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Gambling with house money

I usually allow letters to the editor stand for themselves, but I’ll make an exception for Gary Ravani’s letter in Friday’s paper (You can read the full letter here). Ravani, a longtime leader of the California Federation of Teachers, addressed a Fed report that detailed the wealth lost by the middle class during the Great Recession. In particular, he said:

“The article detailed the evaporation of middle class wealth and that the ‘promise’ of a secure retirement built on the stock market proved ‘illusory.’ Isn’t one recommendation to make public pensions more 401(k)-style, stock-market-based systems? To make public employee pensions also insecure and ‘illusory’ is moving us forward economically?”

Ravani overlooks or ignores the fact that public pension funds are invested in the stock market, just like 401(k) contributions. The only difference is that taxpayers are on the hook if pension fund investments lose value or even fall short of their targeted gains.

The retroactive pension increases authorized in 1999 for CalPERS members (a group that doesn’t include public school teachers) were based on a promise that investment earnings would cover the full cost. They didn’t, of course, leaving taxpayers to make up the difference. The cost is being counted in billions, and it’s still growing.

Until 1984, the big California public pension funds were required to put most of their assets in low-risk (and therefore low-yield) bonds, just as Social Security contributions are invested in government bonds rather than stocks. The pension funds couldn’t invest in stocks at all until 1966. In 1984, Proposition 21 removed the cap on stock investments by CalPERS and CalSTRS, the pension fund for California public school teachers. The funds were freed to bet as much as they want on the market. That, in turn, made it easier to promise larger benefits on a retroactive basis. Make a bad bet? No sweat. The taxpayers will pay you back.

That indemnification feature, of course, has been missing from proposals to put Social Security money into the market. No gambling with the house money.

So, should we get rid of pensions for public employees? I don’t think so. I like the federal system – a small (relative to state employees) pension, a 401(k)-style savings system and Social Security. Ravani says private sector pension systems are terrible. He’s right. But let’s not kid ourselves. A system that allows, even encourages, big bets on big returns in the market to pay for pensions that can match or exceed working income, with a guarantee that any investment losses will be made up by the taxpayers, isn’t sustainable, and it isn’t a model for the private sector. It’s not working for the public sector, either.

- Jim Sweeney





14 Responses to “Gambling with house money”

  1. Peter's Principal says:

    Yesterday The Cities of Stockton and Mammoth Lakes Ca. filed for chapter 9 bankruptcy.

    The major list of creditors include the current salaried employees and those receiving pension benefits.

    Pension reform is happening, one way, or another.

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  2. GAJ says:

    Race to the bottom?

    Like a County that is so bloated with a gold plated bureaucracy that it can’t even maintain its roads?

    That kind of race to the bottom?

    Thumb up 19 Thumb down 4

  3. Sarkyfish says:

    “A great deal of growing economic inequality in this country is due to wages and retirement dollars being shifted from the middle class to the bottom lines of corporations.” Ravani’s true colors finally come out. He’s just another philosophical socialist who whines a fat pension.

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  4. Gary Ravani says:

    Good to see so many people still engaged with the topic.

    A very smart guy once said: “It doesn’t really make any difference what the answers are, if you first get people asking the wrong questions.”

    The question many of you shoule be asking is not: Why are public employee pensions so good? The question you should be asking is: Why is it private sector pension are so lousy or don’t exist at all?

    Neither our economy nor our society gains by a race to the bottom. We don’t need to eliminate pensions and secure retirements, we need to make sure more and more people are eliible for them.

    A great deal of growing economic inequality in this country is due to wages and retirement dollars being shifted from the middle class to the bottom lines of corporations.

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  5. GAJ says:

    Isn’t it amazing how the entitled “spin” their outrageous benefits and lump in those who received sustainable benefits before 1999 with the masses that got huge increases beginning in the 2000′s based on lies initiated by CalPers. The fact that CalPers lied should be some basis for action…but of course the Politicians would rather just keep us taxpayers on the hook.

    And yes, $4,100/year in retirement for a teacher is beyond the pale…but they are far from the biggest gluttons feeding at the trough.

    “Pensions for career Sonoma County government workers have more than doubled in the past decade, led by sheriff’s deputies and other public safety workers who by 2011 were retiring with an average of more than $94,000 a year.

    Employees outside the ranks of public safety who retired in 2011 with 20 or more years averaged nearly $68,000 — 107 percent more than what co-workers who retired in 2002 get on average, county retirement records show.”

    http://www.pressdemocrat.com/article/20120520/ARTICLES/205201072

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  6. Jean Anderson says:

    A pension of $4,100 per month on the taxpayer’s dime is MORE than generous. More than any of us will see from Social(ist) (in)Security. I hope these public employees also saved for their retirement years like the rest of us do with other investments and not rely solely on a pension.

    No one “owes” anyone anything. The sense of entitlement among SOME public employees and ALL politicians is the HUGE problem. And paying some Sonoma County retiree a pension of $20,000 per month is obscene.

