Apolitical Government Reform

Not as a libertarians, but as a good government fiscal conservatives, who value government and government programs, how might we respond to charges of right wing radicalism? How might we respond to charges that we are biased against working people, or want to destroy the middle class, or are a tool of the super-rich? If you want to keep good government programs, but want to make government more financially efficient, how to respond to charges of resenting government workers, or wanting to change the deal on government workers, or not appreciating government workers? Focusing on the state and local government entities here in sunny California, here are some thoughts:

(1) Public employees used to take jobs that paid less than private sector jobs. Up until about 20 years ago, the trade-off was clear: Government workers exchanged a lower salary for better benefits, a pension that was better than social security, and job security. This was a fair exchange, and the system worked just fine.

(2) Over the past 20 years, during the economically unsustainable internet bubble followed by the real-estate bubble, public sector unions stirred up envy among public sector employees, prodding them into demanding unsustainable increases to their compensation to match the private sector. Since these bubbles have burst, these unions use their nearly absolute power over California’s state and local politicians to maintain unsustainable levels of public sector employee compensation.

(3) We now have a situation where public employees have, in most cases, better base salaries than in […] Read More

The Contract on California

California’s state and local government workers, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.

They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are the public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayer to cover public employee pension fund returns. That is, whenever these government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for California’s state and local government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.

Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.

On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the next […] Read More

Agroforestry is Regreening the Sahel

The African Sahel is the arid belt of land that forms a buffer between the Sahara desert to the north and the more temperate savannahs to the south. From the coast of Mauritania and Senegal to the west, the Sahel stretches over 3,500 miles to Sudan and Eritrea’s Red Sea coast to the east. Over 500 miles wide, this vast area forms the biggest front line on earth in the relentless battle against desertification.

For decades there has been nothing but bad news. Population increase led to overgrazing and unsustainable harvests of fuelwood. Equally if not more harmful to the Sahel ecosystems were the imposition of western methods of agriculture and forestry, techniques that began under colonial administrations and have been perpetuated over the past 50 years by well-intentioned aid agencies. A fascinating article by Burkhard Bilger in the December 19th issue of The New Yorker, entitled “The Great Oasis (subscription required),” documents a new and hopeful trend in the Sahel that may reverse over a century of environmental decline.

Back in the 19th century and through the first half of the 20th century, French colonial administrators in the Sahel attempted to develop commercial agriculture according to Western techniques that worked well in temperate zones, where sunlight needed to be maximized, but were disastrous in the arid Sahel, where crops responded better if they were beneath a protective tree canopy that attenuated the sunlight. The areas designated as forest were considered state property and were protected, […] Read More

How Wall Street Bought the Public Employee Unions

Earlier this week, on December 7th, 2011, as reported by the San Jose Mercury, the “San Jose City Council votes 6-5 to place pension reform on June ballot.”

This plan is drawing fierce resistance, but there are two financial considerations that most critics of pension reform don’t take sufficiently into account when making their arguments:

(1) Pension contributions are very sensitive to how much the fund can earn. A pension that earns 3% per year, i.e., allows someone who works for 30 years to retire with a pension equivalent to 90% of their final salary, will require a 10% increase in annual required contributions (as a percent of pay) for every 1.0% the earnings on the pension fund drop. That is, if the contribution to a firefighter’s pension is currently 35% per year (based on employer and employee contributions combined), and CalPERS lowers their expected rate of annual return by just 1.0%, from 7.75% to 6.75%, then the required annual contribution as a percent of salary goes up to 45% per year.

(2) The rate of return being currently maintained by most pension funds, 7.75% per year, is much higher than can be sustained going forward. A key reason for this is because equity growth over the past 20-30 years, and especially over the last 10-15 years, was fueled by increasing debt. By enabling massive borrowing – consumer, commercial and government – more consumer spending was […] Read More

Merge Social Security and Public Pensions

When solutions to the challenge to provide retirement security to American citizens in the 21st century are considered, they typically address either social security or public sector pensions, but rarely focus on both of these systems together. But when considered together, as systems that each have unique strengths and weaknesses that might be combined in a single program available to all Americans, options present themselves that might otherwise be ignored.

With both social security and public sector pensions, the challenge of maintaining financial sustainability is dramatically affected by the demographic reality of an aging population. As increasing numbers of people live well into their eighties and nineties, the ratio of workers to retirees edges closer and closer to 1.0.

There are four ways to address the reality of an aging population: (1) Increase withholding from current workers, (2) Increase the retirement age, (3) Lower the level of retirement benefits, and (4) Increase the amount the retirement trust fund can earn. Before delving into each of these further, however, it is important to identify one crucial advantage the USA enjoys vs. virtually all other major developed nations. America, alone among major nations, is projected to have a perfectly even distribution of ages within her population.

AMERICA’S DEMOGRAPHIC ADVANTAGE

America, like all developed nations, has an aging population. But as the four charts below indicate, unlike all other major developed nations, America’s population is replacing itself at an even rate. It is difficult to overstate the serendipity of this phenomena, nor the […] Read More

Why Not “Occupy” Public Sector Pension Funds?

A CIV FI post back in January 2010 entitled “Axis of Wall Street & Public Sector Unions” identified an irony still lost on the occupy movement’s rank and file – Wall Street is financed by the pension funds of unionized government workers. Every year, taxpayer funded government agencies pour hundreds of billions of dollars into Wall Street investment funds.

Occupy Wall Street? Why not “occupy” Wall Street’s union paymasters, the government employee pension funds?

