Teacher Tenure/Unions/Government/Pensions

[macrockett]

JUNE 1, 2010

The Lessons of the GM Bankruptcy
Everybody knew it was ridiculous and unsustainable to pay UAW workers not to work.

By PAUL INGRASSIA

Today is the first anniversary of one of this country's less-than-crowning milestones: the bankruptcy of General Motors, once the largest and richest company in the country, and indeed the world.

Keeping GM alive, albeit in shrunken form, was an expensive undertaking for America's taxpayers: about $65 billion in all, if one counts government aid to the company's former financial arm, formerly GMAC, now renamed Ally Bank. For all that money we, as a country, should take away some lessons from the experience. The following get my vote for the three most important:

• Problems denied and solutions delayed will result in a painful and costly day of reckoning.

• In corporate governance, the right people count more than the right structure.

• Appearances can be deceiving.

All three might sound blindingly obvious, but it's amazing how frequently they're ignored. That's especially true for the first lesson, about denial and delay.

Everybody knew it was ridiculous and unsustainable to pay workers indefinitely not to work (in the United Auto Workers union's Jobs Bank), to keep brands such as Saturn and Saab that hardly ever made money, and to pay gold-plated pension and health-care benefits to employees. But all of these practices, paid for by mounting debt obligations, continued for decades in GM's 30-year, slow-motion crash.

Yet there were plenty of warnings. A dramatic one came in a January 2006 speech by auto-industry veteran Jerome B. York, who represented the company's largest individual shareholder at the time, Kirk Kerkorian. Unless GM undertook drastic reforms "the unthinkable could happen" within 1,000 days, predicted York (who died recently). As things turned out he was a mere 30 days off.

The relevant question looking forward is whether the unthinkable—going broke—also could happen to America.

Everybody knows that we're running unsustainable federal deficits. And that Fannie Mae and Freddie Mac created financial sinkholes by helping lenders make mortgages to people who couldn't afford them. And that many states' public-employee pensions funds are hopelessly underfunded for the level of benefits they provide. And that shoveling more money into the public schools without insisting on structural reforms and accountability hasn't produced results and won't do so in the future.

Addressing these issues inevitably means enforcing spending discipline and standing up to public-employee unions in a way that GM failed to do with the UAW. Continued denial and delay will prove ruinous. To put it another way: America bailed out General Motors, but who will bail out America?

The second lesson is almost as important as the first, even though the term "corporate governance" sounds about as exciting as, well, dental floss. But good governance is critical because it is private enterprise that creates capital and funds government (though few people in Washington seem to recognize this). What happened at GM, in contrast to its crosstown rival Ford, is instructive.

On paper General Motors was a model of good corporate governance, while Ford was (and is) a disaster. The Ford family's super-voting Class B shares give it 40% of the votes with less than 4% of the shareholder equity. Class B shares get about 31 votes for every share of the Class A stock that nonfamily members own. And the Ford family gets veto power over any corporate merger or dissolution.

This structure seems to fly in the face of what is generally understood to be sound principles of good corporate governance. Such "undemocratic" provisions are sure to be lamented this month at two major corporate-governance conferences: the ODX (Outstanding Directors Exchange) in New York, and the annual confab at the Millstein Center for Corporate Governance at Yale.

But the Ford board of directors and family came together in 2006 to seek a new CEO from outside the struggling company, even though that meant family scion Bill Ford Jr. had to relinquish command. He volunteered to do so and remains chairman, but not CEO. Meanwhile, the GM board, consisting of blue-chip outside directors who chose a "lead director" from their ranks, steadfastly backed an ineffective management from one disaster to another and wrung its collective hands while the company ran out of cash. Some GM retirees dubbed the directors the "board of bystanders."

Ford's governance might be undemocratic. But at least it concentrates decision-making power in the hands of a few people with a significant emotional and financial stake in the company, and they proved willing to act. Absolutely no one on the General Motors board had either such stake, which helps explain why the directors did nothing.

GM's current board—appointed by the company's controlling shareholder, the U.S. government—has a handful of holdovers from the prior board. Maybe they aren't bad people, but they surely showed judgment that was beyond bad. As the new GM prepares for an initial public offering of stock—so that the government can recoup the taxpayer investment—it will need credibility at the board level. The holdover directors should resign.

As for appearances versus facts, the GM bailout—along with the similar exercise at Chrysler—offers ample evidence. The understandable objection to bailouts is that they foster moral hazard, the willingness to act recklessly without fear of consequences. Yet the bailouts of these two companies had painful consequences aplenty for the major actors.

Shareholders of both companies got wiped out. Creditors took major hits, including those who held secured debt at Chrysler. (Their loans to the company were reckless, the equivalent of subprime mortgage loans, but they did recover more than they would have in a Chrysler liquidation.) Many workers and executives lost their jobs. Many dealers lost franchises. The Jobs Bank was abolished, albeit belatedly. So was no-cost health insurance.

All this seems plenty of pain to discourage future moral hazard. Letting the companies liquidate would have produced far more pain, of course, but much of it would have fallen on innocent bystanders—the ordinary citizens who participate in an economy that was on its knees last spring. The Obama administration, to its credit, tried to walk a fine line: doing enough for Detroit to protect the economy, but not doing so much to foster future irresponsible behavior.

