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May. 23 2010 - 7:56 pm | 548 views | 1 recommendation | 34 comments

In California, we are all Europeans now

As it becomes increasingly clear that the post World War II European model of living well through social welfare is no longer a viable financial model, California would do well to pay attention to the European experience as the Golden State faces its own similar challenges.

Just as is the case in many European nations, the day of reckoning is at hand for California’s public employee pension programs. As retired government employees live far longer while being compensated in their sunset years far better that what was anticipated when these programs were created, the retirement funds responsible for these pay-outs are finding it increasingly impossible to make good on the obligation.

And it’s not just California.

Estimates place the current gap bewteen what is required by all the states in the union to pay public employee retirement obligations and what is available in public employee pension funds to meet those obligations at about a $2 trillion deficit and on its way to $3 trillion.

If you’re looking for an  example of where this kind of a problem leads, look no further than Greece, Portugal or Spain.

In Athens, Aris Iordanidis, 25, an economics graduate working in a bookstore, resents paying high taxes to finance Greece’s bloated state sector and its employees. “They sit there for years drinking coffee and chatting on the telephone and then retire at 50 with nice fat pensions,” he said. “As for us, the way things are going we’ll have to work until we’re 70.”
Via New York Times

Mr. Iordanidis could just as well be speaking from a bookstore located somewhere in Los Angeles, as the state employee pension system sits at or near the center of the California’s own financial disaster.

While I would not suggest that California’s public sector employees ‘sit there for years drinking coffee’ – particularly those heroically serving in the public safety arena – there is no denying that the largest “stones” around the neck of California are the state’s financial obligations for education and state employee retirement costs and the prohibitive structure of state goverment that requires a 2/3 majority of the legislature to agree on all budgetary issues – a supermajority requirement that has never worked in any legislative body, at any time in history, and in any place in the world.

Still, logic instructs that the problem of unsustainable obligations to public employee retirement funds can be resolved only by making cuts in what is paid to retired public employees.

Of course, California being California, it’s not quite that simple.

The state’s constitution obligates the government to stand behind the pension obligations to its employees and prohibits a default on these debts– even as the gap grows between what is required to make agreed upon payments and the funds available to do so. Thus, even in crisis years, such as what California is currently experiencing, any deficit in the availability of pension funds required to honor the obligation must be paid by a state government that is broke.

And these benefits can be very generous indeed.

A survey by the watchdog group California Foundation for Fiscal Responsibility found that some 15,000 Golden State public employees are knocking down $100,000 or more, while some 200, mostly police and fire chiefs and school administrators, are members of the $200,000-a-year-and-up club.

Via Barrons

Not bad for government work …. not so good for California’s sinking credit rating.

It’s not all about laws that don’t work. Like it or not, the state made contractual promises to past and current public employees and is ethically bound to honor those promises.

Nevertheless, given California’s lack of available funds, just as in the cases of Greece, Portugal and Spain, something’s got to give.

Unlike Greece, Portugal and Spain, there is no European Union to bail out California. Turning to the federal government is not going to fix this problem as the feds can hardly afford to take on California’s massive obligations -not to mention the impossible precedent it would set when it comes to all the other states in the nation hanging by a fiscal thread.

It’s going to be up to California to fix this and failure to do so means inevitable cuts to vital state and local services such as firefighters and police officers. It could also mean brutal cuts in the social safety net available to the state’s poor, elderly and infirm.

Natually, fixing the problem is far easier said than done.

State employees are represented by a variety of unions, including the notoriously powerful California Teachers Association. Making it all the more challenging is the fact that the state employees unions are among the very largest of political contributors, particularly when it comes to California’s elected Democrats who currently hold the majority in both the Assembly and the Senate with a strong possibility that that they will gain the Governor’s mansion come November.

This puts California’s Democrats is an extremely difficult position.

In a state where Republican candidates need only sign pledges not to raise taxes in order to be elected – even when reason would dictate that sometimes this must be done in order to serve the greater good – getting GOP legislators to focus on legitimate fixes has proven to be a useless endeavor.

