
California’s public pensions are breaking the bank - JumpCrisscross
http://www.latimes.com/projects/la-me-pension-crisis-initiatives/#nt=oft09a-6gp1
======
cassieramen
This is a wonderful series the LATimes has been doing. I encourage everyone to
checkout the other articles in here.

The one that focused on El Monte was particularly discouraging.
[http://www.latimes.com/projects/la-me-el-monte-
pensions/](http://www.latimes.com/projects/la-me-el-monte-pensions/) A former
city manager with a $250K pension rationalizes with: “I have to admit that we
made the mistake back then, and I have to admit that I make too much money
now, but what can I do?”

------
jhulla
Pension funds are one of the largest victims of Central Banks after the
2008/2009 financial crisis. Quantitative easing on top of zero/negative
interest rate policies has dramatically reduced the risk-free return on
capital. Bond yields have collapsed worldwide.

In short, the problem is this: commitments were made when interest rates were
higher than now. Interest rates have now stayed far lower for far longer than
expected. Meeting those commitments in the recent few years would have
required taking more risk than the funds can justify.

~~~
neffy
It's much worse than that. Commitments have been made that could never have
been met - and not just in California.

Hard equations are coming home to roost.

~~~
aswanson
Facts. The baby boomer generation set up public commitments on the back of the
taxpayer, from municipal to federal, that simply cannot be met. On top of
that, after inheriting a system that allowed them to get a post-secondary
education doing unskilled labor, they sloppily set up incentives that caused
their children to inherit mortgage-level debt with horrible employment
prospects for a comparable education in their era. Thing is, they are reliant
on the people they saddled with this piss-poor situation for continued
retirement payments.

~~~
tossaway322
Speaking for the municipal aspect: the municipal voters voted for these
measures and certainly voted for the mayors and city councilmen who brought
these measures into place. Then the cities, under the same politicians, failed
to fully fund the pensions they had set up (they are normally required to fund
pensions, each year, to a significant level, but the cities postponed the
funding).

Years pass and then the cities lament, crying that these pension funds are now
undue "public commitments on the back of the taxpayer", such as aswanson says
above. IOW cities are trying to screw retirees out of their pensions.

For example, at this very moment Houston, in the name of "Pension Reform", is
trying to coax the state to pass a law that would cut the pension of widows
and widowers in half!

And that's just part of the cutbacks Houston is asking.

~~~
WkndTriathlete
The municipal and state governments that brought the measures into place
generally operated in an ethically-compromised environment and mathematical
fairy land.

The people that voted in the fundamentally-flawed plans are also the ones that
are standing to benefit from them as the legislative fixes are rolling in. I
sympathize that they have built plans around the expectations of the money
being there, but at the same time I think it's pretty unrealistic to expect
current taxpayers to pay for unrealistic and underfunded plans.

~~~
neffy
I remember, back in the 90's, going to one of those retirement planning/sales
sessions, where they explained how much you would need to invest at what rates
to have a good retirement. With the little I knew then about
economics/investment, I knew there was no way they were going to be able to
deliver the 8-12% annual return they _assumed_ would be required to meet their
projections.

So yes, I sympathise with people who allowed themselves to be lied to, i
really do, because ultimately this is white collar crime we're talking about -
but caveat emptor also applies.

~~~
aswanson
Guaranteed 8% rate of return, let alone %12, violates historical
data/mathematics. Anyone other than Renaissance Technologies advertising as
much needs to be sued.

~~~
vkou
The average rate of inflation through the 80s was 5.6%

Given that, an expected 8% rate of return isn't unreasonable.

~~~
AstralStorm
Historic data is not good enough to base a long term policy on. Not without
precise risk valuation at least.

~~~
vkou
No, but it generally makes sense to talk about expected investment return over
the rate of inflation. Hence, the raw number is meaningless - a 12% return
rate in an environment with inflation of 9% is almost as reasonable as a 3%
return rate in an environment with inflation of 0%.

~~~
neffy
That's one of several things to bear in mind - but it's not a straightforward
one - the various causes of high inflation tend to mitigate against matching
investment rates.

