More pension math: CalPERS’ and CalSTRS’ investment earnings

By David Crane | Triggered by recent earnings reports from CalPERS and CalSTRS, some readers have asked why California’s pension funds are underperforming the overall stock market. For example, for the fiscal year just ended June 30, 2018, CalSTRS and CalPERS earned only ~two-thirds the stock market. While the question is best asked of their Chief Investment Officers, one reason might be portfolio construction designed to minimize contribution volatility. CalSTRS’ most recent CAFR discusses volatility on page 29 here.

David CraneOther readers have inquired about the impact of investment earnings on pension costs. The answer: Not much. Far more important is liability growth. As explained here, rapid liability growth results from a deliberate effort by California pension funds to suppress the size of pension promises when they are created. That lie works only so long — and then it reverses with a vengeance because of accretion, as explained here. To its credit, last year CalSTRS took a small step towards truth-telling by dropping its discount rate for reporting liabilities, though the drop was only ~10 percent of that required.

As a near-quadrupling of the stock market since 2009 makes clear, rising stock markets cannot overcome fast-growing liabilities. Absent reforms that reduce liabilities, California governments and school districts will divert ever-larger amounts from services to pension costs.

EDITOR’S NOTE: All of Fullerton’s city employees participate in CalPERS.

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Watch last night’s city council meeting

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Tonight’s city council meeting agenda

The AgendaTo read or download tonight’s detailed council meeting agenda, please click here (pdf).

The public participation portion of the meeting begins at 6:30 with presentations and awards. Actual city business normally doesn’t start until 7:00 or thereafter.

And you can also watch it on cable Channel 3 (Spectrum — formerly Time Warner Cable).

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The Verdict On Prop 30 — Part I

More than 100% of schools’ share went to increased retirement spending

David CraneBy David Crane | In January 2012 California Governor Jerry Brown announced he would ask California voters “to approve a temporary tax increase on the wealthy, a modest and temporary increase in the sales tax, and to guarantee that the new revenues be spent only on education.” Later that year his proposal was embodied in Proposition 30, a temporary tax increase projected by the Legislative Analysts Office to raise $6 billion per year for four years and smaller amounts for three years. Marketed as “Temporary Taxes to Fund Education,” P30 passed. Seven budget years later, the results are now known:

More than 100 percent of expected P30 revenue for schools went to INCREASED school spending on pensions and retiree health care costs. For example, over the seven years of the tax increase, Fresno Unified increased retirement spending $4000 per student, 167 percent of the average expected P30 revenue per student. Outcomes were no different elsewhere:




ABOVE: FYE12 - FYE19 increase in retirement spending per student expressed as percentage of estimated average P30 revenues per K-12 student. FYE19 estimated.



Such outcomes were predicted before the tax increase. But elected officials chose a cover-up via tax increase. The cover-up also allowed the retirement problem to grow worse, which will produce higher costs down the road. Worse still, school retirement spending in excess of 100 percent of P30 revenues ate into other school revenues, forcing schools to lay off and underpay teachers despite record revenues of more than $16,000 per student.

It’s one thing to pay higher tax rates for better services, quite another to pay higher tax rates to fund higher retirement costs. But that’s all the state accomplished for schools by enacting P30 without first addressing retirement spending. Elected officials are continuing to seek tax increases to cover up rising retirement costs. Misled again in 2016, state voters approved an extension (Proposition 55) of the income tax portion of the P30 initiative. But that revenue will also be absorbed by growth in retirement spending because of steep already-scheduled increases in retirement costs and $230 billion of unfunded retirement obligations added in the last decade. This year San Francisco Unified enacted a regressive tax increase to cover up retirement costs that increased more than twice P30 revenues. Just imagine how many more tax increases will be sought when the current bull market ends, tax revenues decline, and retirement costs keep rising.

If elected officials really want to help schools they can — and should — act right now to reform retiree health care, the costs of which are fast adding to school district pension woes. Doing so would free up billions of dollars that could actually improve schools. Needless to say, any school district asking for higher taxes should first be required to reform retirement spending.

Part II will address other consequences of P30.

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A few taxpayer victories in an anti-taxpayer California Legislature

By Jon Coupal | Ronald Reagan once said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” With a record $130 billion budget, we know that California state legislators are adept at all three practices, but none more so than taxes.

