As I reported in my book on government-employee pension systems, California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis, former San Francisco Police Chief Heather Fong was paid more than $528,000 in her last year as chief, but more than $303,000 of that were payouts for unused sick, vacation, and comp time before retirement, which was used to increase her lifetime pension.

When Fong left office at age 53, she received a government pension of $277,656 a year, a lot more money than she received when working ($187,875). I noted in California Dreaming that other retired law enforcement officers—for example, former Ventura County Sheriff Bob Brooks and former Merced County Sheriff Mark Pazin—are also making more money retired than when they worked. Apparently, cops don’t mind ripping off hard-working taxpayers.

One way that government employees accomplish this scam is through “pension spiking,” using “special compensation” in their final year or years of work to boost their final pay, which is used to calculate their lifetime pension benefits. The special compensation could include overtime pay, unused vacation and sick day cash outs, allowances, and bonuses. Fong claimed more than $300,000 of special compensation in her final year. Each government employee has an incentive to bump these up in the last few years of service since these are the years used to calculate their pensions. Pension spiking adds to the immoral mountain of pension debt that our children and grandchildren will have to pay. But two recent court decisions have begun scaling back pension spiking.

Former Gov. Jerry Brown (D) and the California Legislature sought to rein in pension spiking through reforms included in the 2013 California Public Employees’ Pension Reform Act (PEPRA). The Alameda County Deputy Sheriff’s Association, and other groups, filed lawsuits over PEPRA to keep certain types of compensation pensionable, such as accumulated vacation cash outs, in order to inflate their retirement pensions.

In a unanimous ruling on July 30, 2020, the California Supreme Court upheld PEPRA reforms that closed loopholes used by county workers to spike pensions. The decision is limited, however, to employees of 20 California counties that operate their own independent pension systems under the parameters of the County Employees’ Retirement Law of 1937. But the “1937 Act counties,” as they are called, are some of California’s most populous counties, including Alameda, Contra Costa, Los Angeles, Orange, Sacramento, San Diego, and San Mateo. Unfortunately, the court did not make sweeping changes to the “California Rule,” which should be abolished, as I explain in my book.

The Supreme Court ruled that the governor and state legislature did not violate contracts by enacting PEPRA to amend the law governing the 20 county pension systems, even though the reforms affect employees hired before the law went into effect on January 1, 2013.

“It would defeat this proper objective [preventing abuse of the pension system] to interpret the California Rule to require county pension plans either to maintain these loopholes for existing employees or to provide comparable new pension benefits that would perpetuate the unwarranted advantages provided by these loopholes,” Chief Justice Tani G. Cantil-Sakauye wrote in the court’s decision.

By calling spiking practices “unwarranted advantages” and “loopholes” that are not protected by contracts, the California Supreme Court has opened the door to future lawsuits to further restrict spiking practices. Steve Berliner, an attorney with the Los Angeles-based law firm Liebert Cassidy Whitmore, said, “There could be other circumstances where there are similar types of spiking that may be subject to further pension reform and under this ruling would appear to be something that can be changed.”

This ruling is yet another setback for pension spiking. Last year, in another unanimous decision, the California Supreme Court upheld PEPRA against a challenge by Cal Fire Local 2881, the union representing Cal Fire firefighters, who wanted to continue inflating their pensions by purchasing additional years of service credit through the California Public Employees’ Retirement System (CalPERS). From 2003 until 2013, the state allowed government employees to purchase up to five years of service credit that would boost their pensions as if they had actually worked that time. The court’s 2019 ruling upheld the 2013 repeal of the “air time” benefit, which had allowed service time to be untethered from actual work time.

As California’s progressives look for ways to “Defund the Police,” a good place to start is to end pension spiking by law enforcement officers, who are paid to protect our children, not to burden them with billions of dollars of pension debt. But the long-term goals should be to eliminate all forms of pension spiking by all government employees, abolish the “California Rule,” and end California’s outdated defined-benefit government pensions and replace them with more reasonable and fiscally sound 401(k)-style defined-contribution plans. The gravy train must end.

The post California Supreme Court Curtails Pension Abuse by Law Enforcement Officers, Others appeared first on The Beacon.

After years of promises by politicians—who, like public employees themselves, have done little to provide funds to pay for the generous retirement benefits—many public employee pension funds are now at increased risk of insolvency as the economy faces turmoil from the coronavirus lockdowns.

This long-festering problem has become so bad that some pension analysts think that several large public employee pension funds will become insolvent by 2028, if not sooner.