Leaving that aside - even at the time it seemed ridiculous - so learning 20
years later that the "professionals" involved have essentially bet everybody's
future, on projecting those kinds of returns for 40 years...

... because we all understand I hope. When this thing blows up - its not going
to be pretty.

------
tn135
This is part of the real reason why California is imposing the new gas tax in
the name of infrastructure.

Part of the reason why even reasonable people do not take left's claims of
"tax to protect environment" seriously because this is all the money that they
can see going to the pockets of politicians and government employees.

~~~
Ericson2314
Whatever you think of pentions, the politicians are a minuscule portion of the
government payroll.

~~~
cassieramen
From the article: "In Los Angeles and other cities, [retirement benefits]
account for 20% or more of general fund spending."

That is certainly not a minuscule portion.

~~~
vkou
And what percentage of general fund spending goes to salaries, and salaries of
contractors? The other 80%?

Pensions are part of employee salaries. Not budgeting for them is like buying
a house, and not budgeting for anything past the first mortgage payment.

Why are we talking about defaulting, or haircutting pensions, instead of
defaulting... On any of the other people or companies that the state owes
money to?

~~~
cassieramen
I think the big focus of the article is the "California Rule" that prevents
changes to pension commits that have yet to be earned. It's like buying a
house and having the real estate market crash. You can renegotiate your
property taxes (lowered home value). You can refinance your mortgage.

~~~
vkou
Changing future pension payment rules is entirely reasonable, as long as your
prior work results in pro-rated payouts.

Changing 'future' pension payment rules, where a pension kicks in after 20
years of employment, when you are on year 19, should not fly.

~~~
shouldbworking
Social security pushes back retirement ages continually. Not an extra year at
year 19 of 20, but tacking on 5-10% to everyone's remaining time is reasonable
and the govt does it all the time for other entitlements.

I fail to see how social security, which is a national program for all
citizens, is any less holy than pensions. Pensions are usually backed by city
and state govt which have much shallower pockets.

What I'm saying is if the federal government can cut back social security
benefits there's no reason we shouldn't cut future pension benefits

~~~
vkou
> Social security pushes back retirement ages continually.

SS is a welfare program. This is fundamentally different from a salary.
Welfare programs can, and do change just before, or just after, you become
eligible for them. This is fine. This is social programs are supposed to work.
(Although, generally, their accounts should not be plundered to fund illegal
wars.) There was no contract that you signed when you started paying into SS.
It's a tax, which funds a welfare program.

Salaries, on the other hand, are sacred. Pensions aren't social programs. They
are deferred salaries. Cutting pensions is a salary clawback.

If you're going to stop paying the pensions you're obligated to, you damn
better have declared bankruptcy, and let your creditors - including the
pensioners - pick over your carcass.

~~~
nugget
Social security is a pension program with contributions made from salaries,
and future benefits based on the amount of contributions and age at
retirement, as opposed to need.

There are other programs administered by the Social Security Administration
(e.g. SSDI) that are welfare programs, but that's not what the previous poster
was talking about.

~~~
vkou
Unlike a pension, there is no enumerated entitlement of what you will receive
out of SS. You didn't enter any contract when you started making payments. The
government _could_ shut it down tomorrow, and it would not be considered a
default.

The fact that the payments are structured much like a pension is tangential.
For example, nothing stops the feds from restructuring it into flat payments.

~~~
nugget
> there is no enumerated entitlement of what you will receive out of SS

What do you base this statement on? The Federal Government enumerates the
exact formula used to determine future social security benefit payments, even
for people 40 years away from retirement. Given a known salary scale, a 22
year old can calculate their expected future social security benefit down to
the penny. This future benefit is funded by a 12.4% tax/contribution from your
salary. It's a % contribution for a defined benefit.

How is that any different than a state or municipal pension?

They are in fact so similar that, in some states, participation in the state's
pension plan entirely replaces (rather than compliments) participation in
social security.