Nobody on any point of America's political spectrum really liked this bailout. But having paid for it, let's hope that we as a nation are willing to learn from it.

Mr. Ingrassia, a Pulitzer Prize-winner and former Detroit bureau chief for this newspaper, is author of "Crash Course: the American Automobile Industry's Road from Glory to Disaster," published recently by Random House.

[macrockett]

And why not take more risk for a potentially higher return? Especially when the California taxpayer is on the hook for any mistakes (losses). Where can I get that deal?

Also, while your returns over the last 3 decades are above 8%, what are they over the last two decades? The world has been changing, incomes in the U.S. are plateauing. The world is awash in debt and overvalued assets. In short, the developed world is deleveraging. Stanford, Kellogg and the University of Chicago say those types of returns are suspect.

But who cares... the taxpayer will pick up the tab.

www.calstrsbenefits.us/post/calstrs-board-considers-revised-investment-assumptions

CalSTRS Board Considers Revised Investment Assumptions
May. 27, 2010 Chad Christman

The Teachers Retirement Board will discuss possible changes to its investment return assumption at its June 4, 2010 meeting. A change would affect the funded status and actuarial valuation of the CalSTRS Defined Benefit (DB) and other programs.

Each year, the Board adopts an actuarial valuation of the DB Program that projects the program’s assets and liabilities to give the Board a snapshot of the program’s current fiscal health. One of the key components of that snapshot is the assumed rate of return on investments. The 2008-09 market downturns and the uncertain investment outlook for the next few years has prompted this review of the investment rate of return actuarial assumption. At its February 2010 meeting, the Board discussed alternatives that would reduce the current investment return assumption of 8 percent to 7.75 percent or 7.50 percent.

A decision to lower the investment return assumption from its current 8 percent would increase the unfunded liability and lower the funded status of the Defined Benefit (DB) Program, increasing the need for higher contributions in the future.

Unfunded Actuarial Obligation Trigger

Under California law, a trigger kicks in raising the State’s General Fund contribution to the DB Program when there are not enough assets to fund the DB Program as it existed in 1990. According to CalSTRS consulting actuary, there are likely to be insufficient funds to fund the DB Program as it existed in 1990 even at an 8 percent investment return assumption. For 2010-11, that increase would be about $110 million.

In September, the Board will receive a valuation of the program as of June 30, 2009, which will reflect the growth of unfunded actuarial liability to about $44 billion with an estimated funded ratio of 77 percent using the present interest rate assumption of 8 percent. By comparison, the unfunded liability was $22.5 billion and the funded ratio was 87 percent as of June 30, 2008.

Historical Performance

The investment rate of return actuarial assumption is one of many assumptions, methods and parameters that the Board must adopt to complete an actuarial valuation of the fund. Every four years, the Board conducts an experience study of past and anticipated future experience in many economic and demographic areas, such as inflation, salary increases, mortality and rates of retirement an provides a status of the fiscal health of the fund. The Board evaluates past performance of these assumptions, methods and parameters to make projections about the future.
The last such study was conducted using data as of June 30, 2007. However, the 2008-09 market downturns and the uncertain investment outlook for the next few years prompted an earlier review.

CalSTRS’ actuary has advised the Board that the current 8% assumed investment return is reasonable but that a slightly lower assumption, such as 7.75% or 7.5% would also be appropriate. For 30 years, CalSTRS’ investment portfolio has averaged 8.6 percent annual returns, which includes the 25-percent loss resulting from the 2008/09 global market crash. Nevertheless, the performance over the past three decades betters the 8.0 assumed rate of return in place since 1995.

Changing market realities requires that CalSTRS take a responsible approach to assessing the fiscal condition of its benefit programs.

The investment return assumption is important because it sets the growth rate of future assets from investment earnings, which historically has accounted for more than 60 percent of every benefit dollar paid out.

The CalSTRS DB Program is funded through shared sources:

* Member’s payroll contributions (8 percent of salary)
* School employer’s payroll contributions (8.25 percent of each member’s salary)
* State of California contributions (2.017 percent of payroll)
* Returns on investment earnings (Historical

[macrockett]

Just like social security, medicare/aid, (and the new health care bill ...soon), the actuarial assumptions of the public pension funds are flawed. Even if contributions had been made when required, much of those funds, as well as any gains generated, would have been lost over the past decade.

Quite simply, pension managers have not been able to deliver on the 8% returns as they did in past decades. Debt and leverage are making such promises suspect at best, as pointed out many times in earlier posts.

online.wsj.com/article/SB10001424052748704463504575301032631246898.html?mod=WSJ_WSJ_US_News_5#printMode
JUNE 12, 2010

Pension Cuts Face Test in Colorado, Minnesota
By JEANNETTE NEUMANN

A showdown is looming over whether commitments made to retirees by government pension funds can be scaled back in dire economic times.

Facing shortfalls, some public pension funds are responding by paring back payouts pledged to retired workers. Earlier this year, pension funds in Colorado and Minnesota curtailed annual cost-of-living increases.