The Financial Times reported recently on the findings of Jean-Pierre Aubry at Boston College’s Center for Retirement Research (CRR), who singled out two large public employee pension funds with hundreds of thousands of members as being particularly at risk of insolvency, unable to pay the pensions promised to their members because they haven’t been putting enough money into them for years:

More than 320,000 members of the New Jersey Teachers and Chicago Municipal public pension plans face the biggest risks as severe cash outflows are draining the assets of these two schemes.

A slow recovery for the US stock market could result in Chicago Municipal’s funded position falling from 21 per cent this year to just 3.6 per cent by 2025. This would eave assets to cover just three months of the fund’s retirement payments, according to CRR’s analysis.

New Jersey Teachers is also burning through cash, with its funded position projected to decline from 39.2 per cent to 23.2 per cent over the next five years. By that time, New Jersey Teachers would have assets to cover 19 months of retirement payments.

That fate will come despite the intervention of central banks, who flooded markets with funds specifically to avoid pension losses.

The Organization for Economic Co-operation and Development (OECD) recently published a report showing how pension funds in OECD countries recorded a massive loss of approximately $2.5 trillion during the stock market meltdown in February through late March. Shortly, after that, central banks intervened with monetary cannons to rescue stock markets and other financial assets to avoid pension returns from going negative.

Although the stock market has since gone on to a remarkable recovery, thus limiting the damage that pension investments in stocks may realize, the economic damage from the lockdowns will weaken state and local government’s ability to fund public employee pension funds through their constriction of ordinary commerce.

There are three potential ways to solve this problem. First, the politicians and public employees could face up to reality and acknowledge their failures to fund their retirement benefits by cutting their promised benefits to sustainable levels.

Second, politicians and public employees could demand that taxpayers in their states and districts bail them out by paying higher taxes so the public employees can keep their generous pension benefits.

Third, the politicians and public employees could demand the federal government bail them out, which would require the government taking on trillions of dollars more in debt, on top of the trillions it has already racked up this year alone, following the economic damage caused by the shutdowns of so much of the U.S. economy in response to the coronavirus pandemic. Shutdowns of businesses that were ordered by state and local government politicians, who so clumsily implemented them, they were far more damaging than they needed to be.

Which of these options do you think state and local politicians and public employees will pursue to benefit their interests?

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Many of these politicians are more than willing to negotiate incredibly favorable contracts with the public employee unions that demand lavish pension benefits for their members in return for their political support. However, when it comes time to pay the bills associated with the deals they’ve made, these policymakers often turn to smoke-and-mirrors accounting tricks to hide just how far short they are in covering the costs of their largesse with taxpayer money. Some of their tricks include:

• Exempting government employees from contributing a reasonable portion of their pay toward their public employee pension plans from which they will benefit.
• Reducing the amount of money their governments pay into public employee pension plans by assuming the plans will regularly deliver higher rates of return than relatively safe investments provide.
• Chasing after the high rates of return they need to make the pension solvent by compelling pension fund managers to invest in risky investments, some of which fail and create losses that they then try to recoup by investing in even riskier investments.

Half the states’ pension funds for state and local government employees today are less than 70 percent funded to pay the lavish retirement benefits they’ve promised, including several that are now so deep in the holes they’ve dug for themselves that several state and local politicians are seeking to be bailed out at the expense of taxpayers.

But not every public employee pension fund in America has been so badly mismanaged by state and local government politicians. Politicians in states as politically diverse as New York, South Dakota, Tennessee, and Wisconsin have demonstrated that it is possible to maintain a solvent pension fund for their public employees.

What’s their secret? Writing in National Affairs, Josh B. McGee explains:

Plans in each of these states are better than 90% funded at this point because policymakers have been proactive in adjusting important assumptions, closing funding gaps quickly, and developing risk-sharing mechanisms that can fairly adjust contributions or benefits as needed. These states demonstrate that it is possible to sustainably manage a defined-benefit pension plan.

McGee then gets to the bottom line of what it would take to fix the pension funds that have been subjected to both chronic overpromising of benefits and chronic underfunding by state and local politicians:

Fixing public-pension funding is not technically difficult, but in most jurisdictions, fully funding pensions at this point would require significantly higher contributions or reduced benefits (or both), making a solution politically challenging to achieve. However, failing to take meaningful action to close the funding gap will only make the problem more challenging and painful to fix in the future. No matter the scale of the problem, governments that work with their plans to craft workable solutions and begin down the path to full funding will be better positioned to weather the next downturn.

