MOORLACH UPDATE — What Pension Crisis? — September 27, 2017

I sit on the Senate Public Employment and Retirement Committee, which held a joint hearing with its Assembly counterpart earlier this year. During the hearing I asked a very difficult question of Dane Hutchings, the legislative representative of the California League of Cities (see MOORLACH UPDATE — 37th in the 37th — August 9, 2017 ).

In shaping my question, I used the “F” word — “fraud” — and it caught the attention of CalPERS and its administration. This started a dialogue, which has been very helpful. So, I recently sent two letters, addressed to two separate CalPERS Board members, requesting very specific information (see https://www.calpers.ca.gov/docs/board-agendas/201709/financeadmin/item-6c-02.pdf and https://www.calpers.ca.gov/docs/board-agendas/201709/financeadmin/item-6c-01.pdf).

Instead of writing back with an affirmative response and attaching the requested data, the matter was put on the agenda of this month’s CalPERS Finance and Administrative Committee meeting (see MOORLACH UPDATE — OC’s Newest Landmark Plaque — September 20, 2017 ).

The entire segment of the Committee meeting related to my requests is an amazing watch. To have city managers state that they are facing Chapter 9 bankruptcy and even providing the precise upcoming year they may be filing is a massive disclosure. You would think it would be headline news for the local papers where the cities are located. The California Policy Center certainly thought the discussion was disturbing and provides the piece below.

I’m trying to address the pension crisis in California. It’s getting noticed. Let’s hope the testimony of a dozen plan sponsors wakes up the super majority in the Capitol. Also see MOORLACH UPDATE — Pursuing Reforms — August 11, 2017 august 11, 2017 john moorlach.

BONUS: If you happen to watch the linked video to the CalPERS meeting, you will observe the public employee unions testify as the concluding witnesses to strong arm those CalPERS Board members who just also happen to be public employee union members. The massive influence of public employee unions in Sacramento is evident and detrimental to the fiscal well being of our state. I discuss this in more detail on Rick Reiff’s most recent Inside OC program and it is worth a watch at https://www.youtube.com/watch?v=t-rpMqqQJJE&feature=youtu.be.

DOUBLE BONUS: I don’t want to be in the “me thinkest thou protesteth too much” category, but crime is going up (see MOORLACH UPDATE — Taken to Task — August 23, 2017). The FBI released the 2016 crime statistics on Monday of this week and the news is not good. Allow me to give you just one of the many links, as I spend a lot of time in Sacramento, at http://www.kcra.com/article/sacramentos-violent-crime-rate-was-higher-than-us-crime-rate-in-2016/12473362.

TRIPLE BONUS: To date, the Governor has not addressed any of the top 20 bills Assemblyman Harper and I have recommended he veto (see MOORLACH UPDATE — 2017 Top 20 Veto Worthy Bills — September 22, 2017).

Cities facing fiscal mess plead with CalPERS as pensions consume budgets

By Steven Greenhut

http://californiapolicycenter.org/cities-facing-fiscal-mess-plead-calpers-pensions-consume-local-budgets/

Sacramento – If you ask the union-controlled California Public Employees’ Retirement System about the state’s looming pension crisis, you’re likely to get this answer: What pension crisis?

But the story was much different at CalPERS’ own Finance and Administration Committee meeting held Sept. 19. City officials from across California warned CalPERS board members about the dire fiscal situation their cities face because the pension debt is consuming larger portions of local budgets. The energetic discussion included 18 speakers, many of them local officials who trekked to Sacramento.

“In Hayward, 68 percent of our unfunded pension cost is retiree benefits,” said Hayward City Council member Sara Lamnin, who pointed out that “this means the promises of the past weren’t paid for, frankly.” Hayward’s future is really troubling. She said that “over the next three fiscal years, the city of Hayward’s revenue is projected to grow 1.4 percent, but our cost for PERS is going to go up 30.5 percent.” Lamnin wasn’t asking for someone to rescue Hayward. Officials just want to know how bad the damage will be. “We ask you for data,” she said.

