Tuesday, August 11, 2009

LA Times: Amid Cost Cutting, Los Angeles City Pensions Continue to Soar

The dichotomy between the private and public is going to be one of the big issues in the decades to come. Just as with our entitlement programs we have promised too much; although I'd argue at least a whole mass of people "benefit" from the misalignment in Social Security and Medicare. In our public workforce (no offense if you are part of it) we have created an ivory tower parallel class who exist in a different world than the private worker. Many are no longer affected by the free market - even as we watch city after city and state after state suffer with massive shortfalls, we still see huge payouts. I see it here in story after story in Michigan - in a state that never truly came out of the 2001 recession. If it is happening in the 1 state Depression known as Michigan, it will happen in your state.

In May 2008 Vallejo, CA went bankrupt [May 7, 2008: Vallejo, California Votes for Bankruptcy] After some digging we found out in a decent sized town of 100,000 people - some 300 city workers made over $100K; many of those over $150K and more than 30 over $200K. And that is just salary - we did not even scratch the surface of the gold plated benefits and pensions that many are receiving. While their private worker peers are seeing pensions go the way of the dodo bird, and left with 401k plans. Job security between the two sectors is a whole different conversation but until the taxpayer wakes up, I continue to urge you to raise your child to be a government worker. Or switch careers yourself.

We will have a massive bailout down the road in public pensions [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout] States and cities are now literally selling off assets to pay the salaries and benefits of a very few citizens.

While this is specific to pensions it really is a parallel to almost every major program in the U.S. at both federal and state level. Promises that had no chance to be fulfilled in the name of "kicking the can down the road". Unfortunately multiple roads are converging at a dead end. If the federal government is going to bail these all out it is basically a transfer of wealth from those without these pensions to those that do....many of which are government employees as the vast majority of private enterprises have done away with the pension plan.

[Bloomberg] Public pension funds across the U.S. are hiding the size of a crisis that’s been looming for years. Retirement plans play accounting games with numbers, giving the illusion that the funds are healthy. The paper alchemy gives governors and legislators the easy choice to contribute too little or nothing to the funds, year after year.

The misleading numbers posted by retirement fund administrators help mask this reality: Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30 percent less than that, at $2 trillion.

That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years. The quick fix for pension funds becomes a future albatross for taxpayers.

Effectively the stimulus plan is plugging in holes in many state budgets for 2009; that money is basically a transfer from the taxpayer nationwide to the subset in the public sector. And that transfer at a smaller scale, is exactly how these salaries and budgets get approved without regard for supply and demand. I mean what's another 0.2 millage? If you spread it over 40,000 households, whats another $18 a year in taxes (no skin off your nose!) to make sure a tiny sliver of the population is not affected by the same forces their neighbors are. And then another $23 the next years, and then $35 the next... rinse, wash, repeat.


Here is a great story from the LA Times showing the complete disassociation between reality and what is going on in the public sector. As I noted last week, public and pseudo public jobs (of which healthcare has now become with the massive subsidies - you can also include education here) is now 1/3rd of our entire workforce... and it's growing like a weed. So 2/3rds are subsidizing 1/3rd ... today. And it will only grow from here. When is the breaking point? 50/50? When 1/3rd outside government is supporting 2/3rds inside government / healthcare? I don't know. But it will end badly.