"No matter how draconian you got on the new hires, you ran out of money" if you didn't cut benefits to current retirees, said Meredith Williams, chief executive of the Colorado Public Employees' Retirement Association, with $34.2 billion in assets.


In February, Colorado lawmakers passed a bill that reduced the pension system's cost-of-living adjustment from a fixed 3.5% a year to a maximum of 2%—but possibly less for current and future retirees. For example, retirees who were expecting a 3.5% increase in cost-of-living adjustments this year will receive no increase. The new law also increased contributions from employees and employers.

In response, Colorado and Minnesota have been hit by lawsuits filed by retirees, who claim the changes violate state law. Those retirees have "lived up to their end of the bargain, and the state is not living up to theirs," says Stephen Pincus, a Pittsburgh lawyer representing plaintiffs in both states.

The legal fight could decide whether financial commitments to retired public workers are sacrosanct, as many employees have long assumed.

While many retirees from the private sector have seen retirement benefits weakened in recent years, retirees at public pension funds largely have avoided such cuts.

But investment losses, reduced contributions and benefit boosts are making it far more costly for public pensions to live up to their obligations. To replenish assets, many pensions have reduced benefits to new hires and increased contributions by employees and employers, says Ron Snell, director of the state-Services division for the National Conference of State Legislatures.

Far fewer funds have taken the more-drastic approach of curtailing benefits to retired public-sector employees. The outcome of the Colorado and Minnesota lawsuits could embolden other pension funds to make their own cuts, though the legal landscape varies from state to state.

"The lessons of Minnesota and Colorado will be interesting, but they also won't be considered absolute guidance," says Keith Brainard, research director for the National Association of State Retirement Administrators.

The move to scale back cost-of-living increases in Colorado gained momentum last year following a study that estimated the Colorado Public Employees' Retirement Association would be out of money in around 30 years, assuming its investments generated a 7% annual return.

Colorado Gov. Bill Ritter, a Democrat, signed the bill into law without fanfare, says state Senate President Brandon Shaffer, also a Democrat. "We didn't celebrate this because we know that there is real pain associated with the changes we enacted through this legislation," Mr. Shaffer says.

According to a benefits booklet provided to Colorado retirees, the pension fund said it "will increase your benefit each year by 3.5% compounded annually."

Kathy Ratz, a 63-year-old retired special-education teacher who lives in Golden, Colo., says she was "totally blindsided" by the extent of the change. She gets a $54,000 annual pension and has $89,000 in savings with her husband, she said. He receives less than $1,000 a month in Social Security.

"I started out thinking I wanted to do my share to help, but I think this is way beyond helping," she says. "What we're going to do is sit down and put more into savings than we have."

Mr. Pincus's law firm has said in court documents that the new law could mean a loss of more than $165,000 in benefits over 20 years for a retiree who received an annual pension of $33,264 in 2009.

The retirees point to a 2004 opinion written by then-Attorney General Ken Salazar, now secretary of the Interior in the Obama administration, that a retired public-sector worker's pension "becomes a vested contractual obligation of the pension program that is not subject to unilateral change of any type" by the legislature.

Seeking to dismiss the case, the defendants, which include the Colorado pension fund, contend that "to claim that a cost-of-living adjustment can never be adjusted defies law and logic."

The defendants also highlight the exigencies of financial stress: "There can be no dispute that preserving the solvency of the Public Employees' Retirement Association is a legitimate governmental interest."

The Minnesota lawsuit came after the state legislature passed a bill in May that reduced retirement benefits from a 2.5% annual increase to between 1% and 2%, depending on the pension fund.

Mary Vanek, executive director of the Public Employees Retirement Association in Minnesota, which reduced the cost of living adjustment from 2.5% to 1%, said potential lawsuits were a concern considered amid the rollback. "We weren't letting that override our fiduciary concerns," she says.

Some experts say that if judges decide in favor of the retirees, public pension funds will have to find another potentially painful way to bridge the funding gap.

"If benefit promises can't be adjusted, then contributions are going to have to go up a heck of a lot," says Olivia Mitchell, director of the Pension Research Council at the Wharton School of Business in Philadelphia. "It's not likely anybody is going to win here."

[macrockett]

articles.baltimoresun.com/2010-06-10/news/bs-md-pension-bill-hearing-20100610_1_pension-city-solicitor-george-nilson-city-council-committee

City Council committee backs police, fire pension fix
Unions protest changes to members' benefits
June 10, 2010|By Julie Scharper, The Baltimore Sun

A bill that would drastically alter the police and firefighter pension plan — and, officials say, avert a financial disaster for the city — won unanimous backing from a City Council committee Thursday, despite protests from union members.

The legislation, which consultants hired by the city say could save $400 million over five years, would delay the age at which employees could retire, increase their contributions and replace a benefit that varies with the market with a modest annual cost-of-living increase for retirees over 55.

Union members called the marathon hearing of the taxation and finance committee "a sham," and accused city officials of reneging on their promises to public safety officers.

[macrockett]

www.bloomberg.com/apps/news?pid=20601039&sid=awW.rqJzAad4#

Pension Plans Go Broke as Public Payrolls Expand: Joe Mysak
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Commentary by Joe Mysak

June 11 (Bloomberg) -- Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.