Oroville Finance Director Ruth Wright said her Butte County city has been forced to cut its workforce by a third and negotiated cuts in police salaries by 10 percent. Oroville expects its cash flow to be gone in three to four years, she said. “We’ve been saying the ‘bankruptcy’ word.”

These city officials were there to support state Sen. John Moorlach, R-Costa Mesa, who sent a letter to the CalPERS board of administration requesting detailed answers to two seemingly straightforward actuarial questions.

First, Moorlach wanted to know the financial effect of moving employees from “their current tiers to a PEPRA tier on a going-forward basis.” That would mean providing them with the slightly-less generous pensions offered after the 2013 reforms went into effect. Moorlach also wanted the pension fund to study the cost savings if cost-of-living adjustments to retirees were temporarily suspended until the fund’s liabilities are stabilized. No one is proposing any cuts, but Moorlach was just seeking cost comparison data.

“Cities all across the state of California are gravely concerned about the rising costs of their annual retirement contributions and the growing size of their unfunded actuarial liability,” said Bruce Channing, the city manager for Laguna Hills in Orange County, and chairman of the League of California Cities’ pension-services committee.

He warned of “severe hardship” and cutbacks in staff in many cities if the problem isn’t addressed – and reminded CalPERS officials that “saying we have to invest our way out of this really is not the answer.”

The League’s Dane Hutchings noted a shocking statistic: “I have members who by all accounts are considered financially healthy cities” but their financial models “suggest that by fiscal year ’27-’28 as much as 94 cents of every current dollar of payroll will be allocated to CalPERS contributions.” That’s without accounting for new hires or raises in the coming decade.

Lodi City Manager Steve Schwabauer said his city’s pension costs are expected to double by 2022, which is the equivalent of a fire station and “all of my parks and recreation and all of my library.” These are ominous warnings from actual city officials.

Given CalPERS’ touting of PEPRA as a key reason that the state is “bending the cost curve” regarding pension liabilities, Moorlach’s first request should have been a no-brainer. Why not figure out other PEPRA-related savings possibilities? The second question would make sense, too, if the pension fund were interested in exploring ways to protect cities from potential insolvency rather than simply protecting public employees from any pain.

As expected, CalPERS gave the final say to union officials, who feared that the data would be used to justify lower benefits.

“Yes, it’s painful for employers to deal with those rising costs,” said Jai Sookprasert, a California School Employees Association lobbyist. “It’s doubly more painful for the employees. What part of negotiate, talk to your employees is not clear? … Really, data? This is just data? … Is it data or conjectures?”

So, learning actuarially sound information about what different benefit levels might do to unfunded liabilities is now just a conjecture, at least in the view of some union officials. Apparently, it’s better for local officials not to know what different options will mean for their budgets. They should just pay up and quit their complaining.

The CalPERS board fell in line and didn’t even vote on the request, meaning that Moorlach’s proposal will not be heeded.

In 1999, CalPERS promised that the Legislature’s proposal that would lead to 50-percent retroactive pension increases for public-safety officials across the state wouldn’t cost taxpayers “a dime” because investment returns would make up the difference. The fund was laughably wrong, and their efforts led to the current problems cities across the state are facing.

Now CalPERS and its union allies typically claim that there’s no pension crisis and that Gov. Jerry Brown’s modest PEPRA reform will right the ship. Apparently, there’s no need to worry about what these hard-pressed city officials are saying. But what will they say 10 to 15 years from now, as pension costs gobble up majorities of local budgets and services will be slashed and burned?

For now, denial is the easiest course. CalPERS had a good year with investment returns of 11.2 percent. Likewise, the Democratic-controlled state Legislature totally ignored the pension liabilities and the arguably even-larger problem surrounding soaring retiree-medical costs during its recently concluded legislative session. But the problems only are going to get worse, and other cities are going to hit the fiscal wall.