This leaves the Democrats with the responsibility to champion those who so badly need the social safety net. As a result, California’s Democratic leadership is being forced to choose between the poor and the workers’ unions that have always been there for them. Indeed, GOP Governor Arnold Schwarzenegger took full advantage of this situation by presenting the Democrats with what he referred to as a “Sophie’s Choice”. The Guvernator did this by proposing a budget last week that virtually cuts all welfare to those who rely on the state’s assistance along with massive cuts in public services offered to shut-ins and other severely disadvantaged people who would have nowhere to turn should the state cut them off.

While the Governor’s approach is both unfeeling and deplorable, there is no denying that this ‘Sophie’s Choice’ is a reality in the state and one that the Democrats will have to confront if there is any hope of even beginning to solve the California crisis.

The good news is that there may be a glimmer of hope in the person of Speaker of the California Assembly, John Pérez.

Speaker Pérez, chosen to be the leader of the Assembly during only his freshman term in office, is an extremely bright and highly capable legislator. He might also have a unique edge when it comes to addressing the pension problem as, prior to entering elective office, Mr. Pérez spent his career as a union organizer and political representative. He is a man whom the unions trust and, hopefully, might listen to when it comes to finding a reasonable approach to solving the problem of reforming the public employees pension programs that California can no longer afford.

But make no mistake. Speaker Pérez is not in an enviable position. As the man charged with the responsibility to maintain the Democratic majority in California’s assembly, he has no choice but to keep an eye on political realities as he works towards a  resolution of the budgetary issues. To be sure, one such reality of politics is that encouraging the anger and opposition of the unions is not the best way to go about keeping Democratic legislators in office.

Still, if anyone can create a meaningful discussion with the unions charged with representing California’s public employees, Speaker Pérez could be precisely the right man for the job.

Joseph Campbell defines a hero as a one who jumps into the bottomless chasm – not knowing if survival is possible- because it is the right thing to do.

Let’s hope that Speaker Pérez and his fellow Democrats are prepared to be heroes. Those of us who live in California know that we cannot look to our GOP to assume the mantle and must depend on our Democrats to find a way out of the thicket.


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  1. collapse expand

    the impossible precedent it would set — you mean like the precedent that was set when our past illustrious president/congress/senate decided to bail out Wall Street?

    Ok so now that I got that teensy bit of bullsh*! out of the way now I can get down to the business of really addressing the situation …
    I feel the collective pain of California as the city I inhabit is going through some pretty tough fiscal decisions also. Here it is one week b4 my birthday (June 1st) and I am STILL hitting potholes on a regular basis (I’ve lived here 20+ years and it has never been this bad b4), and yet the police union is throwing a hissy fit in an attempt to force the city council to continue letting our policemen retire at 25 on an annual retirement of over 100k (they aren’t really 25 but if I had been honest and said 38-43 readers would have thought I was joking)! And the latest group the mayor pissed off are the city employees who have retired and are looking at paying a monthly bill for their health insurance — they figure they’ve already paid their ‘dues’ and have no intention of paying anything for the ‘health insurance they’ve earned.’
    It’s like the whole country is filled with 2-year-olds that want what they want when they want it; when do we go back to caring for our neighbors — whether they’re across the street or across the country?

  2. collapse expand

    So.. The unions and their political allies the democrats created an unholy alliance that renders the states finances a gigantic conundrum. The republicans won’t fix it because they are bad people. So the only hope is that a hero will emerge within the democratic camp to save the day because the no-good republicans won’t do what is right. Hmmm… The puzzle parts don’t fit together real well.

    • collapse expand

      No, the pieces don’t fit if you consider the relationship between the dems and the unions to be an unholly alliance and trivialize what I wrote by indicating that I simply call the republicans “bad people.’

      Dont’ know if you live in California or not – either way, yours is not the cleverest of comments if you have any sense of what happens in the state’s government.

      In response to another comment. See in context »
    • collapse expand

      Hello Leonkelly,

      Using the California Public Employees Retirement System (CalPERS) as an example, I would only point out that the average CalPERS retiree earns 2,101 USD per month, hardly extravagant. Indeed, 78 percent of all retirees (state, local, and schools) receive less than $36,000 a year or less. Retirement from public service in California is not the road to riches.

      In response to another comment. See in context »
      • collapse expand

        That’s true – but there is a bit more to the story.

        According to the source for this information – http://www.calpers.ca.gov/eip-docs/about/facts/retiremem.pdf-
        if it unclear whether or not the continuing health care benefits that survive in retirement are included in this payout. I suspect not.

