State Budget Cuts: Starting at the Top - Dean Baker/FDL

[WillyT]

State Budget Cuts: Starting at the Top
By: Dean Baker
Monday February 7, 2011 10:25 am

<snip>

The elite media are on yet another jihad. They are determined to cut the pay and benefits of public-sector workers who can still enjoy a middle-class lifestyle.

The idea that a schoolteacher or highway worker can retire with a pension of $2,000-$3,000 a month is directly at odds with their view of government. They believe that government exists to redistribute income from everyone else to those who already are rich and powerful. To these people, the money that is going to pay the wages and pensions of ordinary workers is money that could be in the pockets of the rich.

The economic crisis caused by the collapse of the housing bubble has created a great opportunity. State and local tax revenues plummeted as employment fell. Lower property values also meant lower property taxes. This meant that governments across the country suddenly faced severe budget shortfalls. This provided the opportunity to attack the pay and pension packages of public-sector workers.

It is difficult not to admire the brilliance of this attack. The country’s elite, with the Wall Street high rollers at the forefront, wrecked the economy through a combination of incompetence, greed and outright fraud.

As tens of millions of workers are still struggling with unemployment, underemployment and underwater mortgages, this gang now turns around and starts demanding that middle-income workers take pay cuts and give up part of their pensions. This is like a child setting fire to his parents’ house and then complaining because dinner isn’t ready on time. But this is the way America now works, with the spoiled children on Wall Street calling the shots.

<snip>

More: http://my.firedoglake.com/deanbaker/2011/02/07/state-budget-cuts-starting-at-the-top/

:kick:

[StarsInHerHair]

1. they aren't "making cuts"-THEY'RE CUTTING AMERICA ITSELF DOWN

make no mistake, whenever they talk about 'cutting middle class wages' they really mean DEFUNDING AMERICA.

[Hannah Bell]

4. +100.

[spooky3]

2. great column- thanks for posting

[hfojvt]

3. Do "middle income" workers really get pensions of $3,000 a month?

I bet there's a lot of low income working Americans who don't like the idea of paying for that with their sales taxes on groceries. I only make about $1500 a month for working 105 hours a month, and these people get $3,000 a month for doing nothing?

Yeah, that sounds too generous to me too and I am not rich and powerful, even if my name is Koch.

[Hannah Bell]

5. "these people". yes, everyone should be poor except the rich.

the pensions were paid for by the workers themselves.

[hfojvt]

7. that's harder to tell in the public and service sector

In manufacturing, it is the worker who produces all the income. The worker makes the widgets which are then sold to provide income which pays for wages, benefits and pensions. The value of the widgets he/she produces is more, often much more, than the money they get paid.

In my job, it is far tougher to say that. I work for an hour, or for 105 hours every month and get paid for them, but I don't produce any physical thing which can be sold to provide revenue. I produce clean floors, clean toilets and organized tables and chairs. Is a clean floor somehow worth $25 while I get paid $20 for doing it? Is a group of twenty 3rd graders who learn something worth $300 while the teacher gets paid $250 for that day? That's harder to tell.

It's not that services are not valuable, but it is harder to quantify them and measure their value.

Unless it is just me. I was 'educated' after all, as an economist and an economist traditionally "knows the price of everything and the value of nothing."

[Hannah Bell]

8. in case you hadn't noticed, mr economist, a minority of us workers produce "widgets" any more.

public workers paid for their pensions; a portion of their checks was deducted every week of their working lives.

[hfojvt]

12. a portion of their checks

but the pension also comes from an amount that the employer contributes, although states have not kept up with what they were supposed to contribute, and also from capital gains from the management of the pension fund, which, prior to the crash of 2008 was 'earning' 10% returns in Kansas.

But just because the money is coming from their checks does not mean the worker paid it, at least not when they didn't physically produce anything of value. That was the question I asked. The service worker, such as myself, or a teacher gets paid and some of that pay goes into a pension fund, but does the worker really produce that much value for their pay. In the public sector I am paid slightly over $14 an hour plus benefits to do janitorial work. When I was in the private sector I did basically the same work at various times for $5.50 an hour, $7.15 an hour and $8 an hour, each time with no benefits.

Now the public sector janitor is being paid by taxpayers, and some of those taxpayers are private sector janitors who make much less money and get much fewer benefits. I can see the $5.5 an hour janitor being happy to do what I do for $9 an hour and no benefits. I doubt if they think that I earn my pension.

[Hannah Bell]

13. employers' pension contribution is considered part of workers' pay. it's figured that way on

corporate financial statements.

iow, the workers pay for what they get.

why don't you use your energy for something other than tearing other workers down? like building yours up, maybe?

tearing down public workers isn't going to make you better off. rather the opposite.