Just mark this as another crisis that we clearly see, but do nothing about. Because no one wants to say no ... who wants to be unpopular. You already see the massive protests anytime any public sector salary or benefit is even considered to be "adjusted" to reality. As long as we can borrow more, put it on IOU, and make another generation pay for it... it's good. Sound familiar? And when the end game approaches, we'll all look around and say "no one could see it coming" Yep... no one. [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]
  • Collecting nearly $318,000 a year, the former head of Los Angeles' Department of Water and Power tops a list of 841 city pension recipients paid six-figure benefits, according to newly obtained records.
  • And, like many of the retirees, former DWP General Manager Ronald Deaton will be paid more beginning this summer -- boosting his annual retirement pay to more than $327,000 -- because of annual cost-of-living increases, records and interviews show.
  • Former DWP Assistant General Manager Frank Salas ranks second on the list, receiving about $290,000 a year. Councilman Bernard C. Parks, a former Los Angeles police chief and head of the city's budget committee, is third. The Times reported in May that Parks, 65, who has publicly warned about soaring payroll and pension costs, received $265,000 a year in retirement payments on top of his $178,789 council salary. (watch what they do, not what they say) With a cost-of-living adjustment that took effect this month, Parks' pension has grown to $273,000 annually, roughly 10% more than his final pay as police chief, records show.
Here is the list, hundreds of people - almost all making $100K+ in yearly pension; on your dime. Not just California's dime, but since this "stimulus" was used by many states to plug budget holes, it is YOUR money being transferred to these individuals. So please review their names - perhaps they will mail us all thank you notes or Christmas cards. And if you are a Californian? Please please have your child get a job at the Department of Water and Power. They will be set for life!
  • New DWP pension data provide a fuller picture of the city's largest retirement packages at a time when City Hall is cutting services, the public is being hit with recession-driven tax increases to cover government budget shortfalls and rising public pension costs are under close scrutiny.
  • The Times previously reported that nearly 600 pensioners received $100,000 a year from the city's police, fire and general government retirement plans. The new data from the city's utility adds close to 250 names to the list, which includes retirees or, in some cases, beneficiaries.
This comment seems logical... thankfully, logic has no place in government.
  • "We should never, ever design a pension formula that provides more for a person when they retire than when they are working. It defies any common sense," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, a nonprofit pension reform group headed by former GOP Assemblyman Keith Richman.
  • "But that's what we're finding" in some school systems and public safety agencies, Fritz said.
That's just LA baby..... greater California has 5000 of these folk ... >$100K each.
  • The group has publicized more than 5,000 names of state and local government pension recipients across the state collecting more than $100,000.
How could this happen? Something about a fox guarding the hen house would apply.
  • Fritz said high-end public pensioners are worthy of attention. They include "people who were advising, in closed-door labor negotiations . . . negotiating benefits," she said. "These are the ones that made this whole thing happen."
If you follow the entitlement problems in the US (Medicare especially) this will sound so very familiar. The share of LA budget going to pensions? It will rise from 15% of all funds to a mind blowing 33% in half a decade. Yes, 1 in every 3 dollars will be going into (insert Medicare OR public pensions in LA) - it's the same "long term planning"; just replace the name of the benefit. Kick the can policies 101.
  • One recent projection warned that the share of the city general fund receipts required by two large pension funds would jump from 15% this year to 33% in 2013-14.
  • That would amount to an increase of nearly $1 billion, making pension contributions the fastest-growing area of city spending, said Asst. City Administrative Officer Tom A. Coultas, an employee relations specialist.
Remember what I posted above from the March 4th Bloomberg story? How are cities and states "getting around" the issue i.e. hiding it? Accounting changes ... (man, just like our banks - if in doubt, lobby for accounting changes)
  • Recent market gains and accounting changes have eased the financial blow somewhat.
And this won't get fixed... once promised, it's pretty much an American right.
  • Court rulings generally protect benefits provided to retirees and promised to current employees, officials say. Altering pension plans involves negotiations with unions and, in some cases, voter approval.
Anyhow, the bottom line is these plans are underfunded and will get more so. Many pension funds assume annual gains from investments of 6-7-8%+ as they try to figure out how much they can pay out. That return has not exactly happened the last decade. While we whine about "no money for education" or "lack of social services" just remember the money is there for pensions. And when these "accounting" changes no longer can hide the reality and the shortfalls arise? That's where you come in - or more specifically, your wallet. Knowing this (moral hazard) why should anyone in public office ever plan for a rainy day or adjust long term benefits in a self sustaining manner.

Answer: they have zero incentive. Bailout Nation assures them they don't need to.

[Apr 5, 2009: AP: $1 Trillion Hit to Pension Funds Could cost Taxpayers, Workers]
[Oct 24, 2009: WSJ - Pensions Funds Taking Serious Hits]

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