The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.

This number, 9,700, illustrates just how hard it is for political leaders to reduce headcount even as tax revenue declines, and even as the gap grows between what governments owe their workers in retirement pay and benefits and the amount they have on hand.

Hard? It’s almost impossible, as that number shows.

Politicians have talked a lot about layoffs during this recession. In most cases, that talk is an empty threat. Nobody wants to fire teachers, or firemen, or policemen, in the name of efficiency or good government.

It’s easy to get passionate about the subject. Let’s take a look at the numbers.

Companies started firing more employees than they hired in January 2008. After pausing in November 2009, they fired more in December. With the economy starting to turn around, they have hired more than fired every month so far this year.

Since the Peak

Employment peaked in December 2007 at 115.6 million, according to the U.S. Department of Labor. During the subsequent two years, companies shed 8.5 million workers, or 7.3 percent.

State and local governments, by contrast, kept hiring right through August 2008. From a peak of 19.8 million, these governments have reduced headcount by 231,000, or 1.2 percent.

This breaks down to 46,000 fewer employees on the state side (0.9 percent) and 185,000 among local governments (1.3 percent).

And this, I think, is what drives people crazy. What our politicians are telling us is that state and local governments are optimally sized -- just right. If tax revenue declines, well, then we’ll just have to find more taxes and fees to replace it. We couldn’t possibly look at the cost-of-labor side of the equation.

Doesn’t that strike you as a tad arrogant and entitled?

If you really want to provoke outrage, of the same populist stripe that once targeted bankers’ bonuses, you have to take into consideration public pensions.

Enviable Dotage

Generous and bloated are the terms that have been used to describe them; critics have set up websites to pillory those government retirees who enjoy $100,000-plus annual pensions and other goodies, such as health-care benefits for themselves and their families for life.

These pensions and benefits are enviable, not to mention envied by all those private-sector employees who long ago were forcibly weaned off such defined-benefit programs to 401(k) plans that were subsequently shellacked by the stock market crash.

What’s equally clear is that such pensions and benefits now seem unaffordable, because those responsible -- state and, sometimes, local governments -- didn’t put away enough, or haven’t invested wisely enough, to pay for them.

“Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities” is the title of Rauh’s recent study. It’s a provocative piece of work, especially for one of its tables, titled, “When Might State Pension Funds Run Dry?”

www.taxpolicycenter.org/events/upload/Rauh-ASPSS-USC-20091231.pdf

Circle 2018

Not everyone may agree with Rauh’s conclusions or methodology. He did get my attention with that table, showing Illinois running out of pension-fund assets in 2018; Connecticut, Indiana and New Jersey in 2019; and Hawaii, Louisiana and Oklahoma in 2020.

That’s when I consulted the website of the Bureau of Labor Statistics and was surprised, or perhaps nonplussed is the word, to discover that the state and local governments in these states, combined, added employees even as private companies were firing.

They have joined other state and local governments in firing workers since the peak of August 2008. That month, the seven states and their local governments employed 2,714,800 workers. They have since shed 20,300, and now employ 2,694,500. That’s still more than they carried in December 2007. But I suppose it’s a start.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at [e-mail]
Last Updated: June 10, 2010 21:00 EDT

[macrockett]

One thing is for sure, unions have a lot of money. Two things they don't have, however, which are critical to their success, are the numbers and voter sympathy.

Total union representation pales in comparison to the private sector. In addition, it has become well know that public employee salary and benefit packages are quite generous compared to the private sector. I suspect this perception will only increase when the numbers are in on just how bad private sector middle management was gutted in the lasted recession.

As in this election, Lincoln in Arkansas, and Christie in New Jersey, the voters in the country are waking up and getting active. I don't think the public unions can depend on the voter's ignorance and/or indifference to the political process. Private sector employees have been assaulted from every direction. Exporting their jobs, higher medical, education, and other costs. Loss of private sector pensions and flat compensation over the last decade, and on and on.

www.investors.com/NewsAndAnalysis/ArticlePrint.aspx?id=537131
Taking On The Unions In Calif. — And Winning

By STEVEN GREENHUT
Posted 06/11/2010 06:40 PM ET

A political candidate can take on the public-employee unions in a nasty street rumble and emerge bloodied but victorious. That's the message from Tuesday's election to fill a board of supervisors seat in Orange County, Calif.

It was a race that could have statewide and even national implications because of the particularly gutsy role the Republican Party played in directly challenging union power.

The county's two most powerful public employee unions, the Orange County Employees Association and the Association of Orange County Deputy Sheriffs, spent upward of $1 million in independent expenditures on behalf of their candidate, Anaheim Councilman Harry Sidhu, a go-along, get-along Republican who promised to drop a county lawsuit challenging a 2001 retroactive pension increase for deputies.

Most of the union money went toward hit mailers against Shawn Nelson, a Fullerton councilman who played a key role in stopping an egregious pension hike in his city and the conservative choice for the seat.