[hfojvt]

21. isn't that what the rich always say?

The poor are just jealous and trying to tear down the rich instead of working to make themselves rich.

When the employer gives you X in compensation plus Y in pension benefits, the worker is not paying for anything. The worker is being paid, sometimes very generously for his/her labor and sometimes very miserly. The people who are paid miserly are never gonna be gung ho in supporting those who are paid generously. If the well paid want to preserve their own pay maybe THEY should work a little bit harder to raise up the rest of us.

[Hannah Bell]

22. you're not attacking "the rich". you're attacking the working class.

you're attacking people who make $40K because you make $20K.

You're attacking people who get a pension of $22K because you don't have a pension.

you're attacking people as powerless as you are.

your attack benefits "the rich" & gives aid to their attack on the working class.

and it won't help *your* situation a bit.

do you honestly think that if every public pension fund went down, your situation would be improved one single bit?

those people would be more people competing for *your* job.

[hfojvt]

26. I have a pension and I work for the government

not that I am counting on that pension. I already semi-retired in 2006.

And actually I am attacking, such as my attack is, people who make $70,000 because I make $14,000.

People who make $70,000 ARE rich. 80% of households make less than $90,000. Somebody with a $70,000 a year job probably has a spouse making over $20,000 and thus is in the top 20%. Not super-rich like a Walton, but fairly rich.

I think that if the pension system was not titled upwards, if it was slanted more like social security, that would likely improve the solvency of the pension funds.

It does not fit my vision to have people be paid $3,000 a month for not working, out of the taxes of people who are working and making much less than $3,000 a month.

[Hannah Bell]

28. my manners forbid me from responding.

[Yo_Mama]

9. Only a portion

If there was enough in the pension funds to cover the pension, there would be no question about it. The money is legally theirs.

But the more generous public retirement packages are for hugely more than the employees plus employers ever paid in. In part the problem is that almost all public retirement plans use a wildly exaggerated annualized return rate of 8.5% or 8%. You can get that, but only by investing in high-risk instruments with little insurance, which inevitably means that sooner or later you are going to take losses, thus cutting your net return. Five percent would have been far more realistic.

Here is an annuity calculator:
http://www.freeannuityrates.com/annuities/calculators/immediate-annuity-calculator.php

Assuming that the average retirement age is 60 and that the average retiree lives 25 more years, no beneficiary residual value, and an annualized return of 5%, you would need to invest a lump sum of more than $500,000 to get about a $36,000 annual pension. This also does not account for COLAs - you would need to contribute significantly more to adjust for inflation.

That does not include the value of medical retirement benefits, which would cost about 150,000 more for retiring at 60. (5 years total coverage, the rest Medicare as primary, retirement medical benefits cover copayment percentage of 20% only, plus extra prescription drug coverage).

Almost NONE of the retiree payments into the system plus the employer payment cover that.

Public employee unions have not been realistic in their negotiations. They probably needed to hire a few more actuaries.

It is not even speculatively feasible for the taxpayers, most of whom will be living on extremely constrained incomes, to cover the remaining portion in taxes. The US has a declining tax basis, and that's not avoidable.

There are some states and localities that have a much better setup - they have promised less, required more contribution from the public workers, and delivered more. There retirees are going to get most of their promised benefits. But many retirees are going to be shortchanged. They'll get more than is in the fund, but far less than negotiated in the last 10 years.

Many public pensions are for considerably more than 3K a month. Basically, at 5% it will cost you $100,000 upfront to get a 25 year payout of 7K each year. So 49K would cost you $700,000, plus that extra $150,000 for medical, which is a bit of a lowball.

Now don't tell me that the employees contributed that much. They didn't, even assuming very strong investment returns.

The best scenario that I could come up with, with following assumptions:
Retiring at end of 2012:
First year employment 1977.
Wage begins at Social Security average wage + 10 percent (website here):
http://www.ssa.gov/oact/cola/AWI.html

Figuring three contribution scenarios, and three return rate scenarios:
First contribution rate (employer + employee) 8%.
2nd is 12% (almost exactly social security - employee half would be 6%).
3rd is 14% - employee half would be 7%.
Rate of return is calculated as follows:
For each year,
Rate 1 = increase in SS average wage.
Rate 2 = increase in SS avg wage + 1%.
Rate 3 = increase in SS avg wage + 1.5%. (This actually does approximate returns from safe investments minus admin costs assuming very good investment strategy)

The ending salary was $10,757. The ending salary was $47,300.

