Originally posted at www.foxandhoundsdaily.com
California Common Sense (www.cacs.org) and the Stanford Institute for Economics and Poilcy Research (SIEPR) published a new report on local pension systems February 21, showing that the largest independent systems are over $130 billion in debt. This is more than three times their annual budgets!
Much attention, in both policy research and broader political circles, has been paid to California’s statewide pensions systems. In contrast, virtually no systematic analysis of the state’s independent pension plans had previously been performed, though they collectively hold more than $150 billion in assets. A detailed look reveals that the June 2011 funded ratio for the aggregated 24 systems is 53.6 percent, based on an assumed rate of return, or discount rate, of 5 percent.
There are notable outliers on both sides. The City of Fresno’s two systems have an aggregate funded ratio of 78.5 percent, while the Kern County system is only 41.5 percent funded. However, none of the systems is at or above 80 percent funded, which is the conventional benchmark for the minimum funded ratio.
The report also reveals that benefit levels vary significantly. The average annual pension benefit in 2009-2010 for miscellaneous members was $34,461; for safety members, it was $67,718. This includes all beneficiaries, regardless of the number of years of service. Those numbers would be much higher if the systems were willing to provide data for retirees who worked a full career.
It is also important to note that a majority of independent systems base final average salary on the last one year of work, while a minority based this on three years. This encourages spiking of the final year salary to increase retirement benefits. All systems contain some form of cost of living adjustment, further inflating average payouts to retirees and costing taxpayers more.
Why all this really matters is that pension costs were 4.1 percent of aggregate municipal spending in 1999; by 2011, that figure had more than doubled. The highest share is 17.7 percent in San Mateo County and the lowest is 6.0 percent in Los Angeles County. Between 1999 and 2010, pension spending grew at 11.4 percent per year, more than the rate of growth for any other expenditure category. And this is still with the unrealistic assumption of 7.75 percent for annual portfolio returns.
This practice is at odds with standard practice in economics, which holds that pension liabilities are full-recourse obligations that must be paid without regard to the performance of pension fund investments. Thus, each system substantially understates liabilities and overstates funded ratios.
If pension systems assumed a more realistic 6.2 percent average annual rate of growth (what Warren Buffet argues for), which is a typical rate of return for private systems, pension costs would total 17.4 percent of all municipal expenditures. This unfortunately means we can expect to see less local parks, roads, libraries, firefighters, and police, while we keep paying more for government employees’ pensions.
By Dakin Sloss is the Executive Director of California Common Sense