County supervisor races don't usually generate that level of spending. But the unions — with their nearly bottomless pit of cash from dues-paying members — dropped one mailer after another championing Sidhu and depicting Nelson as a man who wants to free child molesters because his law firm does criminal defense work.

The unions had so much money, they even bought radio spots on Los Angeles talk radio — an astounding use of funds, given that Orange County accounts for only a portion of the L.A. radio market.

But the unions had to make a point. Nick Berardino, president of the OCEA, told the Orange County Register that his union went after Nelson because he doesn't "tell the truth about us being a reform union" and because Nelson "vilifies us to get votes."

My sense is the union had to strike hard against Nelson because of his hard-line stance in favor of pension reform and because of Orange County Republican Party Chairman Scott Baugh's line-in-the-sand manifesto.

In January, Baugh gave a speech to the county Republican central committee deploring the influence of unions and berating Republicans who "have been just as guilty as Democrats" in giving in to pension increases and debt spending.

"I don't want to see Republicans voting the so-called right way on the pension issues facing us today," he said. "I want to see Republicans taking political risks by offering pro-active solutions that include creating two- or three-tier pension systems that would allow us to get our books back in order. For elected officials, this means risk and political courage to place your principles above your office."

He said the party will no longer endorse candidates who receive support from public employee unions.

Baugh and the party got behind Nelson, an outspoken pension reformer and county GOP elected official of the year. Nelson refused union support and embraced Baugh's controversial stance. Sidhu not only made a promise to the unions (regarding the county lawsuit), but also sat back and enjoyed enormous union support in the form of independent expenditures even though he signed the no-union-support pledge.

More than a supervisor seat was on the line. Baugh's manifesto and the party's credibility were put to the test. Few people, however, expected the amount of union support that would flow Sidhu's way, or the number of establishment Republicans who backed Sidhu — in my view because they preferred the malleable candidate who might be more amenable to their lobbying.

I talked to Nelson, Baugh and others involved in the race right up until Election Day, and everyone was on pins and needles. Many OC political observers believed Sidhu would prevail, given the union onslaught.

In the end, Nelson won big and Sidhu barely edged out low-spending, second-tier candidates who weren't viewed as serious factors in the race. Nelson will fill the seat immediately, given that the seat is vacant after another libertarian-oriented pension reformer, Supervisor Chris Norby, was elected to the state Assembly.

As the top two vote getters, Nelson and Sidhu will face off again in November to fill the seat for the next four years. But it's clear union spending accomplished little, and it's unlikely the unions will spend so much again after getting beaten so badly Tuesday.

The OC race, coupled with the failure of national unions to unseat Arkansas Sen. Blanche Lincoln, reminds us that it's possible to stand up and beat the unions in a head-to-head battle, especially in the current political climate, where the public is increasingly frustrated by overly generous pensions and mounting debt. The key is having the courage to stand up and fight.

May this be the first of many such battles.

• Greenhut is director of the Pacific Research Institute's journalism center in Sacramento and author of "Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling our Lives and Bankrupting the Nation."

[macrockett]

latimes.com/business/la-fi-0611-calpers-20100611,0,5124226.story
latimes.com
CalPERS to resume seeking another $700 million in tax money
Many board members of California's public pension fund are in favor of the move after legal advice, plus an analysis concluding that it would affect the state's budget deficit less than expected.

By Marc Lifsher, Los Angeles Times

June 11, 2010

Reporting from Sacramento
Advertisement

California's troubled, giant public pension fund is preparing to seek another $700 million from the state and school districts, after postponing a decision last month because of concerns about the state's massive budget deficit.

The staff at the California Public Employees' Retirement System is recommending the increase, and the pension fund board is set to reconsider it Tuesday. Several board members — including state Treasurer Bill Lockyer, who questioned the move last month — now are in favor of it.

Board President Rob Feckner, when asked whether the increase would be approved, said, "I think it probably will. It's the right thing to do for the system."

Lockyer asked for a delay last month so actuaries could look again at the increase in light of the state's projected $19.1-billion budget deficit for 2010-11.

The pension fund's poor investment record over the last few years has forced it to ask for more contributions from the state and school districts to meet its obligations in the coming years. On Tuesday, the fund had $198.3 billion in assets, down 24% from a peak of $260.4 billion on Oct. 31, 2007.

At least three factors are prompting CalPERS to make its already-financially strapped member agencies seek more of their taxpayers' money:

The country's largest public pension fund lost about a quarter of the value of its portfolio of stocks, bonds, real estate, private equity and commodities during the severe recession of 2008-09.

On top of that, a new study shows that CalPERS retirees are living somewhat longer and drawing more monthly pension checks.

Third, there has been a jump in the number of eligible employees deciding to retire.

After weighing those factors, CalPERS actuaries concluded that it would be all right for the fund to go ahead with the hike because it wouldn't overly affect the state's general fund. The general fund, currently at $86 billion, pays for major state programs, including health and welfare, education and public safety.

The $700-million CalPERS increase under consideration would boost employer contributions from the state and schools to about $5 billion in 2010-11.

However, the state's nonpartisan legislative analyst's office now estimates that the increase would cost the general fund only $184 million more than the current year. The rest of the $700 million would come from other state funds that don't affect the state deficit.

