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I have trouble communicating with people who do not appear to care about facts. One well-meaning acquaintance approached me, a public employee, and told me that the Los Angeles Times had run an article about how CALPERS (California Public Employee Retirement System) had based its projections about public pensions on the assumption that the Dow Jones would reach 25,000.
Given that the Dow Jones has never been especially close to this number, this sounded like CALPERS had made a tremendous mistake. He implied that the taxpayers are being asked to pay too much toward public employee pensions and perhaps even saying that people like me should agree to reductions.
I researched and found what I believe is the article to which he referred. Here is the relevant excerpt, from the Orange County Register, a newspaper not known to be friendly to public employees:
"CalPERS, which in 1999 advocated retroactive pension increases based on assumed rates of investment returns that essentially required the Dow Jones industrial average to reach 25,000 by 2009, is backed by taxpayers whether its projections are right or wrong."
I looked to see where CALPERS had actually made a statement or had implied that the Dow Jones would need to reach 25,000 by 2009. So I went straight to the law that enacted the pension increases in 1999, SB 400. Here is a portion of the bill where proponents say why they support it:
If this benefit package is enacted, the state contribution will fall initially in 2000-2001, to 1.07% of payroll, or $103 million, due to the initial impact of the accounting change, but will increase significantly thereafter, to 4.65% of payroll in 2001-2002, or $465.6 million. The employer rate will level off in subsequent years, eventually falling below 3% in 2008-2009, but the employer contribution amount will remain in the $379 million range. CalPERS, however, believes they will be able to mitigate this cost increase through continued excess returns of the CalPERS fund. They anticipate that the state's contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade. Overall, the benefit equity package is the equivalent to about a 2% to 2% increase in normal costs.
If no changes in benefits are enacted, and current assumptions hold, the employer rate will continue to decline, to below 2% of payroll by the 2002-03 fiscal year. State contributions will decline from the $1.2 billion paid in 1997-98 to $112 million in 2005-06, a decline of about 90% in less than a decade. With the enactment of this bill, the state will not realize all of these currently projected savings. The CalPERS Board of Administration, however, has agreed to increase from 90 to 95% the assets considered in its valuation of the plans, and shorten the amortization of the excess assets to 20 years, to help mitigate the impact of the benefit enhancements on State employer contributions.”
I have put in bold what I think are the most important excerpts. The comments mention state contributions (i.e. taxes to go towards funding of the pensions) to decline at least until about 2009 because of “excess returns of the CALPERS fund.” I am still unclear about where the number 25,000 in connection to the Dow Jones came from.
At the time of the bill’s writing, CALPERS had gotten exceptional returns. The Dow Jones had cited CALPERS for a 20.1% return in 1999-2000. At around that time, the USA Today had said that “strapped” governments had “looked to pension funds.”
The point that critics make is not without merit. When CALPERS investments go poorly in a given year, the state uses taxes to fulfill its obligations to the pension funds. To guarantee pensions in this manner may not be the best idea, they say.
I can, as a taxpayer and as a public employee (who chooses not to belong to any union), identify with some of the calls for reform. Recent hires at my and other cities are promised a lesser pension if and when they work a certain amount of years (typically 30) and reach a certain age (55 or 60). The base of pension that one receives could be adjusted to their mean salary rather than their highest salary. Annual pensions could be capped at $100,000.
These reforms would not likely upset the obligation of the state to fund the pensions. We need a good dialogue between those who are concerned about taxes and those who serve the public. It all begins with identifying the problem, the most relevant facts and the most just solutions.
Dean Hartwell keeps pursuing the truth about those who govern us.