        Also – keep in mind that CAPpers participants pay 5% of their wages to receive this benefit and do not pay into social security (and, of course, don’t receive Soc. Sec. in return.) Those who do get Soc. Sec. pay 6.5% of their wages (their employer pays the other 1/2 of the tax) and get far, far less on average per mont that $2,101 USD – and this definitely does not include their Medicare which is a separate tax.

        When you add in the remainder of what an employee pays (those who work outside the public secto) for medicare and disability, it totals 7.65% – over 50% more than what a state employee pays.

        In response to another comment. See in context »
  3. collapse expand

    Rick.. It just seems silly that you accurately identify the problem and it’s root cause, and then point the finger of blame at the party you like the least. The logic seems a bit stretchy. I’m not asserting that that California republicans are paragons of virtue. Im my mind’s eye, most career politicians are slimeballs (red, blue, green, whatever). JMHO, but I think political analysis is too often framed as red-blue contest. What ever happened to sincere and insincere?

    • collapse expand

      Sincere and insincere would be great – but it is not what happens in the California assembly. This is not a matter of who I like or don’t like. This is a matter of the discipline of the GOP legislators in California that refuses to even consider solutions if it runs contrary to the established political arguments that the GOP insist be followed. And in California legislative circles, it is red vs. blue and while I don’t like it any more than you, it is what it is and the serious problems of California will have to be solved within the reality of that fact.
      Because the California GOP has so alienated the unions, there is virtually zero opportunity for them to have a reasonable conservation that could lead to reform of the state employee pensions system. To the unions, they are the enemy – and their track record has solidified this fact. Thus, it will be up to the Dems. to find a solution with the unions – and it will not be an esay conversation for them. That is the point.
      We don’t live in fairy tale land – even if that is what most think of California. This problem has to be solved within the context of what is possible as I doubt we will wake up tomorrow and find the heads of the unions sitting at the campire withe GOP leadership singing Kumbaya.

      In response to another comment. See in context »
  4. collapse expand

    I am a sixteen year resident of California (San Diego and Tustin). I find it amazing that you are blaming the lack of solutions to California’s fiscal disaster on Republicans. Except for a brief period in 1995-96 where Republicans controlled the house, the entire California legislature has been dominated by Democrats since 1970. Thats over 40 YEARS! Sure there have been republican governors during that time but the executive branch doesn’t pass laws, right?

    Yet you have miraculously (although predictably) pinned the blame on Republicans. This is why the state is in such a shambles.

    Why not get your ire worked up and directed where it belongs? Namely on the party and people (read Unions) that got us into this mess in the first place.

    I just laugh (or should it be cry?) when knee-jerkers like you state that California would be fine if the Republicans would only get out of the way and let the left act without opposition. I suppose this explains why the left is so enamored with China and Cuba (see Woody Allen’s recent comments on Obama and the benefits of dictatorship).

    I have yet to see a government that taxes too little but examples of excessive spending abound.

    In closing and in the interest of full disclosure I should add that I, like tens of thousands before me, have already voted with my feet. Last year I took my family (and tax dollars) to a state that has more political balance and lower tax rates. See, I feel a moral obligation to my 3 kids and not to the pension plans of union fat cats.

    I await your ad hominem attacks.

    • collapse expand

      No need for ad hominen attacks – unless you interpret my suggestion that you better familiarize yourself with the constitutional requirement for a 2/3 supermajority on budget issues as ad hominem.

      If you read the post again, you will see that I do not blame the GOP for the problem – i do, however, blame Prop 13 that created the 2/3 supermajority required to get anything done on this subject, a proposition that I’m as guilty as the next person for having passed as I voted for it. Like everyone else, I was attracted by the property tax benefits (which haven’t turned out to be very beneficial) and didn’t know the 2/3 requirement was in the initiative.

      I do, however, place a good amount of blame on the GOP for blocking a resolution. I do live in California, I pay a fortune in taxes and I don’t like it any more than anyone else. But I also understand that until we fix what is at the root of the problem (and it is not the unions much as they may be a convenient target), we can’t allow the state to go down the drain. I like it here and I don’t chose to leave because the state is in trouble. While I don’t criticize you for making a decision to go elsewhere, I’d rather stay and try to get it fixed.