The recommendations of the Society of Actuaries Blue Ribbon Panel on Public Pension Plan Funding (SOA BRP) make a great starting point for policymakers who wish to tackle the challenge of pension reform. The SOA BRP’s most important recommendations involve investment-return assumptions and pension-debt amortization. The assumption plays a critical role in calculating the current value of promised benefit payments, and thus the adequacy of annual contributions to cover the cost of those benefits. The amortization schedule determines how quickly pension debt is paid off. Together with mortality estimates, the investment-return assumption and amortization policy are the most important elements of pension funding policy. Tightening rules around these three elements would dramatically improve the accuracy of public-pension cost estimates and help ensure the adequacy of annual contributions....

Given the importance of these assumptions in calculating plan cost, policymakers should remove as much subjectivity as possible from the choice of the investment-return assumption by explicitly linking it, in statute or ordinance, to the yield on United States Treasury bonds (i.e., the risk-free rate) plus some pre-specified risk premium, as recommended by the SOA BRP. Tightly constraining plans’ investment-return assumptions to more closely track economic conditions would eliminate the most significant source of cost underestimation, mirroring improvements that were put in place for private-sector pension plans with the passage of the Pension Protection Act in 2006.

Making public employee pensions work more like private-sector pension plans is essential for their rescue. It’s a lesson that was recently demonstrated in Houston, Texas, which took action in 2016 to reform its underwater public pension plans by reducing its pension promises to a more sustainable level while boosting contributions to its pension funds with taxpayer support.

Houston’s template is one that ought to be followed in every jurisdiction with public employee pension plans that have no realistic path to becoming solvent as they are currently managed. Unlike the bailout path preferred by irresponsible policymakers, reforming public employee pensions to incorporate more realistic assumptions for how their pension funds should be managed is the only approach that protects the interests of the taxpayers who are ultimately the ones who pay to compensate their community’s public employees.

The post How to Fix Government Employee Pensions appeared first on The Beacon.

That’s how New Jersey Senate president Stephen Sweeney described what his state’s politicians are doing with the tax dollars they collect, in a recent interview with Bloomberg, where he exclaimed “we are in worse shape than Illinois.”

That’s really surprising because Illinois’ public finances are in absolutely awful shape for exactly the same reasons. In the Land of Lincoln, Wirepoints Ted Dabrowski and John Klinger find that several cities in the state are being forced to cut police, fire, and other public services to fund city government employee pension plans and health benefits. It’s gotten so bad that the pension funds are demanding the state comptroller intercept and divert city revenues for their benefit—money that city officials were counting upon to provide public services for their residents.

On Tuesday, the East St. Louis’ firefighter pension fund demanded that Illinois Comptroller Susana Mendoza intercept more than $2.2 million of East St. Louis city revenues so they could be diverted to the pension fund.

The fund trustees said the city shorted firefighter pensions by $880,000 in 2017 and another $1.3 million in 2018. Under a 2011 pension law, the state comptroller gained the powers to intercept city revenues on behalf of police and fire pension funds shorted by their municipalities.

Harvey was the first municipality to run afoul of the intercept law. North Chicago, a Chicago suburb of 30,000, was the second. Now it’s East St. Louis’ turn.

Illinois’ situation looks set to only get worse. Dabrowski and Klinger explain:

Back when Harvey was first intercepted last year, Wirepoints reported that comptroller confiscations could wreak havoc on hundreds of Illinois communities, potentially creating a domino effect. Hundreds of Illinois’ 650 pension funds have not received their statutorily required contributions from their respective cities in recent years, meaning the intercept law could go into wide usage under a broader crisis scenario. In the most recent analysis of Illinois Department of Revenue data, nearly half of the 650 funds were not properly funded in 2017 (see details below).

That domino effect could be exacerbated given that municipalities have virtually no control over their own pension funds. State law sets all the rules and pensions are protected by the Illinois Constitution, meaning that in a market downturn, the pension funds may have little choice but to demand more intercepts.

Illinois’ state constitution contains provisions that specifically promote the interests of state and local government employees by protecting them from ever having their pensions benefits reduced. In 2015, Illinois’ Supreme Court ruled that a government worker’s pension benefits cannot be changed in any way after their first day working for a state government entity, which carries down to local governments in the state. In Illinois, the interests of government employees reign supreme.

Dabrowski and Klinger describe what happened to the city of Harvey, Illinois, after it became the first city to have its revenues diverted to its public employees’ pension funds:

The intercept law was first utilized in 2018, when Harvey, Illinois, revenues were garnished to pay the city’s police and firefighter pension funds.

That intercept of nearly $3.3 million led to the layoff of 40 public safety workers so the city could avoid insolvency. The city found it couldn’t simultaneously pay for both current workers and pensioners. The city and the pension plans eventually reached a deal that relieved some of the pressure on the city.