The accumulated funds were (using the three scenarios to provide a reasonable spread):
$136,413.20
$243,491.58
$310,834.28.

The last would give an annual pension, with no increase for inflation!!!! of $21,805, less than 2K a month. And that doesn't even take into account the inflation adjustment offered to most retirees plus medical benefits.

[Hannah Bell]

10. The average public pension is about $22K.

Retirement systems remain a small portion of state and local government budgets. State and local government pensions are not paid out of general operating revenues, but instead, a trust that public retirees and their employers contributed to while they were working.

Most state and local government employee retirement systems have substantial assets to weather the economic crisis; those that are underfunded are taking steps to strengthen funding. It is important to understand that pensions are funded and paid out over decades. There is currently $2.7 trillion already set aside in pension trusts for current and future retirees. Further, state and local government retirees do not draw down their pensions all at once. Employees must reach certain age and/or years of service before they are eligible for a pension; once retired, they must receive their pension in installments over their retirement years (as an annuity).

The vast majority of public employees are required to contribute a portion of their wages—typically five to ten percent—to their state or local pension, and these contribution rates are being raised in many state and local governments. Employee contributions along with investment returns comprise the majority of public pension fund revenues. The average retirement benefit for public employees is $22,600 and for many of them, including nearly half of all teachers and over two-thirds of firefighters and public safety officers, it is in lieu of Social Security. State and local salaries on which these pensions are based are lower than those for private sector employees with comparable education and work experience, even when benefits are included.4, 5

Long-term investment returns of public funds continue to exceed expectations. Since 1985 – a period that has included three economic recessions and four years of negative median public fund investment returns – actual public pension investment returns have exceeded assumptions.

7 For the 25-year period ended 12/31/09, the median public pension investment return was 9.25%.8 Moreover, for the year ended 6/30/10, this return was 12.8%.9 These actual returns exceed the 8% average public pension investment assumption, as well as the average assumed rate of return used by the largest corporate pension plans.10

http://www.nasra.org/resources/PublicPensionFactSheet110125.pdf

[spooky3]

11. good post - and those pensions were invested all those years

and should have had big gains, in addition to the contributions of employees and employers. So, the other poster's point that payouts for a few pensioners may be greater than the contributions put in misses the ENTIRE point of investing.

It's pretty appalling that some DUers would join in the right wing attacks on the middle class (and divide and conquer strategies) by advocating breaking contracts that both sides agreed to and lived by for many years, particularly where the pensions are modest and appropriate based on years of service and earnings. You make a deal and live by it, and many people got lower salaries and other benefits because of the retirement system.

It's only a tiny minority of communities in which fabulous benefits are provided to people after less than 30 years, but those are the ones getting all the media attention. The major reason that many public systems that are having trouble are in that boat is (a) the state FAILED to contribute its portion for many years, basically stealing from the employees to fund other "priorities" and (b) fraud and mismanagement on Wall Street, which lowered returns well below what they should have been. Some states (such as Ohio) are now suing some of those corporations, but they will never recover 100% of what was lost.

[hfojvt]

14. a-ha!!! Isn't that what I said?

"The average retirement benefit is $22,600"

or $1,883 per month.

Meaning that many people are getting pensions of LESS than $1,883 per month.

And yet Dean Baker uses $2-3,000 a month like that is a typical middle class pension.

It is not. It is a high end pension.

Not the best example to use, when he could have used a more typical pension amount. Because $3,000 a month is kinda outrageous from where I sit.

[Hannah Bell]

15. ...never mind. misspoke myself.

[Yo_Mama]

18. I agree that the number is wrong

But not in all public systems.

Because I just calculated the CALPERS last year retiree average pension, and it is definitely more than $45,000 annually, not including medical.

People are mixing together very generous paying systems with quite chintzy ones.

And Hannah won't admit it, but neither the governments nor the workers have paid in anything near what it would take to fund the more generous pensions. However pension funding percentages vary hugely around the country, so you can't say any one thing about all public pensions.

I think the unions failed. They should have negotiated much more strongly for those payments to be made. I think they took the promise on the theory that they'd be able to get it later, but it does not appear that this is possible in the most extreme cases. Because you aren't going to get taxes out of a stone. In 10 or 15 years, with far more people living on retirement incomes of 25K or less, the ability to raise taxes just won't be there.

And if you think I'm advocating for defaulting on the pensions, you're wrong. Insisting on right numbers was always the duty of the union. My mother WAS a public union negotiator. I literally grew up on this stuff. If you don't get them to pay in, you don't necessarily have a right to the money. There is legal doctrine known as "implied consent". Once the money is paid into the fund, they cannot take it from you. People represented by public unions should be pressuring their unions to get the funding percentages up. You might have to file suit to do it. It worked in some systems!

