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    Lockyer response to Little Hoover Report

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    Lockyer response to Little Hoover Report

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    665 views6 pages

    Lockyer's Response To Little Hoover Commission

    Uploaded by

    Gerrie Schipske
    Lockyer response to Little Hoover Report

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    of 6

    “PUBLIC PENSIONS FOR RETIREMENT SECURITY”

    Little Hoover Commission


    February 2011

    Comments by State Treasurer Bill Lockyer

    The report makes no attempt to answer a fundamental question:


    What should be the goal of public pension systems, or any retirement
    system?

    Problem 1 – The report is long on rhetoric and short on thoughtful analysis.


    “Instead of retirement security, the public pension became a wealth generator,”
    the report declares. Snazzy sound bite.

    The report also asserts that “public pensions no longer bear any resemblance to
    an appropriate or adequate amount of income needed in retirement.”
    Provocative claim. But the report provides no backup.

    It wouldn’t have been difficult to do. Some experts say retirees need 75 percent
    of their working income to maintain their standard of living. Others have
    suggested 77 percent to 88 percent.

    What is the appropriate standard? The report doesn’t delve into that
    foundational issue. Instead, it says this: “Today, a 30-year state worker retiring at
    age 63 can expect to receive 75 percent of the highest-paid year – every year for
    the rest of his or her life.” The report clearly implies that is a bad thing. But it
    never tries to answer the question of whether getting 75 percent of your highest
    pay is inherently bad and, if so, why.

    In short, the Commission gives policymakers no guidance on what constitutes an


    adequately secure retirement.
    The main recommendation – besides being legally dubious – has no
    foundation.

    The report claims governments cannot generate enough savings if they only cut
    benefits for new hires. The only way to provide the “immediate savings of the
    scope needed,” the report says, is to reduce future benefits promised current
    workers, but not yet accrued.

    Problem 1 – The Commission makes no attempt to quantify that assessment,


    presents no data to support its linchpin recommendation. How much would the
    move save immediately or in the long run? How much would it save compared to
    other reforms? The report fails to answer such questions.

    Problem 2 – The report does not quantify the scope of the immediate savings
    needed. Needed to do what, exactly? To avoid what, exactly? The report doesn’t
    specify.

    [Note: The report does not attempt to quantify the savings any of its
    recommendations would generate.]

    The report distorts testimony to make the case for its central
    recommendation, and to support its assertion that pension costs “will
    crush government.”

    In presenting its central recommendation, the report claims “actuaries estimate


    that in the next few years, government agencies in the CalPERS system will need
    to increase contributions into their pension funds by 40 percent to 80 percent
    from 2010 levels (emphasis added).”

    At a couple of other spots, the report reiterates that government contributions


    are expected to rise 40 percent to 80 percent, and stay at that level for “decades.”
    One of these passages adds this rhetorical aside: “It is practically enough money
    to fund a second government, and it will – a retired government workforce.”

    Problem 1 – Use of the plural “actuaries” is misleading. The citation for these
    comments comes from the written testimony of one actuary – John E. Bartel.

    Problem 2 – The assertions take liberties with Mr. Bartel’s testimony.

    The Commission asked Mr. Bartel to answer these questions: “How bad is the
    problem going to get? In general, what percent of payroll will communities need
    to devote to pension costs in coming years?”

    So, Mr. Bartel’s testimony was limited to local agencies. He started his response
    with a series of seven caveats to explain that the Commission’s question is “a very
    difficult question to answer accurately.” Complicating variables, Mr. Bartel noted,
    include: actual investment returns; investment return assumptions; the extent to
    which the agency pays the members’ contribution; whether the agency hires
    employees to replace departing workers; and other factors.

    The Commission takes one actuary’s caveat-laden testimony and presents it as


    actuarial consensus that government contributions, with no clear distinction
    made between the State and local agencies, will have to increase by 40 percent to
    80 percent and remain at high levels for decades.

    [Note: Mr. Bartel on March 10 addressed a Santa Rosa pension task force. He said
    the city’s pension contributions will have to rise substantially, even under
    optimistic scenarios, according to a report in the Santa Rosa Press Democrat. But
    he also said he did not consider California’s public pension system to be in crisis.
    The paper said Mr. Bartel told the panel the system’s problems aren’t serious
    enough to warrant abandoning the defined benefit program in favor of a defined
    contribution approach. “Just because things are not looking good … is not a
    reason to junk the retirement system,” the paper quotes Mr. Bartel telling the task
    force.]
    The report omits or ignores inconvenient data.