Relieved, but did not remove the pressure. Returning to New Jersey, Bloomberg reports the state has just 38 percent of what it needs to pay the all the future pension benefits its politicians have guaranteed for state government employees, which puts the state on the worse financial footing of all 50 states for its underfunded government employee pensions.

Like Illinois, New Jersey’s worsening public employee pension situation is not tenable. The final words belong to state senate president Stephen Sweeney:

“Why am I yelling fire in a crowded theater and everyone else is saying that we’re fine. We’re not. And it’s going to go up in flames. I would rather not go down in memory as the guy that told everyone the pension system was going to collapse and be found that I was correct.”

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In 1994, Beale claimed he was a secret agent for the Central Intelligence Agency, but the mighty EPA failed to verify. That lapse enabled Beale to take more than two years off, with full pay, claiming he was in London, India, and Pakistan when he was actually kicking back at his vacation home in Massachusetts. Beale pulled off his CIA ruse for nearly 20 years, performed little if any work, and still drew retention bonuses. Beale continued to draw an EPA paycheck until 19 months after his retirement dinner cruise on the Potomac River, and 23 months after he announced he would retire. Beale also got retention bonuses even after he retired. As one representative asked in hearings shown on C-SPAN, “was that so he wouldn’t retire again?”

More recently, over at the federal Department of Justice, Bruce Ohr lost his Associate Deputy Attorney General job in 2017. According to a June 7 report by Alex Pappas of Fox News, Ohr received a pay raise of $2,600 in 2018, a year after his demotion. In 2017, Ohr received a “performance bonus” of $28,000, and the year before that a bonus of $14,520. Whatever one thinks of the Russia collusion story, complicated as a John le Carré novel, the timing of the bonuses seems a bit strange, and that is not the only oddity here.

The revealing DOJ documents, it turns out, were not produced by the DOJ Inspector General, a congressional committee, a government whistleblower, or the New York Times. The documents were the result of a Freedom of Information Act request by Judicial Watch, an independent group that uses the open records or freedom of information laws and other tools “to hold to account politicians and public officials who engage in corrupt activities.”

If this revelation winds up on C-SPAN, it just might draw more viewers than the hearing for EPA-CIA-Vietnam fake John Beale, who ripped off taxpayers for more than $1 million but retained his generous government pension.

The post Bogus Bonuses Still Abound in Federal Government. Just Look at Bruce Ohr. appeared first on The Beacon.

TIA’s Bill Bergman explains what the Zombie Index is and why ranking at the top of the list is not a good thing for the residents of the states that do:

This index is inspired by the work of Edward Kane, Professor of finance at Boston College. Kane wrote books warning about the developing crisis in the deposit insurance system in the late 1980s. Kane coined the term “zombie bank,” referring to banks and thrifts that were effectively insolvent but allowed to remain open via untruthful accounting and regulatory forbearance.

Kane called them “zombies” because they were really dead but allowed to walk among the living, and false accounting delayed loss recognition. Zombies had incentives to take large risks to try, in Kane’s words, to “gamble for resurrection”—especially considering moral hazard generated by expectations that taxpayers would get the downside of the gambles. These incentives, in Kane’s view, amplified the cost of the savings and loan crisis for taxpayers.

Becoming a zombie is bad for a bank, but at least the damage is contained to that private institution and its customers when it finally goes under. For a government, transforming into a zombie institution is exponentially worse, because the damage from the fallout when the Ponzi-like schemes of the politicians seeking to keep the state government running while hiding how bad its fiscal condition has become hits everybody when their financial deterioration can no longer be hidden.

Bergman identifies the states that have become the most zombie-like and what they could do to reverse their zombification:

The biggest ‘Zombies?’ New Jersey, Massachusetts, New Mexico, Connecticut, and Illinois. Taxpayers and citizens in those states could benefit from more oversight of risk exposure in investments backing retirement funds.

The primary way that state governments hide the full extent of their liabilities is by omitting their pension obligations from their financial statements, where the states in the worst shape have an extended history of offering lavish pension benefits for public employees while failing to adequately fund them, counting on investment returns to carry the load of making good on the obligation.

Consequently, the worst-run governments turn to riskier and riskier investment schemes to try to make up the difference, which all too often turn into even bigger problems when they can’t deliver the high returns they were counting upon. When they eventually go bust, as happened in Dallas, Texas just last year, essential government services like trash pickup appears to be suffering because the city’s money troubles meant it couldn’t buy enough new garbage trucks to replace aging ones.