“The unions will say it wasn’t our fault. We didn’t vote for it. You guys voted for it,” said Sen. Moorlach in an interview Monday. He was shocked by their audacity. No doubt, they’ll also be blaming Wall Street and stingy California taxpayers. But by then the state and cities could be in full crisis mode. Will CalPERS still be in denial if dozens of cities are using about the “b” word?

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.

This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

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MOORLACH UPDATE — Pursuing Reforms — August 11, 2017

The OC Register’s lead editorial addresses a concern that spawned my bill, Senate Bill 247, to address unnecessary and over burdensome occupational licensing. It was kind of them to give this effort a shout out in the first piece below. It also appears in the San Bernardino Sun and the Los Angeles Daily News. For previous UPDATEs on this topic, in date order, see:

MOORLACH UPDATE — SB 247 — April 20, 2017 april 20, 2017 john moorlach

MOORLACH UPDATE — There Ought Not Be A Law — April 23, 2017 april 23, 2017 john moorlach

MOORLACH UPDATE — Snubbing — May 10, 2017 may 10, 2017 john moorlach

MOORLACH UPDATE — Legislative Efforts — June 29, 2017 june 29, 2017 john moorlach

The OC Register online also provides another perspective on the public employee defined benefit pension plan crisis. It is also in The Press-Enterprise. The challenge? Will there be reform?

Reform? Let me show you reform. And just from this year alone with a recap of my office’s efforts to address what I believe is the top concern of municipalities in this state. You can see all my bill material at my website, including background, white papers, newspaper articles, videos and hearing.

SB 32 — PEPRA II — The attempt to make the reforms that Gov. Brown could not get accomplished with PEPRA was killed by the Senate Public Employment and Retirement Committee (see MOORLACH UPDATE — PEPRA 2 With SB 32 — January 15, 2017 january 15, 2017 john moorlach).

SB 371 — Bargaining Conflicts of Interest — This attempt to prohibit those who benefit from the very bargaining unit agreements that they are negotiating was killed by the Senate Public Employment and Retirement Committee (see MOORLACH UPDATE — Snubbing — May 10, 2017 may 10, 2017 john moorlach).

SB 671 — Pension Pre-Payment Modifications — This attempt cleared up language in the code and broadened pension plan prepayment parameters for all municipal employers. This bill made it to the Governor’s desk and was signed into law (see MOORLACH UPDATE — SB 671/Prepayment — May 14, 2017 may 14, 2017 john moorlach and MOORLACH UPDATE — Bad News/Good News — July 18, 2017 july 18, 2017 john moorlach).

SB 681 — CalPERS exiting reform — This attempts to provide a fair withdrawal process that make for a clean break from a service provider (versus an onerous mother who can’t seem to let go) (see MOORLACH UPDATE — SB 861 and SCA 8 — March 10, 2017 march 10, 2017 john moorlach, MOORLACH UPDATE — PACE and HERO — April 30, 2017 april 30, 2017 john moorlach and MOORLACH UPDATE — 37th in the 37th — August 9, 2017 august 9, 2017 john moorlach — the Letter to the Editor provided in this UPDATE was printed in today’s LA Times). I elected to make this a two-year bill.

SCA 1 — Secure Choice Nonsubsidy — With the successful passage of SB 1234 (De Leon – 2016) (see MOORLACH UPDATE — SB 1234 — August 26, 2016 august 26, 2016 john moorlach) this effort attempted to prohibit taxpayer dollars from underwriting this private sector retirement proposal managed by a California bureaucracy (also see MOORLACH UPDATE — SCA 1 Warranty — March 7, 2017 march 7, 2017 john moorlach, MOORLACH UPDATE — SCA 1 — March 6, 2017 march 6, 2017 john moorlach, and MOORLACH UPDATE — Legislative Efforts — June 29, 2017 june 29, 2017 john moorlach). The federal Department of Treasury recently announced the elimination of the “myRA” program because of low public-interest and high fiscal costs. The Secure Choice program would be impacted by recent legislation passed by Congress and signed by the President that eliminates federal protections of such a program, further exposing California taxpayers.