The bottom line is that some pensions should be funded and aren't. Some were never properly negotiated - no one apparently felt the need to make the numbers add up. Some are darned near fully funded, and members of those unions should really stay on top of this. You can't trust the legislators - they have other priorities in mind. They would happily use the general atmosphere to abrogate on their promises.

But do I believe that there is any way that CALPERS can pay those pensions with what they have in the fund plus future contributions? NO. Hell no.

[Hannah Bell]

23. it's an average of *all* public pensions, as it clearly says in the article.

[Yo_Mama]

16. Those figures do not mean what you think they mean

The average pension includes workers who retired 20 years ago. The average pension of current retirees is a lot higher! For an example of how much higher, see the last few paragraphs below. In CALPERS, newer retirees seem to be averaging about 20K more a year than older retirees.

The problem isn't really what's happening right now, but what is about to happen. Like with Social Security. The same demographic forces are showing up in public retirement schemes.

The average returns are not going to be indicative of future returns. Actually I had high annual return rates in some years as well. Over 11% at one point. One of the factors pushing bond returns up historically was the large pension/retirement fund buy ins from us all trying to save (not unreasonably) and invest those savings. As retirements grow, the effect will tail off an then reverse.

Rates of return on most insured mortgages are less than 4.5%. A 30 year treasury yielded 4.71% yield yesterday; a ten year yielded 3.68%. With that in mind, how on earth can pension fund investors get an 8% yield consistently? CALPERS has changed its assumption to 7.75% and will continue to adjust as necessary.

One of the reasons for the huge explosion of risky mortgage lending was that there was an insatiable demand for the investment grade tranches due to the higher return rates. In case you haven't noticed, accounting rules were changed for hold-to-maturity bonds. That means that non-government insured bond payment shortages are going to be showing up now and in the next few years.

Anyway, for CALPERS going by their annual reports available here:
http://www.calpers.ca.gov/index.jsp?bc=/investments/reports/home.xml

Market value dropped 24.8%.
20 year return still 7.75%.

June 30th 2010,
Investment return rate of 13.3%
"We experienced our first investment gain in three
years, with an investment return rate of 13.3 percent for
the fiscal year ending June 30, 2010. This return marked
the 17th time in the past 27 years that we have seen
double-digit investment returns. As of June 30, 2010,
the market value of our assets was $201.6 billion."

As of October 31, 2010, market value of assets was 218.6 billion:
http://www.calpers.ca.gov/eip-docs/about/facts/investments.pdf

On page 22, from the CALPERS management's discussion:

As of June 30, 2009, the date of the most recent actuarial
valuation, the PERF was funded at 83.3 percent, based on
the actuarial value of assets. A better measure of benefit
security is the funded status on a market value of assets
basis. On that basis, as a result of the negative 24.0 percent
investment return in 2008‐09, the funded status declined
from 88.7 percent at June 30, 2008, to 60.8 percent at
June 30, 2009.

Get that? Management says that its best estimate is 40% underfunded? They anticipate that employer contribution rates will have to keep rising but I don't know how you make up an 40% underfunding with employer contributions alone! They say employer contribution rates may rise from 2-5%.

From page 23 in the comprehensive report:
https://www.calpers.ca.gov/mss-publication/pdf/xC9FZ3lYuQf3O_2010%20CalPERS%20CAFR_0%206_FINAL.pdf
The PERF paid $13.0 billion in retirement benefits to 505,862
annuitants during the 2009‐10 fiscal year, compared to
$11.8 billion paid to 484,955 annuitants during the 2008‐09
fiscal year. Benefit payments increased primarily due to an
increase in the number of retirees and the average benefit
amount, including cost‐of‐living adjustments (COLA).

Now, from the numbers above one can calculate the average benefit for the new retirees, who numbered 20,907.

The maximum COLA was 2%. We will assume that all retirees received 2%, although that isn't true, some should have received less if it is like 2011. This gives us a total of 11.8 billion plus 236 million or a total benefit for the existing retirees of 12.036 billion. So the difference of 964 million/20907 gives us the average benefit for new retirees of $46,108. The average for all retirees, new and old, was about $25,700.

Now a few of the retirees in place would have died, but certainly the new retirees are averaging more than 45K and probably more like 47K.

Total contributions into the system dropped even though employer contributions rose (higher contribution rates to make up the shortfall). But employees were still furloughed, and there were I am sure layoffs:
The PERF received $3.4 billion in employee
contributions from 804,294 active members and
$7.0 billion in employer contributions from 1,544
employers during the 2009‐10 fiscal year, compared with
$3.9 billion and $6.9 billion in employee and employer
contributions respectively, in fiscal year 2008‐09.

