MOORLACH UPDATE — UNP Bottom Dwellers — April 7, 2018

The Unrestricted Net Position (UNP) projects my office has been publishing are obtaining attention (see MOORLACH UPDATE — 2017 State Per Capita UNPs — April 2, 2018).

The ten-volume UNP series on California’s 482 cities makes it to the first piece below. The Beach Reporter provides two interesting looks at the financial well-being of cities in its readership jurisdiction. The first is to point out where the cities are ranked in my listing (not in the best percentiles). The second is to provide how one of these cities is addressing its fiscal concerns.

The cities mentioned in this piece are #319 Manhattan Beach (see MOORLACH UPDATE — City CAFR Rankings – Vol. 4 — February 12, 2018); #429 Redondo Beach and #435 Long Beach (see MOORLACH UPDATE — City CAFR Rankings – Vol. 2 — February 8, 2018); and #462 Torrance, #471 Inglewood, #473 Santa Fe Springs, and #481 El Segundo (see MOORLACH UPDATE — City CAFR Rankings – Vol. 1 – February 7, 2018).

It should be noted that the metric is based on a municipality’s Unrestricted Net Position divided by its population. The UNP will include unfunded defined benefit pension liabilities, among many other liabilities.

Our recent state rankings are mentioned in the second piece below by California Policy Center (see the link provided in the first paragraph above). We have since received three of the state CAFRs that we have been waiting for, with two to go; but we do not expect New Jersey to lose its bottom position.

97 retired city workers in Redondo Beach make more than $100,000 per year

By Nick Green

Three South Bay cities—Torrance, Redondo Beach and Inglewood—now rank in the top in 10 Los Angeles County for retired city workers who make more than $100,000 annually, according to new data released Thursday by government watchdog Transparent California.

The cities were ranked second, eighth and ninth, respectively, on a list of communities with at least 25 retirees pulling in more than $100K annually. Long Beach was ranked first in the county with 390 former workers pulling in six figures in retirement.

Last year, the nonprofit government watchdog ranked Long Beach top in the entire state and Torrance second. This is the first year Transparent California has compiled a top 10 list of Los Angeles County cities.

“The issue is as pension costs continue to go up — and they will — you’re asking (private sector) South Bay residents, who on average make much less and will get much less in retirement, to pay for them,” said Robert Fellner, Transparent California’s executive director. “To me, that’s the issue; is that fair and is that sustainable?”

But even more telling, Fellner said, is the fact that retirees who collect more than $100,000 a year have an outsized impact on the total outlay each jurisdiction pays for retirement benefits.

For example, the 237 Torrance retirees and 97 Redondo Beach retirees who receive more than $100,000 annually account for 44 percent of the entire amount the two cities pay in retirement benefits. That’s about equal to what Manhattan Beach pays, too.

And that trio of South Bay cities trail only El Segundo (46 percent), which is second in the state only to Santa Fe Spings.

To put those figures in perspective, the average percentage for all agencies that participate in the California Public Employee Retirement System is just 14.5 percent going toward retirement benefits for retirees receiving more than $100K.

It’s the first time Transparent California has broken out public retirement benefits in that fashion.

It’s significant, Fellner said, because municipal officials often downplay the number of retirees raking in more than $100K. But the data shows that a relatively small number of former employees with large retirement benefits can cost jurisdictions a lot of money.

But why the large number of South Bay cities with big benefits?

First, Fellner notes, those cities pay their police officers and firefighters well because public safety is valued in those communities. Second, cities have a habit of surveying salaries of neighboring cities, ostensibly to remain competitive in attracting quality employees. But that strategy constantly raises the average salaries higher and higher, which can lead to a massive unfunded liability.

State Sen. John Moorlach, R-Costa Mesa, recently ranked cities in the state by how their unfunded liability is affecting municipal finances.

Torrance, it turns out, is one of the 25 cities in the state in the poorest financial shape. (In the South Bay, only the balance sheets of El Segundo—second worst in California—and Inglewood were worse off.)

Yet when one mayoral candidate said last week at the city’s first political forum of the campaign season that the biggest challenge facing Torrance was its unfunded liability, Mayor Pat Furey downplayed the issue. He said the city was taking care of the issue, recently making a one-time payment of $3 million to reduce the unfunded liability and adding another $5 million to an investment fund to help bring down the debt.

“The council has addressed those (issues) with all eyes open and very transparently,” he said. “There is a light at the end of the tunnel, there is no possibility of going bankrupt. … We can work through this and our employees can keep their pensions.

