Co-authored with Bill Zettler

In the March 28, 2011 issue of the Weekly Standard, Eli Lehrer, Vice-president of the Heartland Institute, a premier think-tank based in Illinois, wrote an article entitled “Pensions Aren’t the Problem.” Lehrer puts forth the argument that defined-benefit state pensions, not only were not in trouble, but were a good way for states to recruit talent at little expense.

While Heartland does some fine work, in this case, we have to disagree with their analysis.  All too often of late the positions of NASRA (National Association of State Retirement Administrators), an organization of self-interest and self-righteousness not unlike their sister organization the NEA (National Education Association), have not received the critical examination they are due. After all, if all state employees were on Social Security and 401K programs there would be no need for state retirement administrators and their staff of thousands.

Let’s go through Mr. Lehrer’s major claims one by one:

CLAIM: “…pension benefits represent a reasonably small share of overall state spending (3.4 percent in Illinois).”

FACT: The way you come up with what appears to be a minuscule percentage of state spending is as follows: (more…)

Co-authored with Bill Zettler

There has been much talk regarding the unsustainable fiscal mess most states are mired in.  Some are even discussing the creation of legislation that will allow states to declare bankruptcy.  The largest component of the mess is the unsustainable pensions for public sector employees.  If a contest were held to select the poster child for the pension debacle, Illinois would win hands down.

Today, Illinois’ unfunded pension liability is estimated to be $78 billion. How did we get here?  Let’s call it the “Four Rules of Too” for public employees whose salaries are too high; contributions are too low; plans are too bloated; and retirement is too early.  As the following chart regarding the Teachers Retirement System (TRS) shows, over the last decade teacher salaries have risen by 7% per year or 96% compounded and the pension cost (Pension Benefit Obligation) taxpayers are responsible for has gone up 116%.

If we look at the rest of us who are locked into the Social Security system, our salaries increased by an average of 3.65% or 43% compounded, less than one half of the teachers’ increases. Thus although our income has gone up less than half as fast as teacher salaries and pensions, we have had to pay more taxes out of our lesser incomes to fund the promises made by union bosses and politicians.  This model could be applied to other state workers as well.  For instance, 35% of Illinois State Troopers make more than $100,000 per year with top salaries of $185,000.

And the future doesn’t look any brighter.

(more…)

Last week I calculated that CalPERS would increase its pension charges to cities, counties, and the state of California over 30% to regain massive investment losses over the last decade.  My initial estimate was drawn from a presentation by Kung-pei Hwang, CalPERS Senior Actuary, which I recorded mid November.  My report also detailed the gimmickry that CalPERS used to hide the 50% shortfall in their planned assets.  However, it looks like my estimate was way low because we now have new video of the CalPERS board stating in their own words that the costs to cities, counties and the state will increase a GINORMOUS 55% by 2013 and the increased rate will need to be in place for at least the next 19 years.

And, this will only provide a 50/50 chance of getting to where they need to be to fulfill pension obligations for municipal and state workers.   In aggregate for all municipalities and the state this could equal a $4 billion a year drag on the economy of cities and counties as each spends less for local government functions.  Many cities and counties are already struggling to meet the current pension costs.  The new rate threatens to put many governments into serious financial trouble.  For the City of Los Angeles alone this means an increase of $340 million each year in payments to CalPERS!

Listen at the 57 minute and 37 second mark of this video as a board member adds up the financial hit cities and counties in California are about to take……

In addition, CalPERS admits earlier in this video that they have not built into their forecast the fact that restrained government budgets will likely result in layoffs and/or early retirement which will further strain the pension system.  Less municipal & state employees means less payments made into CalPERS to refill its underfunded coffers.  Their financial model does not reflect this reality.

(more…)

CalPERS financial sleight of hand is reminiscent of Bernie Madoff’s lying to his investors through phony statements designed to mask losses and outright fraud.

Much has been written about The California Public Employees’ Retirement System (CalPERS) being underfunded by $500 billion due to massive investment losses over the last decade, but now we have video of a CalPERS Senior Pension Actuary, Kung-pei Hwang, describing how they intend to change basic assumptions in their financial model to (please allow me to mix my metaphors) Hide The Decline in their assets held for municipal, county, and state employee’s retirement.

Through this statistical gimmickry, CalPERS can push the loss into later years and appear solvent today.  Of course, at some point in the future it will need to raise funds from state and local governments to compensate for these losses.  But for now, they seem content to hide the disastrous condition of their fund.

As you can hear Mr. Hwang say in his presentation to the Huntington Park City Council last week, “that means we will defer most of the loss to future years.” “This means the city will realize another increase in future years. I hate to bring bad news, but those are the facts.”  Well, the fact is this bad news will hit budgets for all cities, counties and the state of California and not just Huntington Park.  By playing with its financial model in this way, CalPERS is treating all California taxpayers like Madoff investors by cooking its actuarial books to Hide The Decline in its assets.

It gets worse, much worse as noted below after the video………..

(more…)

For years, employers in the private sector have been moving in the direction of versatile, 401(k) style retirement accounts. However, a vast majority of the 20 million state and local government workers in the U.S. have kept their generous, defined-benefit pension plans.

Despite the lofty promises made by policymakers, public employee retirement plans have been neglected over the years and have become huge liabilities that severely threaten the financial health of many states. If legislators do not properly address the crisis in public pensions, they will make current state budget problems look trivial. In fact, as of 2006, states had accumulated nearly $360 billion in unfunded pension obligations, according to a new 50 state study conducted for the American Legislative Exchange Council (ALEC). The report entitled “State Pension Funds Fall Off a Cliff,” is co-authored by Dr. Barry Poulson of the University of Colorado and Dr. Arthur P. Hall of the University of Kansas.

Much of the current data regarding liabilities in public employee pensions was taken before the recent economic downturn, and the study’s authors warn the problem is much worse today since stock market losses have not been fully realized in many official government pension statistics. Other estimates with recent data place the unfunded pension liabilities at $1 trillion nationally.

(more…)