      This means some tough – and hopefully temporary – decisions. One of which, as is the very point of this piece, is reform in the state employees pension fund which we can no longer afford (i have to say you kind of missed the point of this piece in your speed to get on my for being a Cuba loving, China loving, Woody Allen loving…okay, I admit to loving Woody Allen..liberal.

      It is not a matter of political ideology (of which most readers know I don’t have much time for) – its a matter of what has actually happened here.

      I know GOP legislators who have wanted to do things that they believe their districts need (many GOP districts suffer from higher unemployment that Dem. districts) and are anquished over the fact that they cannot do what is best for their constituents because the GOP leadership won’t let them. I dont’ think you will find much of that on the Dem. side of the aisle.

      What is happening in California is not an ideological battle, although there is no arguing that the state GOP has worked to make it one in the effort to reclaim the state legislature. To be honest, your reaction kind of bears this out.

      If you were to take a little time and dig into wht has really happened here – and what caused it to occur – I think you would be really surprised.

      For instance, do you know what caused education to go so wrong in this state, take up the largest chunk of our budget while taking our K-12 school system from number 1 to number 48? I’d be interested in your answer, if you could take a moment to respond. You might be very surprised.

      I view the out of whack public employees retirement fund to be one of the other key problems – had to read this piece with a more open mind, you might have seen that this is what the piece is about.

      I also wonder how you can go all “you crazy liberal” on me when the opening line of the article reads, “As it becomes increasingly clear that the post World War II European model of living well through social welfare is no longer a viable financial model…”

      No disrespect, but is it possible that maybe I’m not the one having a kneejerk reaction here?

      In response to another comment. See in context »
  5. collapse expand

    Hello Rick,

    Your piece was long on the origins of political and budgetary stalemate in Sacramento, a perfectly legitimate point, but short on details about pension reform. The States’ contributions to the employee retirement program (CalPERS) has grown dramatically, from 0.15 BUSD in 2000-01 to 3.5 BUSD in 2010-11, a 20 fold increase.

    Now it is easy to decry these numbers but it is very difficult to understand where they came from or what to do about them. This is not not due to changes in longevity, people are not living 20 times longer than they were just ten years ago. Mind you, that 25 years ago the State started cutting back on contributions. Originally, all state employees got “%2 at 55″ but in the 1980’s a two tier system where newer employees were put into a lower tier of “1.25% at 60″. It also took ten years to get vested, which meant a state worker who worked less than ten years, would collect nothing at retirement.

    Additionally, one of the reasons the pension benefits are they way the are is because state employees salaries are generally less than comparable private sector positions. Public agencies have tried to remain competitive through the benefits offered, rather than salaries. While there a few high salaried, very visible positions the vast majority of public employees do not make huge salaries or huge retirements. As a note, public employees who have not worked at least 10 quarters outside of public service, do not get Social Security when they retire.

    So what is to be done?

    • collapse expand

      Interesting points – but a few responses-

      1. true that public employees don’t get Social Security when they retire, but they also don’t pay into Social Security while they are working.

      2. If you were to survey most public retirement systems, I think you would discover that the 5% of a public employee’s weekly pay check that they contribute towards retirement is at the very low end of the contribution percentage made by public employees in most states. I happen to be with a Boston fireman this weekend who pays 10% of his weekly paycheck towards his retirement benefits and has no problem with that number.

      3. I think you misinterpret the point on lifespan – of course lifespan has not increased 20 fold in ten years. However, the formula’s that are used in the pension funds are not accurate on either life span and expected rate of return on investment – a significant part of the problem we have. What’s more, in order to get to the required 7% annual return, CALpers had to make some pretty risky investments that blew up in their face when things took a turn to the bad, leaving them in danger of bankruptcy. I’m not sure what you think about that, but the question does need to be asked, “Is this any way to handle people’s retirement money?”

      In response to another comment. See in context »
      • collapse expand

        Hello Rick,

        I think the key point is here is very similar to the whole “health care” reform debate. The real driver is not the problem of the uninsured (they don’t vote) but the wildly escalating costs of medical care for the insured (more likely to vote). The State’s contribution to retire costs has increased dramatically (30 fold in ten years), but has payments to retires increased as dramatically? I don’t think so. Something is out of whack but blind calls for “cuts” won’t solve them. I suspect that at least part of the problem is the performance of the economy. CalPERS has lost billions of dollars in the stock market and in real estate investments (they bought into 1/3rd of the disastrous Newhall Ranch project). Cutting contributions will solve that problem.