The "clarification" has persuaded Lockyer to support the proposed employer contribution increase, said spokesman Joe DeAnda.

"The impact on the general fund seems to be considerably less than the numbers that had been thrown out there, so he's more comfortable," DeAnda said. "And even those numbers might be overestimated" if, a year from now, the state's total payroll turns out to be smaller than expected.

Arguments by CalPERS' attorneys also convinced Lockyer of the need to require the state and about a thousand local school districts to pay more. Suspending a needed pension contribution could be interpreted as an illegal borrowing by the state of money that belongs to CalPERS' 1.6 million active workers and retirees and their family members, the lawyers said.

What's more, the lawyers warned that board members could be in violation of their fiduciary duty to protect CalPERS if a vote to put off contributions weakens the pension fund's financial condition.

CalPERS officials are walking a fine line when they try to come up with the lowest possible increase in the state and school employer contributions, warned Marcia Fritz, president of the California Foundation for Fiscal Responsibility, a pension reform group that is considering sponsorship of an initiative to pare retirement benefits for future state workers.

"They're trying to back into what they think they can afford," she said. "There's a lot of pressure to use aggressive assumptions to minimize the contributions and shove the cost to the future." Those tactics in the past have included assumptions that people will die younger and earn less and that future inflation will be lower and investment returns higher than they actually turn out to be, she said.

Though Gov. Arnold Schwarzenegger shares many of Fritz's concerns, he is backing the proposed hike in CalPERS contributions. The request for an increase, he has said, underscores the need for pension reform to rein in escalating annual demands on taxpayers to support California's costly retirement system.

"We all must face up to the reality that pension promises are debts, that those debts are much greater than reported and that pretending they don't exist won't make them go away," said Schwarzenegger spokeswoman Andrea McCarthy. "The Legislature needs to take note, because every single day they don't act to reform pensions is a day that adds to that debt."

In a letter last week to state Senate leader Darrell Steinberg (D- Sacramento), Schwarzenegger threatened not to sign a new state budget unless it overhauls the pension system.

The governor said he is negotiating with bargaining units of 19 of the 21 state worker unions to bring down spiraling pension costs. But, he said, he still needs approval from the Legislature to find more savings.

Schwarzenegger wants to reduce some benefits for newly hired state workers, require employees to increase their own retirement contributions by 5% and calculate retirement payments based on the average of the three highest years of pay instead of the single highest year.

The financial squeeze is hitting CalPERS — a market-leading investor and crusader for better corporate governance — at the same time that is being rocked by a scandal involving alleged influence peddling by former officials. One former board member earned tens of millions of dollars steering multibillion-dollar investments to certain private equity and real estate fund managers.

The allegations, first raised by a CalPERS internal probe, have made the fund a target of investigations by the California attorney general's office and the U.S. Securities and Exchange Commission.

The attorney general's probe already has resulted in a fraud lawsuit filed against former board member Alfred R. Villalobos and former Chief Executive Federico Buenrostro Jr. The two say they did no wrong and have vowed to vigorously fight the complaint.

[e-mail]

Copyright © 2010, The Los Angeles Times

[macrockett]

online.wsj.com/article/SB10001424052748704342604575222642585307912.html

JUNE 5, 2010

California's Pension Protection Bill
Unions try to block the bankruptcy option.

Former Los Angeles Mayor Richard Riordan recently wrote in these pages that the city may have no choice but to declare bankruptcy in the next few years. Not if government employee unions get their way.

Many California municipalities are going broke because of overspending, especially on public worker pensions. Public safety officers and firefighters routinely retire at the age of 50 and earn 90% of their last year's salary.

Two years ago, the suburban San Francisco city of Vallejo declared bankruptcy in large part because of its public pension bills. Fifty-eight employees receive annual pensions over $100,000. At the time, the city owed the California Public Employees' Retirement System $135.4 million for health benefits and $83.9 million for unfunded pension benefits. Its general fund budget was $89 million.

According to McClatchy newspapers, the state's 80 largest municipal governments have $28 billion in unfunded liabilities and $8 billion in pension-related bond debt. About one-third have liabilities that equal or exceed their annual payroll, and many have liabilities greater than their annual general fund budget.

For years municipalities have whacked away at services and personnel to pay for pensions, but there's not much left to cut. Public pay and benefits are difficult to reduce because of union contracts, so more cities will have to take the Vallejo route of bankruptcy that includes those benefits among other creditors.

In March, the Vallejo city council approved a new firefighter contract that cuts pensions for new hires and requires current employees to contribute more to their pensions. Although it's a long way from solving the city's pension problem, it's a step that wasn't possible if bankruptcy hadn't forced everyone's hand.

The prospect of bankruptcy horrifies the unions that negotiated these unsustainable benefits, so they are now working with Democrats in the state legislature to stop the bankruptcy option. A pending bill would require municipalities to seek the permission of the Democratic-dominated state Debt and Investment Advisory Commission to file for bankruptcy.

Democrats say the goal is to protect state taxpayers from the costs of a municipal default and to stop cities from using bankruptcy to break union contracts. The bill says that "given the connection between state allocations and local budgets, the state has a role in mitigating possible local bankruptcy." What that really means is that the state has a role in guaranteeing public employee pensions no matter what the condition of the economy or local budgets.