California should copy New Jersey’s union fund takeover, but with one caveat

By Steven Greenhut

New Jersey’s police and fire unions have demanded that the state give them control over their own pension destiny, and have convinced the Legislature to transfer management of their pension fund to a union-controlled board of trustees. Some Garden State residents have denounced the plan as the equivalent of giving unions a “blank check,” given that taxpayers have to pay for all of the trustees’ decisions. But the bill, which is now on the governor’s desk, offers a brilliant solution for New Jersey and even California – provided it’s amended in one simple way.

Yes, unions should be free to control their own destiny. Their members are dependent on these defined-benefit pensions, so union officials ought to decide how the money is invested. Union leaders should select the expected rates of return. They should manage the assets, decide on cost-of-living adjustments and control every cent within the fund. They and their members deserve to reap the benefits, of course, but here’s the caveat: taxpayers no longer should have to foot the bill for their miscalculations. They simply need to remove the liability from taxpayers.

New Jersey’s pension fund is so mired in debt and so underfunded that it almost makes California’s system – long viewed as the national poster child for pension dysfunction – seem like a model of fiscal probity. Instead of coming up with a plan to address the root causes of the crisis, New Jersey’s politicians overwhelmingly approved the above-mentioned plan (without my caveat, of course). In all seriousness, it could plunge the state’s pension system into a death spiral. You should never give a special interest unchecked control over the public purse.

Most experts view a 50-percent funding level as the point of no return for pension funds. California Sen. John Moorlach, R-Costa Mesa, compiled per-capita unfunded liability figures for all 50 states and found that California residents are each on the hook for $4,287 in pension debts (using a fairly conservative estimate). That’s bad – 42nd in the nation. But New Jersey’s per-capita pension debt is even worse at $15,208. It gets the 50th spot.

The California Public Employees’ Retirement System (CalPERS), which is the nation’s largest state-based pension system, is funded at 68 percent, which means it only has slightly above two-thirds of the money it needs to fulfill all of its pension promises. The California State Teachers’ Retirement System (CalSTRS) is funded at 64 percent. These are dangerously low numbers, especially coming after a year of fabulous investment returns. But, as they say in Jersey, forgettaboutit. The New Jersey situation is on a different plane altogether. New Jersey’s system is funded at 31 percent.

Instead of dealing with the real source of the pension liabilities (excessive pay and benefit packages for public employees, unrealistically high assumed rates of return, decisions made by politicians rather than actuaries), lawmakers in Trenton chose to shift control of the Police and Firemen’s Retirement System (PFRS) from the state and its investment council to the police and firefighter unions whose members benefit from the fund. Former Republican Gov. Chris Christie had vetoed a similar measure, but it’s unclear whether Democratic Gov. Phil Murphy’s will sign it.

Police and fire union officials understandably are frustrated at the pension fund’s poor performance and note that police and fire pensions are funded at a higher percentage (65 percent) than pensions for other New Jersey public employees. Extricating the police and fire portion would create an obvious fiscal problem by removing a better-funded portion of the pooled resources, and could therefore lower the funding levels even further (is that even possible?) for the remainder of the fund.

“The massive shortfalls in public pension funds are the single biggest financial challenge for American states and cities,” reported Bloomberg News last month. “So allowing government workers to determine their own benefits – as New Jersey may soon do – seems a clear recipe for disaster.” As news reports suggest, the new board of trustees would have a majority of union members and would have the power to adjust contribution rate and increase cost-of-living benefits for retirees.

“We want to control our own destiny,” said one New Jersey union official, quoted in that Bloomberg column. But the legislation doesn’t really do that. Perhaps unions should be free to control their own destiny, but that means that they and their members – not the taxpayers – have to pay the price if they make bad decisions or the economy doesn’t perform as expected. That’s the only real way to have control over one’s destiny.

Sadly, the New Jersey bill echoes the current system there and here, but puts it on steroids. For instance, the CalPERS Board of Directors is dominated by retirees, union members and Democratic state officials who are elected with the support of public-employee unions. However, at some level state officials have to deal with fiscal reality. They are accountable to voters. If the unions gain direct control over pension funds, then there’s nothing to stop their spending sprees.

“What’s wrong with letting the unions manage their own pension funds?” asked Asbury Park Press columnist Randy Bergmann in a rhetorical way. “First most of the money … comes from taxpayers.” And “the unions can reap all the rewards while the taxpayers absorb all the risk.” His critique is exactly right. That’s where my idea comes in. Let unions benefit from their good decisions, but make them pay the price for their bad ones. If they blow it, then union retirees should be the ones to suffer.

This idea shouldn’t even be that controversial. After all, CalPERS officials argue that the pension fund is in solid shape because investment returns, taken over long-enough periods, always cover the payments. That sounds like a tacit admission that they don’t really need the taxpayer backing anyway. Yes, unions in New Jersey, California and everywhere deserve to control their own destiny. Agreed. And we, the taxpayers, deserve to control ours, too.

Steven Greenhut is contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Write to him at sgreenhut.

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