        In response to another comment. See in context »
        • collapse expand

          1 Increasing the amount that public employees pay in will help solve the problem.

          2. The fact that the state has to pay in much, much more than comes out in benefits kind of makes my point. While the benefits may not improve as much as the pay-in, if retirees are living longer, and costs naturally go up, this is precisely what necessitates larger pay ins. If someone is getting a pension of, for example, $1,000 a month and it was based on a n actuarial estimate of that person living to 72, and now that person lives to 85, he or she may get the same benefit but is getting it for 13 years longer. That is an additional $156K paid to the beneficiary. This adds up pretty quick.

          3. I don’t believe what I wrote was a ‘blind’ call for cuts. Indeed, I point out that existing obligations cannot legally be changed. However, we can and will likely be forced to make some adjustments going forward, wouldn’t you think?

          4. It seems to me you trip up your argument just a bit in your response to uncertain. First you point out that public employees do get paid as well as private industry employees doing similar jobs so they are compensated in the way of benefits. This may be true (as i noted, I do not know how the comparisons go.) But then you say that public employment has been more stable than private employment. It seems to me that the stability factor would more than compensate for marginally lower wages in a state where unemployment runs over 12%. So, I’m not sure how this bolsters your argument.

          In response to another comment. See in context »
  6. collapse expand

    Funny thing, that when budget cuts are needed to keep the system afloat, the first things to get the axe are usually the things that people willingly and voluntarily pay government for: roads, bridges, sewer/water, general infrastructure, welfare programs for the needy, etc.

    What never gets cut are the extravagant salaries of government employees, pension programs, the number of costumed enforcers (police) on the beat, the amount of taxes we pay to keep two illegal, never-ending wars going, and so on.

    • collapse expand

      It’s interesting to contrast your comment with DavidLosAngeles’s note. David suggests that public employees are not competitively paid and, therefore, the state seeks to make it up to them via benefits. You suggest that state employees are getting extravagant salaries.
      I honestly don’t know. I wonder if either of you would be able to put forward some facts and authorities to support your varying points of view?

      In response to another comment. See in context »
      • collapse expand

        There was the USA Today exposé of March (which relied on Bureau of Labor Statistics data) that showed people working jobs for the FedGov make more – sometimes far more – than their counterparts doing similar or identical work in the private sector.
        [link: http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm ]
        Towards the bottom is a telling table, which is quite lengthy and I won’t reproduce here.

        The Google search that led me to that article shows that other sources were highlighting this information in Dec. 2009. The Cato Institute seems to be the ones who initially published it, with their informative article being dated Aug. 2009. [Google terms used = government salaries compared to private]

        While State-employed workers probably enjoy less salary padding than their Federal counterparts, plenty of those employed by individual States make more than their private-sector peers.

        Even if the salary itself doesn’t match one earned by someone in the private sector, the perks that come with the job more than make up for it. Government employees get at least twice as many paid holidays than do those working in the private sector. Aside from the six federally mandated holidays the entire country gets off (New Years Day, Memorial Day, 4th of July, Labor Day, Christmas) government employees in general enjoy a number of additional paid holidays – MLK’s birthday, Columbus Day, and Veteran’s Day, to name a few.

        According to http://www.usajobs.gov/EI/benefits.asp, government employees also enjoy a greater dispensation of paid vacation days – you’re given 13 days per year as a mandatory minimum, and have the ability to earn up to 26 more throughout a year for a total of 39. That’s over a month of paid vacation per year on the taxpayer dime!

        If you look at all the other benefits listed at usajobs.gov, such as (but definitely not limited to) family leave time that is generally not offered in the private sector; (taxpayer) paid-for daycare – often right at the job location – that a private-sector employee would have to pay for out of their own pockets; a pension system that is unrivaled this side of the CEO Golden Parachute we always hear so much about; a medical benefits package that provides more comprehensive and better coverage than most privately offered plans, and continues into retirement where it gets supplemented by medicaid; the list goes on & on.