On the plus side, reforms that Dallas has made to fix its public pension disaster appear to be working, so it is possible for a fiscally strapped government to repair the damage.

The real question for zombie government politicians is why wait until a crisis has forced the issue to put themselves onto a fiscally sustainable path?

The post The Rise of Zombie Governments appeared first on The Beacon.

That general rule of thumb comes, however, with a caveat. Americans expect that when they give public schools more money, this will help to fund the education of their children and to support programs that promote their children’s development, such as athletics or the arts.

What they don’t expect is for the money they give to be siphoned off in ways that will either never show up in a classroom or that will never benefit their children.

But sadly, that’s exactly what is happening at school districts around the country, because of the increasing cost of public employee benefits. The editorial board of the Los Angeles Times recently weighed in on the worsening fiscal state of the L.A. Unified School District, where health care and pension benefits provided to the school district’s teachers, administrators, and employees are projected to drive the district into insolvency:

If it needed any more prodding about the looming budget pitfalls, the Los Angeles Unified School District certainly got it this week. An analysis by the nonprofit journalism organization CALmatters showed that the cost of L.A. Unified’s employee benefits has been growing faster than its base funding for five years. And a report by an outside task force put the district’s dilemma in blunt terms:

“L.A. Unified is facing a structural budget deficit which threatens its long-term viability and its ability to deliver basic education programs. The District’s own forecasts show it will have exhausted its reserve fund balance by 2020-21, will have a budget deficit of $400 million in 2020-21, and therefore be insolvent.”

The report noted that the district’s pension contributions will rise dramatically in coming years. And for the report’s ultimate shocker, there’s this: Within 13 years, the district’s healthcare and pension costs will eat up more than half its annual budget.

That grim fiscal scenario is already diminishing the quality of education in L.A.’s public schools when compared to school districts around the country that have similar student demographics according to CALMatters’ report:

According to these data, L.A. Unified’s salaries and health costs per teacher are higher, even when they are adjusted for cost of living, and it provides less instructional time.

L.A.’s Unified School District is providing a raw deal to Los Angeles’s taxpaying families, who are paying more for public school employees but getting less public education for their children in return.

The saddest part of the editorial is the revelation that the public school employees are fighting any fiscally responsible reform of their benefits and appear to be counting on getting bailed out by California’s cash-strapped state government, which has public employee pension funding problems that are already causing cutbacks in public services.

Without serious reform to put public school districts like L.A. Unified on a fiscally sustainable path, expect taxpayers around the country to confront similar situations, over and over again.

The post Growing Public Employee Benefits to Force School Cuts appeared first on The Beacon.

Milton Friedman

Milton Friedman, the 1976 Nobel Laureate in economics, was interviewed on the television program Uncommon Knowledge in 1999, and he offered a solution to Social Security’s financial problems: shut it down.

But Friedman didn’t advocate that the federal government walk away from its promises.

Social Security participants are owed a stream of payments during their retirement years based on a set of factors, including lifetime earnings, number of years worked, and age at retirement. This stream of Social Security payments has an expected present value.

Friedman advocated that each Social Security recipient, or future recipient, receive a bond equal to the current expected value of the benefit stream they have been promised under current law. The bond would be due at age 65 for future recipients and due today for current recipients.

Issue the bonds; then shut down Social Security.

This approach ensures that everyone gets what he or she has been promised. It brings the true cost of the unfunded liability above board. It funds the unfunded liability and requires the federal government to establish a specific financing plan to pay off the bonded debt. And it closes Social Security, a program whose tax and benefit design is morally indefensible.

Here’s what Milton Friedman said in 1999:

Friedman’s approach to Social Security can also be applied to ending the state and local government pension crisis. The programs are very similar: Social Security and state and local public pensions have massive unfunded liabilities; and they promise a stream of benefits after retirement.

Applying Friedman’s solution, state and local governments across the country would close their defined-benefit pension plans and issue bonds to beneficiaries equal to the current expected value of the stream of benefits owed. The bonds would be due today or at retirement depending on the beneficiary’s stage of life.

As with Social Security, this approach would ensure that people receive what they have been promised. It would force governments to acknowledge the true extent of the unfunded pension liabilities and establish a specific financing plan (something they refuse to do today). And it would permanently close these politically mismanaged defined-benefit plans.

Going forward, government employees would be offered 401(k)-style pensions, just like the plans offered to most private sector workers with employment based retirement plans.

Once again, Milton Friedman had the answer.

The post Milton Friedman’s Solution for Social Security Would Work for Government Pensions, Too appeared first on The Beacon.