    Problem 1 – The report ignores CalPERS reforms adopted last year as part of the
    budget solution. The reforms increased all workers’ contributions, and lowered
    benefits and raised retirement ages for new workers. Those reforms will save the
    State an estimated $10.7 billion to $13.5 billion through 2040, according to a
    CalPERS analysis.

    Problem 2 – The report uses data from FY 2008/09 to present CalPERS’ and
    CalSTRS’ unfunded liability. More current data was available. The data show that
    market gains from the last two years have reduced both systems’ unfunded
    liability. CalPERS’ funded status has increased from 61 percent at the end of FY
    2008/09 to an estimated current funded status of close to 70 percent. The
    Commission did not use the more current data.

    Problem 3 – While distorting Mr. Bartel’s testimony about employer


    contributions, the Commission dismisses conflicting data from CalPERS, some of
    which is in the report. CalPERS projects the average employer contribution will
    increase from about 21 percent in FY 2011/12 to a peak of about 26 percent in FY
    2023/24. That’s an increase of 24 percent – not 40 percent to 80 percent. And
    that lower peak is not maintained for decades. By 2033/34, CalPERS projects the
    average contribution will decline to 20 percent. It then will decline to about 16.5
    percent in 2042/43 and remain at that level through 2062/63.

    The Commission also ignored publicly available data on local agencies’ costs.
    CalPERS’ chief actuary has projected that average local employer contributions to
    miscellaneous workers’ pensions will rise through FY 2016/17, then generally
    decline and level off through 2030/31. The data counters the report’s claim that
    employers’ pension contributions will stay at highly elevated levels for “decades.”
    You won’t find these numbers in the report.
    Problem 4 – From the State’s perspective, contributions won’t come close to
    crushing government. In FY 2011/12, the State General Fund will spend $2.38
    billion on CalPERS contributions. That works out to 2.8 percent of the $84.6
    billion General Fund.

    Knowledgeable observers agree that increased contribution levels are a more


    significant problem for local agencies – whether they participate in CalPERS or an
    independent pension plan – than for the State. The report, however, makes no
    meaningful distinction between the State and local governments when discussing
    the budget impact of increased contributions.

    The report’s credibility is undermined, and its bias revealed, by


    rhetorical pot shots.

    Problem 1 – From the start, the report goes overboard trying to make its case.
    The second paragraph of the executive summary likens the public pension
    problem to the subprime mortgage scandal. It talks about funds’ value being
    “inflated by optimistic market return estimates.” It calls employer contribution
    levels “teaser rates” that are “re-setting” at a higher cost to taxpayers. “A public
    pension, like a house, is not a get-rich-quick scheme,” the report lectures. “As a
    house is for shelter, a pension is for long-term financial security.”

    Set aside the inappropriate, inaccurate comparison to the subprime mortgage


    debacle. What the report fails to mention is that the “optimistic market return
    estimates” actually have been conservative.

    CalPERS’ current assumed rate of return is 7.75 percent (likely to be reduced to


    7.50 percent next week). Over the past 21 years, CalPERS’ portfolio has
    generated an average annual return of 8.6 percent. In 15 of those years, it beat
    the 7.75 percent assumed return rate. You won’t find that in the report.
    Problem 2 – The report asserts public pensions, instead of helping provide
    retirement security, have become “a wealth generator.” That statement might be
    true if limited to charlatans who have gamed the system to enrich themselves.
    But it’s unduly inflammatory when applied to average rank-and-file workers.

    About half of CalPERS retirees receive annual pensions of $18,000 or less. 78


    percent receive $36,000 or less. Only 1.7 percent of CalPERS retirees receive
    annual pensions of $102,000 or more.

    The report omits this data. Instead, it emphasizes what it calls a “trend toward
    higher-income pensions.” Workers who retired in 2008/09 with more than 30
    years of service receive an average annual pension of more than $66,000, the
    report says. What it doesn’t say is that these workers comprise only 22.5 percent
    of the total.

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