        Here comes the good part:

        According to WikiAnswers [Which again sited Bureau of Labor Statistics, but may or may not be an entirely credible source: http://wiki.answers.com/Q/What_percentage_of_americans_are_government_employed, government employees at all levels (Local, State, Federal) including military and enlisted personnel - but not including educational or medical professionals - make up 7.84% of all jobs in the US, employing roughly 4% of the total population, and comes with a price tag of just shy of $3 Trillion (with a 'T') according to usagovernmentspending.com for FY09 [http://www.usgovernmentspending.com/year2009_0.html#usgs302]!

        According to the CIA Factbook [https://www.cia.gov/library/publications/the-world-factbook/geos/us.html], the USA total GDP is upwards of $14 Trillion (for FY09, in 2009 dollars).

        That means that between 20% and 25% of all the generated wealth and productivity in this great land of our is going directly to support 4% of the population.

        People wonder why I call government employees The Parasite Class. Can you think of a better term?

        In response to another comment. See in context »
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          The problem with calling it the “Parasite Class” is that you presume that these employees provide no value in their services to the public. I don’t think this is a fair characterization. You can argue that maybe they are getting a better deal than the private sector if that is your opinion, but we do need government employees. Would you classify police officers and firefighters as parasites? They too are pubic employees.

          In response to another comment. See in context »
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            Firefighters, no.

            Police? Absolutely.

            A Google search shows 24,700 results of Police handing out traffic tickets like candy at a parade in order to shore up municipal coffers in the wake of declining tax revenues. Stories on the first page of results come from Dallas, Detroit, Boston, Oklahoma, New Mexico, Arizona, Florida, California…

            Plenty of examples abound of police department’s overzealous use of hyper-violent SWAT raids. Hauling people into jail on trumped up charges (Hello, Columbia, MO) or outright murdering innocent bystanders through negligent grandstanding (Hello, Detroit, MI).

            Barely a day goes by without a news article detailing the misfortune of a mundane who had a run-in with some Little Napoleon and his portable electro-shock torture device (taser).

            Police aren’t just parasites, though. They’re the enforcers of the parasite class. Every single day, whether it’s in the news or not, somebody gets away with assault, torture, drug use, driving under the influence, murder, and more, and all because they wear a government issued costume with a shiny piece of tin on it that puts them a level higher than the rest of us lowly commoners.

            And don’t give me any of that, “it’s just a few bad apples” nonsense, either, because when you look at what goes on every day in locales around this country, it’s just a few good apples in a sea of rot and filth.

            There are some good cops, undoubtedly; those who do what they do to make a difference in the communities they serve. The vast majority are mentally-ill, power-hungry psychopaths.

            In response to another comment. See in context »
    • collapse expand

      Hello Uncertain,

      Well who do you thinks builds and maintains the roads, bridges, sewers, water systems, &c. The vast majority of public employees do not make gigantic salaries. In many regulatory agencies, engineers are there maybe five years before they get hired by a someone willing to pay a trained engineer more than the State does. Regulatory agencies can become huge training facilities for staff for the regulated community. I worked at sewage treatment plant for a while and the all of the operators were only for only three years tops before they left for better paying jobs elsewhere. Mind you, most public employees in California are on unpaid furlough three days per month.

      What has changed over the last five or ten years is the the private sector has shed so many jobs that the only sector that has any sense of stability is the public sector. Even when people do have private sector jobs, it is often at no more than 24 hours per week so that the employer does not have to pay benefits. Just having a job at all, much less one with benefits, now seems like an extravagance.

      In response to another comment. See in context »
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        The vast majority of laborers who work for private industry building roads, sewers, etc. don’t make gigantic salaries either – nor do they get the retirement packages made available to public employees.

        I genuinely don’t see how the remainder of your comment is a defense of the necessity for a terrific benefits plan for public employees. You seem to be making the point that it is a whole lot better to work for the public sector rather than the private. Not only do you have more job security, are trained at taxpayer expense so that you can later go into the private sector and make more money once the taxpayer has paid for your training, but – you also get a pretty great pension working in the public sector while you are at it.

        Either I completely miss your point or you appear o switched sides on this.

        In response to another comment. See in context »
        • collapse expand

          Hello Rick,

          1) Public employees, for the most part, do not have huge salaries, they make pretty much what other people make, a little more on benefits and less on salary. Put a different way, there are very few public employees living in mansions.