------
notliketherest
This is what happens when your public sector unions have local and state
politicians in their pockets.

~~~
jhulla
Check out public sector salaries in SF sorted by overtime:

[http://transparentcalifornia.com/salaries/san-
francisco/?&s=...](http://transparentcalifornia.com/salaries/san-
francisco/?&s=-overtime)

~~~
acchow
Well, that explains housing prices in SF...

~~~
kevinburke
This goes for everyone in this thread but please don't only be cynical about
this - there's a lot we can do around the margin

\- Approve HOME SF - a Katy Tang plan to provide bonuses for dense housing
near transit

\- Approve the Safai/Breed housing plan, which would require 18% of units to
be affordable, vs 28%

\- Show up to the Brisbane Baylands meetings and voice our support for a plan
that includes 4400 units of housing, vs zero units

\- Support SB 35, which would fast track projects that are near transit and
include affordable housing

\- Support SB 167, which would allow the state to be a lot more aggressive
pursuing violators of the Housing Accountability Act.

~~~
acchow

      a Katy Tang plan to provide bonuses for dense housing near transit
    

Can you explain why this is needed? In other cities, the value of physical
land goes up near subway stations which naturally increases the density of
developments to meet profitability.

~~~
kevinburke
Whether a development would be profitable has little to do with whether it
would be politically viable in San Francisco. In particular areas near transit
aren't necessarily zoned for high density. Follow Kim-mai Cutler or go to a SF
Yimby newbie meeting to learn more.

~~~
acchow
My point was typically you don't need to provide bonuses for higher density
developments near transit. Developments will naturally become higher density
because they have to.

You can't purchase a lot of land and bulldoze it for a 3-story building near a
subway station. It's just not profitable. The building will naturally be a
high-rise. No "bonuses" needed to induce that.

------
trhway
[http://www.ocregister.com/2016/08/12/the-100k-club-public-
re...](http://www.ocregister.com/2016/08/12/the-100k-club-public-retirees-
with-pensions-over-100000-are-a-growing-group/)

21K of $100K+ pensions. I wonder how much i should make to afford 401K
contributions large enough to have result equivalent to one of those
$300K/year pensions.

~~~
cortesoft
Well, lets think about it. The average life expectancy in the US is about 79
years. If we assume a retirement age of 65, that is 14 years of retirement on
average. Lets make it 15 for the math.

According to bankrate, you would need to save about $24,000 a year for 40
working years to be able to support $300,000 a year for 15 years of retirement
(using the default bankrate settings of 7% returns during pre-retirement years
and 4% returns during your retirement years).

That is only 8% of your annual salary (assuming you were making $300,000).
That is NOT an unreasonable saving rate for your retirement.

You also have to remember that retirement benefits is a HUGE selling point for
government work; they are able to pay WAY below market rates to workers
because they have promised this benefit.

Of course, when you are planning your own retirement, you can't just assume
you are going to die at exactly 79 years old, so you have to save more. That
is one advantage of a pension fund - it averages out the cost for people who
die early versus people who die late.

Anyway, bottom line, the pensions aren't ridiculous when you look at them in
context. Of course, they were not being properly funded, but that isn't the
fault of the people who took them.

~~~
ak217
> Of course, they were not being properly funded, but that isn't the fault of
> the people who took them.

Yet it is somehow the fault of the taxpayers, who are asked to sacrifice part
of their income to make up for it.

~~~
cortesoft
Well, yes, because the taxpayers elected the government who made those
choices. Taxpayers are ALWYAS responsible for the choices their government
makes.

------
rrdharan
Here's an interesting long-form writeup on how CalPERS mismanagement
contributed to this situation:

[https://www.city-journal.org/html/pension-fund-ate-
californi...](https://www.city-journal.org/html/pension-fund-ate-
california-13528.html)

------
bkohlmann
This demonstrates that ballot initiatives are a poor tool for creating and
implementing public policy. When the outcome of a binding statue comes down to
the wording, elected legislatures should be given the task. It's part of the
reason why the US is set up as a Republic and not a democracy. Even with
inevitable gridlock, At least getting folks in the same room helps to
eliminate the cognitive biases inherent in us all.

------
bluedino
Are the same people that want to break pension contracts the same people who
want to break student loan contracts?