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  7. Sarkyfish says:

    Greece: California’s future. Attention public sector pensioners. If you can’t live with less, rice and beans is your future. The larder is bare; our state is run by dreamers; the bloated bureaucracy has established their own private state; our school kids are morons compared to other countries, and there will be no Winnebago’s, Caribbean cruises, second vacation homes, high end health clubs or gated communities when you retire at 55.

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  8. Peter's Principal says:

    Obviously those who feel they are entitled, will continue to manipulate the numbers,discussions and argue that all is well. I think we are well beyond that point in time.

    This poblem is huge and ongoing. It has several direct links to the Savings and Loan scandals from the 1980′s. This scandal has a new twist, as the Unions are directly involved as well as direct political donations/actions.

    The individual entitlement and government security of the defined benifit plan is currently what keeps the scam moving forward. Just like the Savings and Loan scandals, much of the money can be tracked to Las Vegas, hence the inside humor with the title and the photo.

    I have no doubt that the defined benifit will be removed and replaced with a benifit that puts the individual with ‘skin in the game’. This will be due to security over the individuals/ employers contributions. An individual would raise hell if an account was siphoned. That gives substantial security to the account.

    Like the savings and loan swindles, it will take years to uncover and prosecute. The well set up, ‘pay as you go’ is a huge drag on the economy.
    The polititians have the taxpayer paying bond interest(house money) on the debt while infastructure and economic starts are colapsing.

    Will the Federal Prosecutors begin taking action before the municipalites drop like flies in bankruptcy?

    Maybe that will be the incentive?

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  9. Accountable says:

    Ravani and Stubblebine missed the point of Sweeney’s article, which explains how CalPers lost money by investing in risky investments. It was no skin off its nose, because taxpayers would have to make up for any loses, without needing legislative approval. CalPers is a mega-corporation and just as corrupt as any Wall Street entity, as evidenced by the recent SEC fraud charges.

    Ravani states that “private sector employee wealth began to evaporate and their retirement security to disappear exactly in parallel with declining union membership.” Wrong! “Union membership was on the wane for most of the 1947-73 period (at least in part because of the decline in manufacturing), but what had been a gradual decline became a steep drop after the late 1970s. This accelerating decline in union membership occurred even as public-sector unionization (protected by more worker-friendly rules than the private sector) held firm over the past three decades” http://stateofworkingamerica.org/economic-landscape/unions-and-minimum-wage/. The rise of the American Middle Class occurred during 1947-73. Globalization in the 1980’s, especially after the fall of the Berlin Wall, and the rise of technology have lead to the evaporation of private sector wealth and retirement.

    Ravani repeats the urban myth that 80% funding of CalSTRS is healthy. CalPers also touts that. Pension finance expert Girard Miller states that “no panel of experts ever made such a pronouncement”. Miller debunks 12 pension half-truths, some of which Ravani and Stubblebine like to repeat http://www.governing.com/columns/public-money/col-Pension-Puffery.html.

    For instance, Stubblebine has faith that the “market will rebound and drive contribution rate back down”. Not only does Miller debunk that, but local economist Robert Eyler stated during the recent pension forum, “Financial markets won’t solve the problem, don’t fixate on a point in time.” I’m going to listen to the experts.

    In January 2011, Santa Rosa’s CFO estimated the pension underfunding @ $100 million. Pension trust manager, Bob Andrews, details how Santa Rosa’s pension obligation became underfunded http://sonomacountytaxpayers.org/2010/04/20/cities-cant-afford-public-safety-super-pensions/. To make matters worse, the taxable pension obligations bonds the city took out are considered “risky bonds”. http://www.calwatchdog.com/2011/12/19/cities-bet-on-risky-pension-bonds/. What is the advantage of pension bonds? They are exempt from voter approval. As I said before, Sonoma County voters need to follow in the footsteps of San Jose and San Diego.

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  10. Sarkyfish says:

    Trying to follow both Sweeney and Ravani is like trying to unravel a bowl of stale spaghetti. However, their joint bottom line seems to be more of the same for unionized state employees and teachers with the emphasis on “more” when it comes to tax payers. They can argue all they want about intricacies and methodology, but in the end it’s all the same. The tax sponge has been squeezed and there isn’t one more drop.

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  11. David Stubblebine says:

    Mr. Sweeney’s entire editorial position overplays his hand. Yes, the CalPERS fund took a dip when the 2002 market took a dip, and then another in the larger 2008 market dip, but even so its lowest value over the past 10 years was $133 Billion (currently its $237 Billion). If CalPERS were to stop all investing today, stop collecting all contributions, and then continue its pension payments at today’s rate, it would take over 15 years to deplete the fund. That sounds pretty solvent to me. With continuing contributions and investment returns, that 15 year figure certainly goes way up (hopefully it goes up to “forever” but that is precisely what is at the heart of the current debate).