          2) The vast majority of retired public employees do not rich either. It is just like many other pension plans, the longer you work and the older you are when you retire, the more you get. As I noted, many state employees are on a 1.25% at 60 plan which is hardly going to let anyone retire on the Spanish Rivera.

          3) My point about retention is to illustrate the point about salaries being lower in the public sector than the private sector where comparable positions exist. Many do not make that jump exactly because of stability and benefits. So this is entirely apropos of my point.

          4) You have yet to respond to my point about public pension plans fundamentals, while their costs have risen 30 fold in ten years, their pay-out to retirees has not risen anywhere near that amount. The main problem appears to have been the collapse of the stock market and the bursting of the real estate bubble. Billions of invested dollars, by from both the employees themselves and the state were lost. That is why costs are up, not because there thousands of public service retirees sipping Martinis in their yachts in Marina Del Rey.

          In response to another comment. See in context »
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            1.But you started out your entire argument saying that public employees earn less than their counterparts in private industry. That was the reason, you said, that they are compensated with better retirement plans in order to make up the difference.

            2. And the vast majority of private industry employees are not rich either – and they don’t get anywhere nearly as good a retirement plan. What is the point you are making?

            3. Your comment in your paragraph 3 is completely at odds with your comment in paragraph 1 where say that public employees make pretty much what their counterparts in private industry make.

            4. Well, I think I have responded to it. The costs go up because retirees live longer and collect longer. This cost more- even thought benefits remain static. I don’t quite no how to be clearer than what I said in my last note where i did the math for you.

            In response to another comment. See in context »
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            All due respect, I think you’ve gotten way off point. Nobody is suggesting that public employees are sipping martinis at the marina. Nor is this an attack on publice employees. However, you’re just not right about costs going up because of failed investments. The investment plunge happened over the last two years (and they’ve recovered a healthy amount in the last year.) The costs are up, as one would expect, for the reasons I have supplied plus the fact that the investment return targets are not realistic. If they fund can’t make the investment return targets, then it falls to the state to make up the difference. As I said, I just don’t know quite how to be clearer, but I’ll try if I’m failing in communicating the point.

            In response to another comment. See in context »
  7. collapse expand

    Hello Rick,

    You wrote:”The costs go up because retirees live longer and collect longer. This cost more- even thought benefits remain static.” This is not the problem, the average number of years that a public sector retiree lives after retirement, the key static for actuarial calculations of interest, has not changed by any measurable amount in the last ten years.

    In 2000-01 there were 19,289 retires in the system and in 2008-09 there were 24,558, and increase of around 25%. Yet costs have risen much more than 200%. This increase has not been the result of either retirees living longer after retirement nor in the number of retirees. As I already noted, State employees have already seen reductions their retirement benefits going back over 20 years. So simply “cutting” back benefits is not the solution since the rates of retiree pay-outs have not the source of these increases.

    • collapse expand

      What do you attribute this rise in costs to?

      In response to another comment. See in context »
      • collapse expand

        Hello Rick,

        CalPERS base income comes from employees 5 – 7% contribution and earnings from investments. The State, local agencies, and school contributions vary depending on how investment income goes.

        Investment Income has fluctuated from gains to losses in the last eleven years, 1999-2009, with 4 years of losses and 7 years of gains. There was investment income gains of 17 billion in 1999, 16 billion in 2000 and 5 billion in 2003. The stock market declines in 2001 lead to investment income losses of 12 billon in 2001 and 10 billion in 2002. Thus, the five year period 1999 to 2003 period had a cumulative income of 16 billion dollars, or about 3 billion a year on a investment portfolio of over $ 200 billion dollars.

        The next four years were a period of investment income stability; a 24 billon investment income in 2004, 22 billion in 2005, 21 billion in 2006, and 41 billion in 2007. This four year period had a cumulative investment income of 108 billion dollars, or 27 billion a year.

        With the stock market decline in 2008, during the financial crisis of 2007-2010, there were large investment income losses. There was a 12 billion dollar investment income loss in 2008 and 55 billion in 2009[1].