A weekly column by Jon CoupalDemocrats in Sacramento spent 2017 jamming three separate tax and fuel-cost hikes into law. They renewed the cap-and-trade program, continuing a multi-billion-dollar increase in fuel costs that brings in state revenue to fund high-speed rail. They invented a new tax on recorded documents that is supposed to fund affordable housing. And of course the SB 1 gas and car tax increase was said to be needed to fund road repair, even though billions of dollars have been diverted away from maintenance over the last decade. In the midst of an $8 billion surplus, Sacramento was steadily increasing taxes.

But fortunately, 2018 hasn’t been as dreadful for taxpayers as 2017. Here’s a sample of the proposals that, for now, have failed to pass:

Senate Bill 794 would impose a new three percent tax on fireworks at the point of sale. The abuse of illegal fireworks is a matter of statewide concern, and as such, it is totally appropriate to spend existing General Fund revenues on enforcement and safety. Instead, by taxing the sale of fireworks, Sacramento would be hurting all the non-profit organizations that raise a sizable share of their annual revenue from firework stands.

Assembly Bill 2497 would impose an as-yet-undefined tax on guns and ammunition to fund school resource counselors and police officers.

AB 2303 and AB 2560 would create a new tax of up to ten percent on small business vendors who contract out either with private prisons or with the California Department of Corrections.

Senate Bill 623 would establish a precedent-setting tax on residential water use. For now, local water agencies have joined with taxpayer advocates to vigorously fight this levy.

Assembly Bill 2486 would impose a $100 million tax on opioid manufacturers and distributors to fund prevention and treatment programs. Ultimately, this tax will be passed onto consumers, especially to patients who use opioids appropriately to manage pain. As an issue of statewide concern as well as a legitimate public health issue, opioid treatment should also be financed out of the General Fund.

Senate Bill 993 is the latest version of a proposal to extend the sales tax to services, generating $100 billion in new tax revenue that would be lifted from the wallets of consumers. And Senate Bill 562 would impose an even larger tax, over $200 billion dollars, to establish a single-payer health insurance program that would effectively make private health insurance illegal in California.

Political considerations are part of the reason that the proposals listed above have been thwarted thus far. Democrats no longer have a two-thirds supermajority in the Senate and, while they do in the Assembly, some of the seats they hold represent more conservative districts. Those legislators may have second thoughts about casting the deciding votes on tax increases in an election year. Moreover, both the widely popular initiative to roll back the car and gas tax increase as well as the decisive recall of state Sen. Josh Newman, who voted for a whole host of new taxes, have forced Democrats to abandon their reflexive approvals of tax increases.

Beyond politics, we can thank Proposition 13 and its constitutional protections, which require all taxes to receive a two-thirds vote of both houses of the Legislature. Most of the tax increases listed above would have been approved if only a majority vote was needed to pass them. It’s difficult to ponder what our checking accounts would look like if legislators had essentially unrestrained ability to raise taxes at will. On the 40th anniversary of Proposition 13, we can celebrate that all taxpayers continue to be protected by this landmark initiative.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

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Fullerton City Hall is closed today for another three-day weekend

City Hall Closure Dates and
Observed Holidays

January –1*, 12, 26
February – 9, 19*, 23
March – 9, 23
April – 6, 20
May – 4, 18, 28*
June – 1, 15, 29
July – 4*, 13, 27
August – 10, 24
September – 3*, 7, 21
October – 5, 19
November – 2, 11*, 16, 22*, 23*,30
December – 14, 24*, 25*, 26^,27^, 28, 31*

*Holiday observed
^Winter Closure

Fullerton City Hall

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Nearly 900% increase in CalPERS benefits dwarfs economic growth, taxpayers’ ability to pay

The total pension benefits promised by the California Public Employees’ Retirement System (CalPERS) increased 886 percent from 1987-2016 — a rate 21 times greater than the cumulative increase in the state’s population, according to a just-released analysis from Transparent California.

The growth in promised CalPERS benefits dwarfs the rate found in a variety of other economic metrics, as shown below:

Transparent California credits Ted Dabrowski and John Klingner of Wirepoints as the source of inspiration for this chart and analysis. In Illinois state pensions: Overpromised, not underfunded, Dabrowski and Klingner irrefutably demonstrate that the true source of Illinois’ pension crisis is the explosive growth in promised benefits, not a lack of funding.