SCA 8 — Abolish the “California Rule” — This attempt is discussed in the piece below. We are waiting on the California Supreme Court’s ruling on the Marin Case. Since the ruling has not been released, I have made this a two-year bill (see MOORLACH UPDATE — SB 861 and SCA 8 — March 10, 2017 march 10, 2017 john moorlach).

SCA 10 — Voter Approval for Pension Debt — This attempts to replicate Orange County’s Measure J (2008), but on a statewide basis. Simply, if a pension enhancement is negotiated that increases the unfunded liability, then the voters must approve it first to become effective (for a sampling of this pension reform measure, see MOORLACH UPDATE — Happy Birthday! — September 30, 2013 september 30, 2013 john moorlach, MOORLACH UPDATE — Alternative Investments — November 17, 2013 november 17, 2013 john moorlach, MOORLACH UPDATE — Social Host Ordinance — November 6, 2013 november 6, 2013 john moorlach, and MOORLACH UPDATE — Conditions of Children — October 24, 2013 october 24, 2013 john moorlach). We have also made this a two-year bill.

All to say, I am not afraid to pursue pension reforms. I’m sure my colleagues on the other side of the aisle believe that reforms should be discussed and approved. I just believe that the public employee unions, who finance their campaigns, are holding the majority of these legislators back. When the public employee unions realize that we are trying to make defined benefit pension plans sustainable, then they have the opportunity to be a part of the solution.

However, just like public safety officers in Arizona, I get the sense the old guard is soon to be replaced by a younger generation of public servants who want to be more mobile and have more control over their retirement decisions. Hopefully that moment isn’t far off.

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OPINION

Occupational licensing reform a bipartisan goal

http://www.ocregister.com/2017/08/11/occupational-licensing-reform-a-bipartisan-goal/

Something the Trump and Obama administrations agree on: occupational licensing laws need to be reformed.

In a speech delivered July 21, U.S. Secretary of Labor Alexander Acosta called on state legislators to reform occupational licensing laws which, he argues, are too often used “to limit competition, bar entry, or create a privileged class.”

He’s right. While upwards of one-in-four American workers require a government license to earn a living, there are often vast discrepancies between states regarding which particular jobs require licensing. According to a 2012 report from the Institute for Justice, of 102 low- and moderate-income occupations assessed, only 15 were licensed in 40 or more states. Whereas Louisiana licensed 71 of the studied occupations, Wyoming only licensed 24. California licensed 62.

The arbitrariness of which occupations are licensed and which aren’t can make it difficult for workers to move across state lines. One particular group of workers harmed by this is military spouses, who commonly have to relocate. Approximately 35 percent of military spouses work in a field requiring a government license or certification. In a 2013 Institute for Military Veterans and Military Families survey of female military spouses, 40 percent reported problems or delays in having their licenses or certifications renewed or reissued.

There are also wide varieties in the requirements for licensing that states impose, including fees and the periods of training and education needed to get a license. As IJ points out, while 10 states required four or more months of training for manicurists, Alaska and Iowa respectively only required three or nine days.

This is often done with minimal benefit to consumers. “There is little evidence to show that the licensing of many different occupations has improved the quality of services received by consumers,” a 2015 Brookings Hamilton Project paper noted.

Acosta’s proposed solution is sensible. “If licenses are unnecessary, eliminate them. If they are needed, streamline them. And, if they are honored by one state, consider honoring them in your own state.”

His remarks echo a report issued by the Obama administration in 2015 which made similar recommendations. Observing that current licensing practices are often “inconsistent, inefficient, and arbitrary,” the report called on states to “review current licensing practices with an aim toward rationalizing these regulations and lowering barriers to employment.”

In this spirit, last year, the state’s Little Hoover Commission called on California to reassess the value of its extensive licensing systems, citing the harm done to consumers, the poor, immigrants, out-of-state workers, military families and people with criminal records.

