California Pensions: Costs Growing Faster than Other States

The Sacramental Bee had an interesting article up on pensions recently:

Median pension costs went up $7,022 per employee in a selection of cities and counties in California from 2007 to 2016, compared to a national median increase of $1,216, Sarah Anzia, an associate professor of public policy, said Wednesday in Sacramento. 

The rising pension costs have consumed an increasing share of local government revenues, absorbing an additional 2 percent of general revenues over the 10-year stretch in California compared to a national median of 0.7 percent, according to Anzia’s data. 

From 2007 to 2016, per-pension costs for local governments with less than 50 percent union membership increased by a median $740, while those with more than 50 percent increased by a median $2,950. 

There's a lot of data points here: costs, percentage of revenue, unions. The problem with the growing percentage of general revenue going towards pensions is the fact that there will be less money to go to upkeep of cities and counties. Less money for parks. Less money for police (other than the money that goes to fund police pension funds). Less money over-all in general. At the end, if residents of a city want to continue those services, they will need to vote for higher taxes or be willing to fight it out with city unions.



The OC Register hit the topic of cost increases from a different angle.

The article highlights those who make over $100,000 per year in pensions. In 2005, only 1,841 collected pensions above $100,000. By 2018, that figure rose to 26,000. (There is no indication in the article if these figures are being adjusted for inflation.) The article throws out two arguments that address both sides. One side states that only 4% of payees receive over $100,000 per year in pensions. That is not significant. The other argument is that this 4% represents 17% of payouts. So even though these individuals are small in number, they make up a more significant chunk of what is paid out.

Other data points from the article is that the average pension is just $32,224 (though this includes survivors and those with limited service -- probably those who probably worked long enough to qualify for their pensions and then moved on to careers). What is perhaps more accurate is that the average worker who has worked 20-years is making $50,333.

A year ago, CALmatters mentioned that the average teacher retired with a pension of $55,000 (teachers get no social security). If my calculations at the time were correct, I estimated that a similar individual working in the private sector would get $29,000 per year via social security and then add on top of that their 401K. So I wouldn't necessarily say that these averages are outrageous.

But they're still causing financial distress on the system. Or are they? The OC Register brings up two different arguments:

“Public pensions are often viewed as being in a state of crisis, with the threat of default looming — but overall, our results suggest there is no imminent ‘crisis’ for most pension plans,” said a study released in July by Jamie Lenney of the Bank of England, Byron Lutz of the Federal Reserve Board of Governors and Louise Sheiner of the Brookings Institution.

Pension payments have pretty much hit their peak, and will remain there for two decades. After that, reforms will start to kick in, easing the pressure, they said. Officials from Californians for Retirement Security point to the Brookings report as evidence that a “pension crisis” is malarkey.

[Joe] Nation agrees that there’s no immediate crisis. “But despite record market gains, most pension systems are no better off than at the start of the great recession,” he said by email. “And when the next recession hits, funding levels will be at 50%. Maybe that’s when the crisis will be official!” While the S&P 500 has more than doubled since 2009, CalPERS’ funded ratio remains essentially unchanged, Nation said.

I say we stick with what Nation has to say. Let's see where we're at when we get a long-term bear market (I'm thinking 2 to 3 years and not the 1 month bear market back in 2018). Then let's see how funding percentages look.