Transparent California Executive Director Robert Fellner believes the same applies to California.

“Some politicians and government unions have claimed that last decade’s market downturn is the cause of California’s pension crisis. As this data makes clear, the real cause is the tremendous growth in the size of the benefits that were promised.”

The chart below reflects the cumulative growth in promised CalPERS pension benefits (accrued liabilities) alongside a variety of California economic metrics:

California Economic Metrics Growth from 1987-2016
Promised CalPERS pension benefits 886%
Total Personal Income 331%
Total State Tax Collections 311%
Median Household Income 121%
Inflation 119%
Population 41%

Fellner observed that blaming the inevitable market downturn as the source of CalPERS funding woes is analogous to a gambler citing a bad run at the blackjack table for having less-than-anticipated funds.

“Elected officials’ willingness to take on such massive debt, not the fact that the stock market sometimes goes down, is the root cause of California’s pension crisis,” he said

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Sen. John Moorlach and CalPERS CEO to discuss ‘socially conscious’ pension investing today in Huntington Beach

State Senator John Moorlach and CalPERS CEO Marcie Frost will be facing off this afternoon in Huntington Beach over the issue of “socially conscious” investing by pension funds. The event will be held in Huntington Beach’s City Council Chambers and it will start at 4:30 pm.

For more details, read the story in the OC Weekly.

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Why the U.S. should drop all tariffs

By Veronique de Rugy | President Trump announced tariffs on $50 billion of imports from China, $34 billion of which came into effect on July 6, saying it will force that country to be a better trading partner. China, not surprisingly, said it would slap $50 billion of its own tariffs on American goods in response, to which Mr. Trump threatened to raise the stakes by another $200 billion.

On trade, the president has been all over the place. One day he threatened to impose tariffs on our NATO allies on national-security grounds. Another day, he exempted these allies from the tariffs. A few weeks later, he changed his mind.

The United States should stop the scattershot, pointless nonsense on tariffs and go the other way, and hard: It should drop all tariffs, even if the rest of the world doesn’t follow.

Mercatus CenterEconomists since Adam Smith have understood that free trade is the best policy. Studies show that countries with freer trade have both higher per-capita incomes and faster rates of productivity growth. Economists have also long understood that barriers to trade, while pitched as a way to help domestic workers, always heavily penalize domestic consumers. For instance, when Uncle Sam imposes stiff barriers on sugar imports to protect a few hundred producers in Florida and Louisiana from competition, these farmers’ gains come at the larger expense of consumers who are obliged to pay more than twice the world price of sugar, on average, each year since at least 1982.

The same is true of Mr. Trump’s steel tariffs. Claiming that they protect a vital industry and its 140,000 workers, tariff supporters never mention how much harder they make things for the 6.5 million manufacturing workers in steel-consuming industries. Add to that number all of us who consume goods made of steel, and you get an even larger figure.

Consider a domestic company that imports specialty European steel not produced in the United States. Thanks to the tariffs, this company faces an instant 25 percent price increase. It will shift some of that cost onto its customers, making the final product more costly and thus less competitive at home and globally. Or the company might shift manufacturing abroad to gain access to cheaper materials.

In both cases, the company probably takes a hit and might even lay off American workers. That’s what happened in the aftermath of President George W. Bush’s 2002 tariffs to the tune of 200,000 jobs lost in steel-consuming industries.

The fact is, free trade is a robustly good policy — which doesn’t mean that it affects all Americans in the same way or at the same time. Not only is it the best policy when other governments practice free trade; but it’s also the best policy even when other governments are wildly protectionist. By lowering its trade barriers, a government enriches its citizens regardless of the policies implemented by foreign governments. This idea runs counter to the public’s assumption that we benefit from lowering our trade barriers only if other governments lower theirs.

To continue reading in the New York Times, please click here.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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‘Repeal the Gas Tax’ organizing meeting slated for Thursday in Yorba Linda

An organizing meeting for “Yes on 6″ — the ballot measure to repeal the gas tax — will be held this Thursday evening at 6:30 pm at 4901 Main Street, Yorba Linda (click for map). For complete details, see below.

If you plan on attending, an RSVP is requested; to RSVP, please click here.

Yes on 6 - Repeal the Gas Tax


Posted in Carl DeMaio, Gas Tax, Yes on 6 | Comments Off