Unfortunately, reform efforts have been stifled to date in California. Sen. John Moorlach, R-Costa Mesa, proposed Senate Bill 247 to drop licensing requirements for a handful of occupations like upholstery not licensed in many other states, but the bill was killed by Democrats in April.

With Trump and Obama administration officials making the same observations of the same problems, occupational licensing reform ought to be a nonpartisan effort, and one that legislators concerned with economic liberty and economic justice alike should be able to work together on.

NEWS

Bull? Stocks can’t stave off California pension crisis forever

By TERI SFORZA

http://www.ocregister.com/2017/08/10/bull-stocks-cant-stave-off-california-pension-crisis-forever/

Remember 2003? Gray Davis was recalled, porn stars ran for governor, Arnold Schwarzenegger catapulted into office – and California’s state and, for the last time in many, many years, local governments paid more into their pension plans than they owed in outstanding pension debt.

In those halcyon days, your cities, state and local governments paid $7 billion to support their workers’ golden years, while the gap between what they owed those workers – and what they actually had squirreled away – was just a wee $6 billion, according to figures from the State Controller’s Office.

One year later – the year Ronald Reagan died, John Kerry faced off against George W. Bush, “The Lord of the Rings: The Return of the King” won 11 Oscars and newly sweetened public employee retirement formulas kicked in in earnest – the gap between what California governments had on hand what they owed workers exploded to $50.9 billion.

And so it went. Each year, state and local governments shoveled more and more cash into pension funds – $16 billion, $19 billion, $21 billion – but each year, the growth of their “unfunded pension liabilities,” as it’s called in government-speak, continued at a monstrous rate nonetheless – to $64 billion, $128 billion, $241 billion.

Then – hallelujah! – the hole shrank a tad in 2015, dipping to $234 billion.

Did California turn the corner?

Unlikely, experts say. That dip was the work of some stellar years on the stock market – the mammoth California Public Employees’ Retirement System clocked returns of 13.2 percent in 2012-13, and 18.4 percent in 2013-14 – mixed with a brew of overly-optimistic expectations on investment returns and less-than-realistic assumptions on how long retirees will live, among other things, which will soon be sobering up in such a way that the unfunded figures will grow even more.

Even at that lower figure, unfunded liabilities can be viewed as a $6,000 debt for every man, woman and child in the state of California.

Why should you care? Because it’s your pocketbook. If that hole is not filled up with meatier earnings and heftier contributions from public workers and agencies, taxpayers could be called upon to fill it directly.

This is where folks start talking about heady concepts like “generational equity.” Your children and grandchildren will be paying for the services that you are enjoying today. And there’s also the concept of “crowd-out;” as governments pay more into pension funds there is less available for services like roads and parks and libraries. They ask: Is that fair?

There are basically two things that can happen next: Workers and governments negotiate more modest benefits for work yet to be performed, or taxes go up.

The smart money is on some combination of the two, and the California Supreme Court may make a game-changing decision on all that soon.

California has long considered public pension promises as contracts etched in stone – i.e., the formulas in place on the first day of a worker’s employment can never, ever be changed, and any attempts to do so violate the California constitution. But state appellate courts have concluded that governments do, indeed, have wiggle room:

“While a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension,” wrote Justice James Richman in a ruling regarding Marin County last year. “And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The California Supreme Court has agreed to hear this, and similar cases. It’s unclear if it will agree.

Bear wrestling

Officials from retirement systems say they’ll be able to hold the line on the growth of unfunded liabilities and eventually catch up without changing the formulas. Observers remain skeptical.

“The economic downturn and the volatility in the market were still the primary drivers for CalPERS unfunded liability growth during this time period,” CalPERS spokeswoman Amy Morgan said after reviewing our numbers. “Our strong investment returns in fiscal year 2013-14 of 18.4 percent and pension reform savings helped offset the unfunded liabilities increase from growing significantly.”

Many agencies in California are trying to attack the problem by paying down their unfunded liabilities earlier and kicking in more than the minimum-required annual contribution, she said. The state will pay an extra $6 billion this year to fill its hole, which should save $11 billion over the next 20 years, Morgan said. In the last fiscal year, more than 150 agencies did much the same thing.