Here’s a summary of the dynamics between Wall Street, unionized government workers, and the taxpayer:

(1) The government workers provide services vital to the taxpayer, and charge the taxpayer, on average, about 40% of their income (middle class worker, all taxes – state, federal, social security, medicare, property, sales) to receive these services.

(2) The government workers receive, in addition to their normal pay, funded by these taxes, pensions that are, on average, five times better than what taxpayers get from social security (the average government pension is $60K per year with an average retirement age of 55, the average social security benefit is $15K per year with an average retirement age of 65).

(3) The government workers tell the taxpayers – don’t worry – you don’t have to pay additional taxes for us to get these generous pensions, because we’ll invest the money on Wall Street, and Wall Street will earn 7.75% per year on these investments.

(4) Wall Street invests the taxpayer’s money, funneled through the […] Read More

Government Pensions Increasing Hedge Fund Investing

In less than five years California will have over 10 million residents who are over the age of 55 (ref. U.S. Census, California Demographics). If every one of these people were to receive a pension equivalent to what the average public employee in California can now expect after working full-time for no more than 30 years, it would cost taxpayers nearly $700 billion per year. To put this in perspective, $700 billion is 40% of California’s entire gross domestic product.

When spokespersons for California’s public sector unions claim that pension reformers are “trying to destroy the middle class,” they should be asked this question: How on earth can any system of retirement security – not even including health insurance benefits – possibly expect to consume 40% of the entire economic output of the state or nation in which such benefits are being provided, and yet remain financially sustainable? Universal and equitable retirement security in America will never be realized by offering everyone the deal that public sector employees currently receive. Their benefits must be reduced. But instead, government worker pension funds are making riskier investments.

Public sector pension funds rely on investment returns to make up for the shortfalls in taxpayer revenues. But can investment returns really hope to sustain public sector pensions when there are as many people drawing pensions out of the fund as there are people (and taxpayers) contributing money into the fund? That tipping point, where there is as much money going out as there […] Read More

Public Safety Compensation Trends, 2000-2010

Today’s Wall Street Journal published an article by Phil Izzo entitled “Bleak News for Americans’ Income,” where, citing U.S. Census Data, it was reported that U.S. median household income – adjusted for inflation – fell by 7% over the past ten years. In constant 2010 dollars, the average household in the U.S. saw their income drop from about $54,000 per year in 2000 to just under $50,000 today.

When debating what level of compensation is appropriate and affordable for public safety personnel, the average income of private sector workers is an important baseline. It provides context for determining whether or not the premium paid to public safety employees – for the risks they take – is exorbitant or fair. The trend of the past ten years is also an important baseline when making this comparison. For example, if the level of risk, the value we place on safety and security, and the degree of training required for public safety personnel have all elevated over the past decade – and they have – does this justify their pay increases exceeding the rate of inflation? Even over this past decade, when ordinary private sector workers have seen their total pay and benefits decrease by 7% relative to inflation?

Here then, also relying on U.S. Census data (ref. 2010 Public Employment and Payroll Data, State Governments, California, and Read More

Special Interests vs. Fiscal Reform

It is impossible to easily summarize all of the efforts government worker unions have mounted in California to consolidate their power. But the efforts by these unions to disrupt reform initiative efforts, as well as undermine the initiative process itself, is worthy of special mention, and is the focus of this post.

As Californians realize that unions stand firmly opposed to reducing government worker pay and benefits as one way to reduce government deficits, and further realize that their elected officials are controlled by these unions and unable to enact reforms, the citizens initiative has become their tool of last resort. Across the state, grassroots organizations have mounted initiatives designed to reduce government expenditures – through banning Project Labor Agreements, or right-sizing government worker pensions, or through campaign finance reforms that target unions alongside large corporations. These measures constitute a profound threat to government union power.

Here are some of the ways government worker unions have spent millions of dollars over the past six months to fight reform through the initiative process:

MISINFORMATION TO THEIR OWN MEMBERSHIP: In mid-July the SEIU created a “think before you ink” flyer filled with misinformation and distortions regarding a major threat to their power, the “Stop Special Interests” initiative that would ban corporations or unions from withholding money from paychecks to finance political activity. The flyer claims, for example, that “business donates more to politics than unions by a ratio of 15-1.” Actually in California the unions spend more than business on politics, […] Read More

The Impact of Tax Exempt Pensions

It is surprisingly difficult to gather data on just how many public safety employees claim disability in their retirements, but this should not prevent us from estimating what the benefits bestowed on disability claimants cost taxpayers.

A common program to compensate public safety workers for job-related disabilities is to grant them a tax exemption, whereby 50% of their retirement pension is exempt from state and federal taxes. While it is virtually impossible to collect data from pension fund administrators on exactly how many retired public safety workers have retired with this benefit, a 2004 investigative report by the Sacramento Bee found that among retired members of the California Highway Patrol, 66% of the rank and file officers, and 82% of the chiefs retired with service disabilities. Similarly, a 2006 investigative report by the San Jose Mercury found that two-thirds of San Jose Firefighters retired with service disabilities. Neither of these reports remain available online, although a Google search on the term “Chief’s Disease” (a term coined by the Sacramento Bee) will find dozens of secondary references to these studies; you can start here, and here.

The point of this analysis, other than to point out the shocking lack of comprehensive data on this issue, is to perform a what-if, based on assumptions that might be reasonably extrapolated from the available data.

The first section of the table below, “Impact per Worker,” shows what a person receiving a service disability tax exemption is really making annually, based on normalizing […] Read More