~~~
Ericson2314
Nope, never

------
carsongross
Pensions are inherently intergenerational agreements.

I'm not sure why Boomers would expect their children, who are saddled with
unprecedented amounts of educational debt and who are priced out of the
housing market, to be able to meet that obligation, let alone feel any duty to
do so.

------
kcorbitt
Back when I lived in London, I made friends with an old, salty Welshman who
had worked as an administrator for the Port of London, before containerized
shipping made London as a port eternally obsolete. His last official act on
the job, 30 or more years prior, had been to assign himself and his cohort
generous pensions and an early retirement (he was in his early 50's at the
time). I can't blame the man -- jobs at the port were going away forever, and
everybody knew it. But anyway, if the same person cuts the cake and serves it
you can bet they'll end up with the biggest piece. Pensions for civil servants
often fall into that category.

------
beatpanda
While we're on the subject of misleading language, let's talk about why this
is always labeled as "pension reform" and not what it actually is, "reducing
payments", or even better, "reneging on a contract."

I don't understand why it's controversial that California (or any other state)
should be legally obligated to pay the pensions they promised to workers.
People make long-term decisions based on those promised benefits, and pulling
the rug out from under them is unconscionable. And, luckily, in California at
least, illegal.

~~~
throwaway91111
On the flip side, even the existence of pensions is amoral. Promising the
funds of future generations, which may never materializes, condems citizens
for decades of wasted spending.

Just look at San Jose. Just look at Social Security. It is hard to identify
these liabilities as working the way they were intended. And what do the
people gain from them? Overpaid cops?

~~~
kspaans
And yet the Canada Pension Plan is fully funded[0] and in no danger.
California's problem is over-promising and mismanaging.

0 - [http://www.osfi-bsif.gc.ca/Eng/oca-bac/as-
ea/Pages/ascpp.asp...](http://www.osfi-bsif.gc.ca/Eng/oca-bac/as-
ea/Pages/ascpp.aspx#toc-Ic)

~~~
aboutthecpp
I get angry whenever people use the words "fully funded" to describe CPP. On
one hand it's true--but it's also very misleading.

After considering investment returns/time value of money/"net present value"
of contributions:

If you were a baby boomer, you'll get ~2x what you put in.

If you were born in the 80's, you'll get half what you put in.

So yes, they "fixed" CPP by changing it so that younger people are legally
obligated to "invest" their money in a pension fund that returns half of what
it should return based on the contributions younger people are making.

I think CPP is in danger. The danger is that someone will create a clear
enough explanation of how CPP was "fixed" and young people will decide that
there is no reason for them to allow being screwed the way CPP does.

------
martinald
Why do people even need these level of pensions? They're very substantial if
you consider many of these people will have paid off their mortgage by this
time, and housing is the only really exploding cost for people recently (apart
from healthcare but that'll be covered under Medicare).

~~~
bazinga888
The answer that covers many cases is: they otherwise have no retirement.

When I worked for a state university, in IT as a senior DBA, I earned half
what private sector friends and professional acquaintances earned.

The story was something like "well, we can't afford to pay you enough to save
for yourself, but we'll make sure there's a decent retirement to draw from for
you."

The problem is, after the housing bubble, and with low-interest rates, the
investment methods they had relied on haven't kept up.

Not saying this covers the more extravagant pay outs. But public workers on
the whole have largely been shorted up front in exchange for a decent
retirement.

~~~
paulddraper
Yeah, that's basically the deal: crap job/salary now, cushy retirement later.

------
vkou
Arguing for public pension reductions is a bit like arguing for your employer
clawing back your salary, after you stopped working for them.

Most public jobs pay far less then private sector jobs. Pensions are one of
the reasons behind it. They are part of your compensation package, not some
communist largesse.

~~~
jhulla
This is a common misconception. You may be surprised by the numbers:
[http://transparentcalifornia.com/salaries/san-
francisco/?&s=...](http://transparentcalifornia.com/salaries/san-
francisco/?&s=-overtime)

~~~
vkou
The people at the top of that list are in executive positions... In the most
expensive metro area in the country.

Middle managers in valley firms make more.