“CalPERS estimates that our unfunded liabilities are expected to decrease over time and not increase unless there is a string of losses,” she said.

Tom Aaron, vice president and senior analyst at Moody’s Investors Service, expects to see much the opposite, at least for a while.

“Something we’ve seen on a widespread basis in the past year or two is that public pension plans have reduced their assumed rates of return,” Aaron said. “Not long ago, CalPERS had assumed returns of more than 8 percent, but recently decided to drop that down to 7 percent. That results in liabilities going up.”

Even when systems hit targeted returns – and they exceeded those targets this year – the amount that governments and workers kick in isn’t enough to prevent unfunded liabilities from growing, he said. They tend to favor paying less now and paying more later, robbing them of the magic of compounding.

There is not a pension fund in America that can earn its way out of its liabilities, said Peter Kiernan, public finance specialist and chair of the New York State Law Revision Commission. Lost compounding is the primary reason.

Money makes money

Compounding, Mary Mary Quite Contrary, is how the money garden grows.

If you put $100 away today and earn 5 percent interest, viola! Next year you’ll have $105 to earn 5 percent interest, and so on. Money makes money. Exponential growth.

But, if you put $100 away today and lost money, not only is your principal gone, but the interest earnings you were counting on to pile up and earn even more interest are gone as well. Dramatic events, like the financial meltdown of 2008, wiped out billions from public pension funds – including nearly one-quarter of what was in the coffers of the CalPERS. That makes it very hard to regain lost ground.

There are larger changes at work: Forty years ago, contributions from governments and workers comprised two-thirds of what was in the pension funds, and one-third was expected from investments, Kiernan said. Today – driven by the bull markets of the 1980s and ’90s – it’s just the opposite.

Annual required contributions have more than doubled over last decade, from 6.2 percent to 18.1 percent, which leaves less money to pay for other things.

Paul Bersebach, The Orange County Register

John Moorlach. Paul Bersebach, The Orange County Register

State Sen. John Moorlach, who had been warning that the current system is unsustainable for years before the issue pierced the popular consciousness. The spike in liabilities seen between 2003 and 2004 was the work of new, more generous, retroactive retirement formulas adopted by one public agency after another in the early 2000s.

Meaning this: City A had been socking money away for Police Officer B’s retirement for decades. When City A adopted sweetened pension formulas, it suddenly was committed to paying Police Officer B quite a bit more every month for the rest of his life – even though it had ever set money aside to cover a pension that large.

Officials thought pensions were so super-funded that this retroactive thing would not come back to bite them. Add in “pension holidays” (when funds looked so healthy that officials quit putting money into them, sometimes for years), a crippling recession, lengthening life spans, a spike in retirements and reductions in what pension plans expect to earn on investments, and you get a hole hundreds of billions of dollars deep.

What’s next?

Or deeper. Current liability totals are computed assuming returns on investments that exceed 7 percent, which critics say won’t pan out over the long haul.

If one assumes lower return rates – as does former Democratic Assemblyman Joe Nation, now of the Stanford Institute for Economic Policy Research, on Stanford’s Pension Tracker – the hole can easily double, triple or quadruple.

But the end is not nigh, said Kiernan.

“California’s pension systems are underfunded significantly, but they are not in a death spiral,” he said. “An effort is being made to achieve reform and enhance funding. A good investment year easily could be followed by a bad one and there could be regression, however. It just is too early for gloom and doom.”

There must be political bargaining, he said. Since the recession, every state has tried to adopt reforms – but those modest formulas apply only to new hires, doing little to nothing to reduce current liabilities for the vast universe of public workers.

We invited several public pension advocates to share their thoughts on the numbers. They said they were studying them, but did not respond by deadline.

“The relevant question to ask is: Is there sufficient political will to achieve major reform?” Kiernan asked.

We’ll see.

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This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District.

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