The only alternative to bankruptcy would be for the state—i.e., taxpayers—to bail out municipalities. Since the state is also broke, the ultimate bailout for these local union benefits would have to come from Washington. The logic here is that taxpayers in Fargo ought to subsidize pensions for retired Los Angeles and Oakland teachers.

Local governments bristle that the state commission would likely flat-out reject or drag out bankruptcy petitions that seek to change worker pensions and contracts. The bill would also relieve the pressure unions now face to renegotiate contracts in order to avoid bankruptcy court. It wouldn't be a surprise if the bill is used as a bargaining chip in this year's budget negotiations.

Municipalities only file bankruptcy as a last resort. But if this bill passes, look for an even bleaker California fiscal future.

[macrockett]

online.wsj.com/article/SB10001424052748703302604575295133157025908.html?KEYWORDS=wall+street+journal+++pete+ross

JUNE 12, 2010
Attack of the Living-Dead Cities

It's no surprise that government employee unions in California are scrambling to protect their pension and health-care benefits from the effects of municipal bankruptcies (June 5, Review & Outlook, "California's Pension Protection Bill"). The political effort to have a union-friendly commission act as a gatekeeper for any municipal bankruptcy filings is similar in spirit to the strategies that governed the Chrysler and GM bailouts (where union retiree benefits were preserved while bondholders were bullied into submission) and may govern a proposed taxpayer bailout of multiemployer union pension plans.

All of these instances of special treatment for unions share common themes: years of irresponsible underfunding and years of poor investment practices; generous benefits and regular increases that were unaffordable in the absence of extraordinary investment returns; risk of benefit reductions in a normal bankruptcy process; and a desperate need for political intervention to force bailouts (ultimately paid by U.S. taxpayers).

Unions are far better organized than are taxpayers to win skirmishes between continuation of unsustainable union benefits and avoidance of crushing tax burdens. But any municipality that is willing to face the devastating effects of bankruptcy has reached the end of its tax-increase rope. If denied a bankruptcy petition, those zombie cities will need to be rescued by others, as the Journal's editors indicate. For the time being, the political winds still favor unlimited bailouts for friends of Washington, but the winds seem likely to shift by year-end; that's why unions are moving so quickly and aggressively to erect as many political barriers as possible.

While union leaders may have been poor managers of benefit-plan assets, they've managed to generate a return of several hundred billion dollars on their political investments, a payoff that would make most hedge fund managers green with envy. Preventing insolvent municipalities in California from seeking bankruptcy protection will add billions more to that staggering investment return.

Pete Ross

Kitty Hawk, N.C.

[macrockett]

www.suntimes.com/news/maxedout/2397122,CST-NWS-maxed16.article

Pension crisis scares off businesses: group
Commercial Club says loans, service cuts not enough
Comments

June 16, 2010

BY KIM JANSSEN Staff Reporter [e-mail]

Illinois' pension crisis is "the sun that blocks out the moon -- it eclipses everything in sight," a business group warned Tuesday, hours after the state's credit rating was downgraded again.

The Commercial Club of Chicago says the huge hole in Illinois' finances is scaring off new businesses and threatens vital public services.

But it warns that the $150 billion state debt -- $130 billion of which relates to unfunded pension and retiree benefit obligations -- will keep growing until voters hold legislators accountable.

"The goal is . . . getting the information out there so that every time a candidate goes to McDonald's [voters] are saying, 'What are you doing with the budget?' " said Cordelia Meyer, a member of the club's civic committee.

The state's $13 billion budget shortfall for 2010 alone has yet to be resolved, with Gov. Quinn's bid to borrow $3.7 billion to meet a required pension payment stalled in the state Senate.

But the club says loans, service cuts and tax increases won't solve the problem.

Pension cuts brought in for new hires earlier this year need to be extended to existing employees, it says -- a move fiercely opposed by unions.

[macrockett]

Finally, politicians do the right thing. A small step, but a start.

www.chicagotribune.com/business/sns-ap-ca-california-pension-fund,0,6059715.story
chicagotribune.com
Calif. pension fund approves rate increase to pay retirees as state faces $19 billion deficit

CATHY BUSSEWITZ

Associated Press Writer

3:23 PM CDT, June 16, 2010
Advertisement

SACRAMENTO, Calif. (AP) — The board of the nation's largest public pension system voted Wednesday to demand a higher contribution from California's cash-strapped general fund to pay for government employee pensions.

The board of the California Public Employees Retirement System made the decision on a voice vote. No members voted against it, although one expressed frustration at what he called an attack on pension benefits.

"I believe that the low funding is temporary and that the fund will recover," said board member J.J. Jelincic, who formerly worked in the CalPERS investment office and was past president of the California State Employees Association. "I recognize that there is an attack on secure benefits for all workers, not just public employees."

The board's action has been criticized because the state faces a $19 billion deficit in its general fund, but others say delaying the increase would cost the state more money later.

CalPERS does not need legislative approval to enact an increase in the state's pension contribution rate. The fund's investments lost $55.2 billion during the 2008-09 fiscal year.

