Some municipal officials in California are blaming Prop. 13 for their financial woes – when in truth the REAL problem, besides their proclivity for wasting taxpayers money in frivolous ways, is the generous pension spikes they have been handing out for the past few years.
Jon Coupal, the head of the Howard Jarvis Taxpayers Association, shed some light on the pension problem, particularly as it pertains to CALPERS – the California Public Employees Retirement System. Here are a few excerpts from Coupal’s latest editorial column about this problem:
The California Public Employees’ Retirement System (CalPERS)is now warning California’s cities that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers, reports the Wall Street Journal. Some communities are already cutting municipal services and they are blaming CalPERS, not Proposition 13. Dan Cort, mayor of Pacific Grove, has been quoted as saying, “CalPERS could bankrupt us faster than anything else.”
According to the Journal, CalPERS has lost almost a quarter of the $239 billion in assets it held in June of this year. Stock market losses are an obvious cause of the fund’s distress, but less well known is that CalPERS makes extensive investments in real estate — investments that have been largely financed by borrowing. Some deals involved as much as 80 percent of borrowed money. While this worked well in a rising market, now that real estate has tanked CalPERS expects to report paper losses of 103 percent on its housing investments for the fiscal year ending in June.
“The use of debt is unconscionable,” County Supervisor John Moorlach told the Orange County Register in commenting on CalPERS’ mismanagement of its funds. Moorlach is the former county treasurer who predicted that the unsound investment practices of his predecessor would result in bankruptcy.
Essentially, CalPERS officials rolled the dice and lost, but the burden will ultimately fall on the taxpayers.
Currently, the average employer contribution rate for public entities is 13 percent of payroll. However, if CalPERS’ assets are down just 20 percent at the end of the fiscal year, it would trigger an increase payroll costs of two percent to five percent, the Journal reports. This could have a major impact on city and county budgets already out of balance, not to mention the state, which now estimates a $40 billion shortfall for the next year and a half.
Click here to read the rest of this column.
As far as I am concerned, the blame lies with both CALPERS and the governmental entities that increased pension benefits during the “boom” years.
The authors are correct, CALPERS invested heavily in real estate during the up-cycle, often taking on debt to finance the acquisitions and acquiring properties in national markets with unsustainable demand, i.e., Phoenix. The rapid fall of real estate prices left CALPERS holding the bag–and I suspect that they guranteed the loans, which would mean they’re stuck covering the losses. Ouch.
CALPERS’ other problem is escalating retirement benefits. Like OC, many CALPERS-dependent agencies increased defined-benefit retirement payouts during the boom years. In example, the pension benefits for some jurisdictions went from 2 percent per year of servce at age 55 to 2.5 percent or higher. For many public safety employees (police personnel) the benefits increased to 3 percent per year of servive at age 50. Instead of saving the unexpected returns for a rainy day, the State and local jurisdictions–in response to union pressure–approved labor contracts with these increased pay-outs. The problem is that these increased benefits, longer lifespans, and the current contraction of the economy have strained the demands on CALPERS.
Couple poor planning with escalating retirement benefits and you’ve got the perfect storm. CALPERS will survive, if for no other reason than it can exact the needed funds from the State and local governments to cover its losses. That is, of course, assuming the State and local governments aren’t in Chapter IX bankruptcy. Personally, I’m glad OC has its own retirement system.
While some are quick to blame Prop 13 for this turmoil, that blame is completely misplaced. An unexpected benefit of Prop 13 was the stablization of property tax revenues. Despite the near complete collapse of CA real estate values, most county assessment rolls are STILL INCREASING! Yes, still increasing.
Even in these times of falling real estate values most properties are still assessed at far less than their fair market value (“FMV”). Those properties will continue to receive the 2-percent annual upward adjustment allowed under Prop 13 unless and until the FMV’s of those properties exceed the assessed values. Yes, many properties acquired during 2003 and later have experienced significant declines in value. But those declines are more than off-set by the 2-percent adjustments made to the millions of properties which are still assessed at less than their FMV.
Yes, some of our legislators and local governement representatives are cursing Prop 13. But, it’s not because Prop 13 has resulted in lower property revenues–as outlined above, property tax revenues continue to rise in most places. It’s because Prop 13 set the basic property tax rate at 1 percent of value AND established a two-thirds voter approval threshold to make increases to our property taxes (lowered to 55 percent under certain circumstances). These officials are resentful that Prop 13 has made it more difficult for them to RAISE PROPERTY TAXES to offet the revenues they’re losing from State government sources. To me, that’s just sour grapes!
The root cause of the blow-up of outrageous public employee pension plans is the ability of public employee unions to contribute to the campaigns of elected officials.
Let individual public employees support electeds who pay their salary and pensions.
Ban unions from contributing to the elected officials who set employee pensions and pay.
Does anyone know which current OC legislator authored and pushed this public safety pension golden parachutes retirement packages?
This was pushed because of the risk our public safety officers face(which I truly believe some in the inner cities face) but the data that these individuals don’t have the number of retirements years as others and that our numerous investments could pay for these benefits is not quite coming out as true. Also, the fact that these benefits applied to all retroactively still working didn’t help.
It might be enlightening to learn who it is that appoints the members of the CalPERS Board of Directors and, via the appointment process, whether any appointing authority has the majority of appointees (and thus presumably control). It just may be that CalPERS and its policy decisions is controllable via the appointment process, and if so then assigning blame should be directed at the appointing authority (ies).
You didn’t hear these same entities crying foul and demanding that CalPERS take their money when investment returns allowed CalPERS to forgive and do without the employer’s portion of the contribution for many years. Just like wall street you don’t complain when business is good only when you have to pay the piper.
Junior, if you want to ban working people from banding together then stop everyone else from banding together too. Get rid of the chamber of commerce, get rid of the Lincoln Log Cabin Republicans, get rid of the Howard Jarvis Taxpayers who don’t want to pay taxes group. Lets make it unlawful for citizens to peacfully assemble as well. Gee the ideas like yours just keep coming. What a great suggestion.
If the lawmakers can ratchet up the benefits, then they can ratchet them down too.
The governor should by his own authority , order a pension contribution holiday. I think that would balance all the budgets involved. The pensions have money, let them carry the load for awhile.
Casual, the Governor appoints some members and others are elected by the groups that contribute. The current CalPERS President is a classified school employee elected by that category of member. Oh and he still has his classified employee job. Some of the directors are retired members like Kurato Shimada a retired classified employee who is elected by those in his member classification. I am a retired member of the CalPERS system. I receive a huge pension of $252.00 a month. We receive the money we paid in first and after that is exhausted we begin to draw on the employer’s portion.
Hmm, I would be a bit more careful with that. Of course, the Howard Jarvis Association, as the main Prop. 13 proponent, wants to deflect blame.
Sure, CalPERS is one of the reasons for the problems we are having, but that doesn’t mean that it is the only reason. Prop. 13 is to blame at least as much as CalPERS.
Anonyms-
“Junior, if you want to ban working people from banding together then stop everyone else from banding together too.”
its a shame that we do not actually know that people we talk about or to or maybe we wouldn’t say the things that we do. Junior knows a heck of a lot more about working people banding together than you think but then again you don’t know him sooooo?
For Anonyms:
From Wiki: The arm’s length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an “arm’s-length transaction”. It is used specifically in contract law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).
There is not an arm’s length distance between the employer (politicians) and public employees. Their interests are intertwined and the public’s interest is left wanting.