The retiree/employee ratio is 505,862/804294 or 0.63. This is a recipe for financial disaster. The number of retirees compared to the contributing employees is going to keep growing. Payments out increased over 10%, and as older, cheaper retirees expire, replaced by higher numbers of retiring employees, the average benefit per retiree will continue rapidly increasing.

We haven't even touched on the medical. There are additional problems there.

[Hannah Bell]

17. "The average pension of current retirees is a lot higher!" so's the gdp.

but in inflation-adjusted terms, the average pension isn't much higher. like the average worker's salary.

you're hyping the fear.

[Yo_Mama]

19. Uhhhh

They all get COLAs after the initial year.

Is it that you just don't want to hear it, or is it that I am confused about your point?

If you look at the CALPERS example, which is at least a very big one in national terms, the average benefit of older retirees is probably less than 60% of current retiree benefits. I am pretty sure the current average retiree benefit is higher than the national average, though. Salaries in CA are higher, and so is the cost of living.

I'm not saying that your number is wrong. I'm saying that it is essentially irrelevant for the future. You said upcoming retirees have paid in enough (through employee/employer payments) to cover their pensions. I gave you an example that seemed to me to show that wasn't true.

You replied with an average retiree benefit that seemed to imply that my example showed that it WAS true.

I responded with some figures from actual CALPERS administration that showed it wasn't.

If I am confused, please explain why you think this is hype. The 60% funded figure came from the CALPERS report. The highest funding they have in there is about 80%, but everyone knows that isn't right.

If current retiree average benefits in CALPERS were running about 36K, they could probably make up the difference through higher contributions. But no one makes up a 40% difference.

If employees and employers had paid in enough to cover pensions, there would be no argument about this. Those funds belong to the retirees - nobody can take them away. And so do the investment returns.

[Hannah Bell]

24. colas are for inflation. it's not a real wage hike. and no, "they" don't "all" get cola's "after

the first year".

font of nonsense, you are.

i can guess why, quoting pete peterson.

[Yo_Mama]

20. One last shot

If you really think I am "hyping" the fear, and you believe that CALPERS is misstating its ability to pay pensions, then you should read this SIEPR briefing on the Stanford research.
http://siepr.stanford.edu/system/files/shared/GoingforBroke_pb.pdf

This is more realistic because it includes a more realistic default rate and it accounts for the need to pay COLAs, which are part of the legal obligation.

Note that the researchers came up with about 450 billion in deficits before the recession, but that was on the three largest CA pension systems. They had CALPERS 50% funded.

Stanford and especially SIEPR are not conservatively oriented institutions. The advisor, Joe Nation, has a masters in Foreign Service and a PhD in public policy. He is a Democrat who served in the CA legislature.

[Hannah Bell]

25. yes, you're hyping the fear. cola's are inflation, not real wage gains.

a "D" means nothing to me these days, as so many of them are pubs, policy-wise.

including a lot at du.

you never did explain the window on your bogus $112 trillion.

lol.

[Yo_Mama]

27. What 112 trillion?

Are we talking about CALPERS? Deficits there should be in the billions, certainly not in the trillions. Current market value of CALPERS holdings is about 229 billion. That's a lot.

I have a cold, maybe I missed something. Where does the 112 trillion come in?

The highest estimate I have seen anywhere is about 3.5 trillion, but that's national - it includes all public pensions. Pew estimated it at 1 trillion in 2008.
http://www.usatoday.com/money/perfi/retirement/2010-02-18-pensions18_ST_N.htm
The median estimate currently is at about 2 trillion. That's updated with lower contributions, earlier retirements, etc.

The only place I have ever even seen a 112 trillion estimated deficit is at this site
http://www.usdebtclock.org/

I just found that for the first time after googling your number. They are adding together the projected long-term SS, Medicare and Part D Medicare deficits. If that's the number you are referring to, I never posted it intentionally, although I'm certainly more than capable of typos, and I believe that it is bogus. You can't accurately estimate that long ahead.

Anyway, we are going to cut those payments under current law, and that site definitely doesn't have that info coded in. Also, it doesn't even have the Census population right.

I know the Fed was publicizing the 54/55 trillion number (long term deficit). That's closer, but it includes everything federal, also projected interest payments. We'll never reach that - long before we did people would stop lending us money.

All anyone has to do is look at trends in treasury yields to see that the games going to be up within a decade and a half.

[w4rma]

6. You're the one who is underpaid. (nt)