Calif. Faces Fiscal Ruin From Unsustainable Govt. Pensions

Posted by Rachael Heisler on June 20, 2016 at 1:20 PM

By Chuck Reed

Special Commentary to the Daily Journal


Despite its growing economy and higher tax revenue, California still faces fiscal ruin from its unsustainable government pension programs. Even in these good times, the state, local governments, public schools and our universities are raising taxes, boosting tuition and cutting services to pay rising employee retirement costs. This "crowding out" of services is most acute at the local level, but state government is suffering as well.

To read more of Reed's commentary, click here.

Calif. Debt = Nearly $21K per Taxpayer

Posted by Rachael Heisler on June 14, 2016 at 12:33 PM

By Chuck Reed


California has racked up $168 billion in retirement debt for pensions and retiree healthcare.   As new national disclosure requirements are implemented in California, the enormous size of the state’s unfunded liabilities are becoming visible.  California’s retirement debt now exceeds its bonded debt, which is $131 billion.  

This information is released today in a report titled, The Financial State of California, by Truth in Accounting (TIA), a Chicago-based think tank that analyzes government financials.

TIA researchers calculated California's overall financial position and discovered the state needs $239.3 billion to completely pay its bills. When this debt is divided among California taxpayers, each taxpayer owes $20,900 – the state’s taxpayer burden.

The report does not include local government pension or healthcare debt.  The data is based on official state financial reports and actuarial reports, which generally use the optimistic assumption that pension fund investments will earn 7.5 percent per year for 30 years.  If they fail to do so, the taxpayers will have to make up the difference through tax increases or cuts in service.



RSI Hero of the Week: High School Senior Passes Pension Reform at Alabama Girls State

Posted by Rachael Heisler on June 13, 2016 at 12:08 PM

A group of bright young women came together last week as part of the 74th session of Alabama Girls State and did something truly spectacular: they passed bipartisan legislation to overhaul Alabama’s public pension system.

Alabama Girls State gives rising high school seniors the opportunity to create and participate in mock city, county and state governments. Sponsored by the American Legion Auxiliary, the young women take a hands-on role in which they form political parties, run for office and work on mock legislation. This summer, 365 delegates took part in the week-long event.

This session’s successful pension reform effort began when one of the rising high school seniors who is concerned about the struggling state budget began looking deeper and learned that pension debt is a main culprit of Alabama’s financial woes. After methodically researching the issue, she drafted pension reform legislation, worked with colleagues to build consensus, shepherded the bill through committee process, and in the end got her legislation passed with overwhelming bipartisan support and signed into law by the Girls State Governor. The pension reform bill was one of only a handful that passed.

The Retirement Security Initiative (RSI) applauds this future leader for taking on a tough issue and seeing it through.  For every new employee Alabama hires into the current system, it makes a lifetime pension commitment in which it doesn’t have the funding to guarantee. It’s a never-ending cycle that requires taxpayers to continually dump money into a system that has no hope of catching up. Unless action is taken, taxpayers will be picking up the tab for Alabama’s pension debt 30 years from now.

Living in a state that pays more than $1 billion per year into a system where the debt still continues to rise, this young woman and her fellow delegates realize that it’s time to stop kicking the can down the road and fix the problem now. We at RSI are inspired by their proactivity and commitment to the role of government and its responsibility to ensure that retirement plans are sustainable and fiscally sound. We are hopeful that Alabama’s legislators, too, draw inspiration from their efforts.

Reed Interview: CalPERS Cost Taxpayers $400B

Posted by Rachael Heisler on June 03, 2016 at 4:20 PM

In an interview this week with the Kersten Institute, RSI board member and former San Jose Mayor Chuck Reed said that with the passage of SB 400 in 1999 and subsequent actions, the California Public Employees’ Retirement System (CalPERS) has committed the worst financial fraud in the history of the state and probably the country. 

SB 400 dramatically expanded pension benefits for public employees in California, including retroactive benefit increases, and became the new statewide standard for pension benefits, despite the fact that the costs of the benefits have accumulated a massive burden of debt for California taxpayers.

According to Reed, CalPERS was able to get the California Legislature to pass SB 400 in 1999 by saying that it would "not cost taxpayers a dime…Well that is true, it did not cost a dime, it cost them more than $400 billion."

To read Chuck Reed's interview in its entirety, click here.


The Perfect Storm for Pension Reform

Posted by Rachael Heisler on May 31, 2016 at 5:25 PM

Findings from a newly published survey of trends in the public sector show that state and local governments are experiencing a surge in employee retirements, and as a result are challenged with having to hire a replacement workforce.  According to the survey from the Center for State and Local Government Excellence, the percentage of governments hiring increased to 77 percent this year—a huge jump from 27 percent in 2013.

With the uptick in public employee hiring, and as many state and municipal governments face significant retirement debt challenges, the time couldn’t be riper for policymakers to implement much-needed pension reforms. It’s a culmination of events—a perfect storm—that would allow governments to place new employees on a path to secure retirement.  

For every new employee a state or municipality hires, it makes a likely 60-year pension commitment in which it more than likely doesn’t have the funding to guarantee. Built on risky investments and holdings, these unsustainable retirement systems have thrown the U.S. into a $4 trillion public pension debt crisis, leaving many public employees wondering what their retirement futures hold.

While current policymakers may not have created the mess in which we find ourselves, they can begin to tidy it up by implementing sound and sustainable pension reforms. This is especially important as workers contemplate going into the public versus private sector. According to the survey, hiring and retaining qualified public employees is the top priority for state and local governments, yet it remains a significant challenge. In fact, positions such as accountants, engineers, information technology experts and nurses remain extremely hard for governments to fill.  So as professionals are given the choice of private versus public work, governments need to be able to offer predictable, competitive compensation packages to get the best recruits for the job.