The proposal calls for a $600 million increase in the next fiscal year, but legislative analysts say it likely will end up being about $480 million. They say about $184 million of that will come from the general fund, with the rest coming from agencies such as the Department of Fish and Game that are funded in part by license fees.

David Crane, economic adviser to Gov. Arnold Schwarzenegger and board member of the California State Teachers' Retirement System, praised the board's decision.

"It's painful, but in a way, it's owning up to the truth," Crane said in an interview. "Pension promises are debt, and the longer their payment is deferred, the more costly they become."

Two years ago, California's two major pension funds estimated their combined unfunded liabilities at $61 billion. A recent Stanford University study commissioned by Schwarzenegger estimated that the unfunded liabilities for the main pension fund, the teachers' fund and the University of California is closer to $500 billion.CalPERS was valued at $201.9 billion as of Tuesday and serves more than 1.6 million public employees, retirees and their families.

[macrockett]

www.chicagotribune.com/business/sns-ap-pa-xgr-state-pensions,0,7012777.story
chicagotribune.com
Pa. House approves changes to large pension plans for teachers, state government employees

MARK SCOLFORO

Associated Press Writer

2:14 PM CDT, June 16, 2010
Advertisement

HARRISBURG, Pa. (AP) — The Pennsylvania House of Representatives voted overwhelmingly Wednesday to approve significant changes to the state's two large public-sector pension plans.

The 192-6 vote, taken without floor debate, sent to the Senate a bill that would delay and smooth out a looming jump in costs to taxpayers and reduce some benefits for newly hired state workers, teachers and other school employees.

For those employees, pensions would be 20 percent smaller than they are today, unless employees opt to have more money taken out of their paychecks. The practice that lets retirees withdraw upon retirement their own contributions, plus interest, would be eliminated. The standard retirement age would increase to 65, and it would take 10 years, not five, to vest.

For the Public School Employees' Retirement System, the lower benefits would apply to anyone hired after June 30, 2011. For the State Employees' Retirement System, the benefits would involve workers hired after Dec. 31, 2010.

The legislation is designed to address a sharp increase in the costs to taxpayers that is expected to occur in 2012. The bill would limit the amount of a single year's increase in costs to governments and school districts, graduallly increasing to a cap of 4.5 percent of payroll.

There would also be higher minimum payments. After 2014, the state and school boards would not be allowed to pay into the system less than the so-called "normal cost" to maintain benefits. That change is designed to reduce the wild swings in the level of government support that can occur under the pension plans' current financial structure.

Senate Majority Leader Dominic Pileggi, R-Delaware, called the legislation "a good first step" in cutting the costs of retirement benefits but noted the new financial structure designed to push back the spike in costs would also cost about $52 billion over 30 years.

The reduced benefits would save an estimated $25 billion, so the net effect would be a $27 billion price tag, most of it borne by taxpayers.

"It's very good, I think, on the reform side, but the cost of deferral is something we need to take a look at," Pileggi said.

David R. Fillman, executive director of Council 13 of the American Federation of State, County and Municipal Employees, which represents tens of thousands of workers in the pension system, said his organization was supportive of the changes, given the potential for financial calamity if the systems were not changed.

"Two-tiered pension plans sometimes are problematic," Fillman said. "The collective union groups that worked on this were recognizing that something had to go through as we move forward. This was the path of least resistance."

The Pennsylvania State Education Association and the state chapter of the American Federation of Teachers both said they support the legislation as a way to address the funding problem and avoid job losses and other cuts to education programs.

Gov. Ed Rendell said Tuesday he was following the debate but did not indicate if he supported the House-passed approach. Messages seeking comment from Senate Republican leaders were not immediately returned.

SERS, which mostly benefits state government employees, had 110,000 active members and 110,000 annuitants and beneficiaries at the end of December. PSERS, which consists mostly of teachers and public school employees, had 280,000 active members and 178,000 retirees as of a year ago.

[southsidesignmaker]

"It's painful, but in a way, it's owning up to the truth," Crane said in an interview. "Pension promises are debt, and the longer their payment is deferred, the more costly they become."


Seems simple enough... next step inform our political leaders that "spineless inaction" will not be tolerated.

Also please do not trot out 50,000 union members with signs proclaiming "raise my taxes", the rest of the electorate are just rolling our eyes at the stupidity.

[sam2]

On the surface, this looks like a good thing, but did anyone else notice the line that the seventh paragraph reports that the bill will actually increase costs by $27 billion over 30 years?

We cannot afford any more government "cost reductions" that cost more than they save.

It's incredible that as government continues on the road to our collective ruin that they can measure progress in terms of savings and reductions that don't exist.

[doctorwho]

Jun 17, 2010 12:24:47 GMT -6 sam2 said:

On the surface, this looks like a good thing, but did anyone else notice the line that the seventh paragraph reports that the bill will actually increase costs by $27 billion over 30 years?

We cannot afford any more government "cost reductions" that cost more than they save.

It's incredible that as government continues on the road to our collective ruin that they can measure progress in terms of savings and reductions that don't exist.

you should see some of the 'savings' being claimed under ARRA..