        During the period of 2000-02, CalPERS lost just shy of 40 BUSD due to the “Dot.com” bust. Between 2007-09 they also lost nearly 70 BUSD due to the general stock market crash and real estate bubble bursting. While I would not say that every investment CalPERS was brilliant, the majority of their loses were similar to losses in the DJIA, S&P500 and other public retirement funds. CalPERS was clobbered by the general economic collapse.

        Now I am not suggesting that there are not demographic changes which are playing a role, the average live expectancy will increase gradually and there is the impending retirement wave of baby boomers, a cohort twice as large as the preceding and succeeding cohorts. However those do not account for the dramatic raise in costs over the last ten years. The first decade of the 21st century has been the worst decade in history in terms of stock market performance.



        This huge increase in the contributions from schools, local government, and state government to CalPERS is largely (not entirely) to result of the worst decade in stock market history. Demographics and poor investment decisions no doubt play a role but they are small.

        In response to another comment. See in context »
        • collapse expand

          This doesn’t make sense to me. The amount of money that CAPpers has on hand to make payments would be directly related to how much income they make – or lose – from investments. But this is no way has a direct correlation to the cost of benefits going up. How could it? It does have a correlation to what the state has to ante up out of the general fund to make up the losses so there is enough money to make payments in these bad years, but if the cost of fulfilling pension obligations is, $1.00 = whether the fund earns 1.00 or loses 1.00- the cost is still one dollar. If the fund doesn’t have the dollar, then the state has to kick it in – but this in no way speaks to cost.
          So – I’m still trying to understand why you think the costs are going up for benefits that need to be paid out.

          In response to another comment. See in context »
          • collapse expand

            Hello Rick,

            When we say “costs” it is a question of “costs to whom”. CalPERS payments out to retirees (“costs to CalPERS”) have increased but not dramatically, not 20 fold. Where the costs have risen are at the other end, how much CalPERS charges the employeers (State, Local, Schools), the “costs to the employers” has ballooned. You are correct, that does not seem right, if CalPERS is not paying out that much more then how can they charge so much more.

            What any retirement fund does is take in money (some combination of employer and employee contributions) and invest it. Profits from these investments are the third source of income. If an employee puts say 10% of his or her income away for 30 years (from age 30 to 60) in a savings account, that person cannot possibly live off of that savings for even 10 years (age 70) after retirement.

            That money has to be invested so that it yields profits so that amount of money in the retirement account is large enough for the retiree can live comfortably through their retired life. Return on investment is the key to successful retirement and retirement fund. When return on investment declines, that is a problem. Of course a fund as large and complex as CalPERS has a very long investment horizon. So when there is an entire decade 1999-2009 when the stock market and real estate are not producing profits as it historically has, that is a lot of lost income. The next decade is not looking any better, Paul Krugman is calling it “The Lost Decade” and says that it will look like the letter “L”, a steep decline and a long time at the bottom. Hence increased the “costs to the employer”

            The retirement fund crisis is simply yet another symptom of the greater economic crisis in this country. Why has Wall Street been so focused on investing in scams, Ponzi schemes, and real estate bubbles over the last ten or 20 years? Why has Washington been so reluctant to reign them in? Because there are very few opportunities for profitable investment in this countries, these hustles are one of the few really profitable investments. It is the only game in town. The problem is not that Wall Street is full of morally corrupt individuals (although that may true), the problem is that we have a bankrupt system where only corruption is profitable.

            With the loss our manufacturing base, the opportunities of honest and profitable investments, well paying jobs, and a sound tax base are being lost as well. There are just fewer dollars to go around. The crisis on Wall Street, of the Public Employee Retirement Funds, of the US Government Debt and Deficit are all just the effects of this more profound crisis.

            In response to another comment. See in context »
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    About Me

    I am an attorney in Southern California, and a frequent writer, speaker and consultant on health care policy and politics. To that end, I am active member of the Association of Health Care Journalists. Based in beautiful Santa Monica, California, I'm very pleased to have the opportunity to be a contributing editor to True/Slant. I've recently finished a book designed to make the health care debate understandable to the average reader, and expect it to be out in the next five months or earlier. In my 'spare time', I continue to write for television and, occasionally, for comic books.

    My checkered past includes stints in creative writing and production for television where I did strange things like founding the long running show "Access Hollywood" and serving, for many years, as the president of the Marvel Character Group where I had the distinct pleasure of being one of Spider-man's bosses.

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