Going forward, state and local governments have a real opportunity to fix their respective pension systems, which will not only help them get the most qualified workers, but will allow them to ensure safe and secure retirement futures for current and future employees.

Dan Liljenquist: Collective neurosis in Puerto Rico

Posted by Rachael Heisler on May 26, 2016 at 10:27 AM

I have spent the last several weeks studying the Puerto Rican debt crisis, trying to understand how the situation got so bad. It appears that Puerto Rican officials have been essentially running an open ponzi scheme, selling lucrative bonds to an eager municipal bond market. Much of that borrowing went to close significant structural budget gaps, caused in part by required debt service payments to other creditors. To make matters worse, at the same time, the Puerto Rican government neglected to fund its public employee pension systems, allowing payments to retirees to nearly liquidate its investment reserves.

To continue reading Dan Liljenquist's special commentary to the Deseret News, click here.

RSI Hero of the Week: The Team behind

Posted by Rachael Heisler on May 20, 2016 at 4:40 PM

The Retirement Security Initiative takes its cap off this week to the team behind the newly introduced research project The research site, directed by Stanford Institute for Economic Policy Research Professor Joe Nation, measures U.S. public employee pension system debt in easy to understand (although perhaps not so easy to digest) data and metrics (the research shows total U.S. pension debt at $4,833 trillion, equaling $41,219 per U.S. household).

The site allows visitors to examine, by state, market and actuarial pension debt per household and capita, as well as general fund expenditures, total expenditures and total general fund revenues per year dating back to 2008. For example, Alaska’s market pension debt per household in 2003 was $58,253; in 2014 it increased to $113, 137. Diving down further, one can look at both state and local debt and even cherry pick states to compare.

For its metrics, the pension tracker team uses a variety of sources for actuarial, budgetary, demographic and other financial data from a number of sources provided by state pension systems, most notably the Comprehensive Annual Financial Reports (CAFRs). They also rely on the National Association of State Budget Officers, the U.S. Census Bureau and the Treasury Department.

In all, is a great new asset to help policymakers, public workers and taxpayers understand the numbers behind the nation’s pension crisis and the significant need for reform.

An IPOD Without a Happy Tune

Posted by Rachael Heisler on May 20, 2016 at 1:42 PM

By Chuck Reed

Analysis published this week by J.P. Morgan’s Chairman of Market and Investment Strategy Michael Cembalest introduces an interesting means to aggregate public pension debt burden and calculate the amount of tax increases or service cuts that a state will have to pay for future obligations. Unfortunately, even with the new way of calculating pension liabilities, the forecast is dreary for many U.S. states.

In his analysis, Cembalest calculated what all 50 U.S states currently spend on bonds, pensions and obligations related to underfunded pensions and retiree health benefits (termed OPED) and what they would be spending over 30 years assuming a 6 percent rate of return. Of the 50 states, four—Illinois, New Jersey, Connecticut and Kentucky—stand above the rest in future obligations and represent 20 percent of outstanding municipal general bond obligations.

Using a calculation called “IPOD” (short for I=interest on bonds, P=pension payments, O=OPEB payments and D=defined contribution payments, all divided by state revenues), Cembalest looks at current IPOD ratios and, more importantly, full accrual IPOD ratios required to service all future obligations accrued to date. And the result does not carry a happy tune. To meet the full accrual IPOD ratio, many states will need to significantly increase taxes, cut services or increase public worker contributions.

For example, to meet its future commitments, Illinois will have to increase taxes by 17 percent, or cut spending on services by 16 percent, or increase worker pension contributions by 400 percent. In Connecticut, policymakers will have to increase taxes by 14 percent, or cut spending by 14 percent or raise workers’ contributions by an outstanding 699 percent. In short, the situation is dire for not only the four states used in the example, but many more throughout the country. Further, Cembalest’s research only digs as far as the state level. Examination of municipalities using the same formula would only further reflect the tremendous debt burden.

So, what does this mean? Looking at the varying scenarios, increased taxes for most of these states will likely be politically impossible since the highest IPOD ratio states already have the highest taxes. Increased spending and worker contributions will also likely be off the table. Combalest says that states could rely on elevated investment returns, but that would require almost impossibly high annual returns for 30 years and, after all, that shortsighted optimism is what helped get our country into its current pension debt crisis.

Moving forward, pension reform can no longer be prolonged by state and municipal policy leaders while liabilities accumulate.  To maintain benefits for current retirees, ensure a fair retirement for future workers and deliver government services to taxpayers without significantly increasing revenues, the debt crisis needs to be addressed now.


And so this happened this morning in Pennsylvania...

Posted by Rachael Heisler on May 18, 2016 at 8:49 AM

...which is never a good sign.

Pennsylvania's public pension debt rises $172,000 in the time it takes to drink a cup of coffee. Each day it increases $1 for every man, woman and child in Pennsylvania, or $1,500 per year for a family of four. Read more here and follow along @PAPensionDebt

Liljenquist: The Pathway Forward for Puerto Rico

Posted by Rachael Heisler on May 12, 2016 at 10:22 AM

by Dan Liljenquist for the Deseret News


This week Congress will consider legislation to help Puerto Rico restructure its staggering debts. This tiny island, only 100 miles across but with 3.5 million people, owes more than $115 billion ($71 billion in bond debt and another $44 billion in pension debt). That equates to a per person debt burden of nearly $33,000 for every man, woman and child on the island where the median family income is $19,000 per year. Puerto Rico can’t pay its debts, and has already defaulted on $400 million in bond payments.

Read more of Liljenquist's commentary here.