    Pension costs to local governments are going up now because the contracts with CalPERS are variable rate arrangements with contribution rates inversely tied to investment returns. When the market goes down, contribution rates go up, and vice versa. For those of us who still have faith in America, we believe the market will rebound and drive the contribution rate back down again. Just how the market will come back – how fast; how strong; how robust – remains to be seen but we can expect the effect on the governments’ pension burden to be inversely proportional, lagging behind Wall Street by about 24 months.

    In the boom times of the 1990’s, many employers saw their contribution rates go to 0%. Where was the hue & cry about sustainability then? The only critics I heard back then said the rate should never be allowed to go all the way to 0% as a hedge against when the market swung the other way. They were right, of course, and CalPERS changed the rules after the 2002 market dip so the rates can never go to 0% again. Had the CalPERS leadership not made these changes, the increases we’re seeing now would be even higher.

    Mr. Ravani is quite correct to point out that there are many subtleties to the various plans under the state retirement umbrella and my remarks here are aimed at the most general case due to space limitations. Certainly this post has a very limited application to the Sonoma County pension situation, which is dissimilar to CalPERS in many substantial ways.

    I am very disappointed that the Press Democrat has taken the editorial position that it has and has gone to such lengths to convince readers that the sky is falling when it isn’t. Mr. Ravani has done very well to concisely state the situation facing state retirees while scratching this surface much more deeply than the Press Democrat at the same time.

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  12. Gary Ravani says:

    Mr. Brooks:

    The average state employee under CalPERS gets about $2,300 per month in retirement.

    The average teacher gets about $4,100 a month. Over the course of a career the district and the teacher contribute 16.5% of salary every month toward retirement. Those dollars have earned 8.2% average return over the course of two decades via investments by CalSTRS.

    CalSTRS is currently funded at about 75% and can function quite nicely when funded at 80%. Should another economic crisis occur CalSTRS could be unable to meet its obligations…in 2042. We do have a cushion in which to make adjustments.

    To your main point: $2,300 per month and $4,100 per month (for teachers that’s after 30+ years of service). Rich and famous? I don’t know which channel you watch the Kardashions on, but my guess is it takes more than those amounts to support those lifestyles.

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  13. Gary Ravani says:

    Mr. Sweeney’s rebuttal to my letter starts with a classic mixing of apples and aardvarks, beginning with discussing CalSTRS and CalPERS. They are different systems. Then there are the major distinctions to be made between County/Municipal and state recipients of CalPERS. These systems should not be “blended’ in discussions and the differences can be examined by interested readers.
    It is true that both state retirement systems suffered losses during the recession and sharply declining stock-market. All investors, aside from some insiders “shorting” the system, did lose. Those losses were not due to the reckless gambling of the retirement systems, but to the reckless gambling of an unregulated banking and investment industry. Let’s put the accountability where it belongs.

    Creating 401(k) type, or hybrid, retirement systems would make a great deal more sense, even for the private sector, if the banking and financial sector would encourage a system of regulation and enforceable oversight along the lines of those in place since the last banking/investment disaster of the 1930s. Instead the bankers and other denizens of Wall Street are spending tens of millions fighting regulation and oversight. A truly crusading newspaper might focus on those issues that could result in protections of both public and private sector employees.

    In truth there is nothing illogical about the state being responsible for state retirement systems for state employees. It is also true that much of the distress the various public retirement systems are in is due to the fact that municipal, county, and state entities took advantage of “opportunities” to reduce funding of the retirement systems often known as “pension holidays.”

    In some cases there been egregious instances of pension spiking, but even that requires more nuanced analysis. If there are loopholes in the pension systems that allow some to game the system, fix those problems. Don’t try and scapegoat all public employees for those cases that are a tiny percentage of those receiving benefits.

    Taken as a whole the PD’s persistent and negative focus on public employee retirement systems is just another drumbeat for the tired austerity ideology. We have an economy based 70% on consumption. As Paul Krugman asserts: Simply put, in the economy, your spending is my income and my spending is your income. What sense is there in further taking away retiree’s ability to consume? We can turn our economy into an England, an Ireland, a Spain or any other economy quickly sinking into a second recession by further reducing public sector jobs and public sector retirements. Austerity is ultimately an “illusory” policy choice and moves us backwards economically.

    Private sector employee wealth began to evaporate and their retirement security to disappear exactly in parallel with declining union membership. The answer to this problem, and the revitalization of the whole middle class in America, lies in continued support for public sector unions, as well as their members, and the reorganization and unionization of private sector workers.

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  14. Thomas Brooks says:

    The whole stinking rotten public sector pension scheme needs to be overhauled if it is to survive at all. This is especially true for public safety pensions.

    Single highest year, military years counted as work time, very liberal disability public pension schemes and and pensions at age 50 need to go and that is just a start. Vesting should start after 10 years of continuous service.

    A pension should not be greater than one half the salary a public employee earned while working for a public agency.

    The citizens are paying the freight and deserve the services they are paying for. Our tax money cannot continue to go to fund public employee’s extravagant retirements. If they want to live the live of the rich and famous, let them get a job or start a business that will accomodate their expectations.

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