unfunded liability for the state.  Both men will receive annual income from their pensions roughly equal to their last-year salary, for life.  No wonder most public employees retire the moment they’re fully vested.

And that brings us to the third article, about how debt is forcing Baby Boomers to reconsider retirement. (Here’s the link to the original article, in the Pittsburgh Post-Gazette.) The article shows how many private sector retirees are looking at bankruptcy as their only retirement option, and says:

“We may be entering several generations of a depression era for future U.S. retirees,” said Thomas J. Mackell, former chairman of the Richmond Federal Reserve Bank.

“The problem is 50 percent of baby boomers are ill-prepared financially to retire,” he said. “They just don’t have enough money, and many of them are in debt.”

Things weren’t great even before the financial slump of the last two years. Then the economic downturn hit older people hard, based on research funded by the state’s economic development department, making an already challenging situation that much more difficult.

For a variety of reasons — from medical bills to limited retirement income to relatives in need — a growing number of older people have been turning to the bankruptcy courts for relief in recent years. …

“With the job environment the way it is and the problems people age 50 and over are having finding employment, the continuation of their problems could increase dramatically if the economy doesn’t turn around,” [bankruptcy attorney Theodore Connolly] said.

Overall, a lot of factors out of retirees’ control are working against them.

The major asset many had expected to rely on in their retirement — their home — is decreasing in value. They may have counted on the equity carrying them through lean times or being able to sell it at a nice profit during retirement.

Whatever they’ve invested in the stock market may not be growing at the rate they expected, and whatever retirement income stream they were counting on from bank CDs and government bonds has been reduced to a mere trickle.

No such worries will plague Freedland and Lamm, or any of the other thousands of California public employees who will leave working behind this year to enjoy many, many golden years at the people’s expense.  Since they enjoy fixed benefits, not fixed contributions, they know they’ll be covered no matter what the economy does.

So we have public employees retiring in their 50s to follow their dreams, while those in the private sector – who paid the salaries of Freedland, Lamm and the others – are looking down the barrel of something that feels very much like a Great Depression, with no fixed, permanent public benefit awaiting them.

You’d think the very least our public sector cohorts could do would be to give their all for another decade or so, since, given how things are in California, it’s going to require all the expertise we’ve got to get through the next decade.  They did their part in getting us into this mess, but we’re paying them to not take part in getting us out of it.