Tag Archives: public pensions

California tax board leader urged quick hirings to get state workers better pensions

jerome horton

Jerome Horton: Working hard for the taxpayer…

From Wikipedia: The State Board of Equalization (BOE) is a public agency charged with tax administration and fee collection in the state of California in the United States. The authorities of the Board fell into four broad areas: sales and use taxes, property taxes, special taxes, and acting as an appellate body for franchise and income tax appeals. The BOE is the only publicly elected tax commission in the United States. In June 2017, Governor Jerry Brown signed legislation stripping the Board of most of its powers.

Why did Brown do this? Again, from Wikipedia:

Each year, the Board spends at least $3 million on education events where elected member appear before their constituents. In 2016, it was revealed that Board Chairman Jerome Horton had spent $130,000 on designer office furniture, prompting criticism. Horton had been previously criticized over $731,835 in donations his wife’s organizations had accepted from companies with matters before the Board.

In March 2017, an audit by the California Department of Finance revealed missing funds and signs of nepotism, leading to calls for the governor to put the Board under a public trustee. In June 2017, the California Department of Justice began a criminal investigation into the members of the Board.

On June 27, 2017, Governor Jerry Brown signed into law legislation stripping the Board of its powers.  The legislation created two new departments controlled by the governor responsible for the Board’s statutory duties, the California Department of Tax Fee Administration and the California Office of Tax Appeals.

The Board still has its constitutional powers to review property tax assessments, insurer tax assessment, alcohol excise tax, and pipeline taxes. The Board will retain 400 employees, with the rest of its 4,800 workers being shifted to the new departments.

Jerome Horton has worked at the BOE for for over 20 years. Guess he has quite the shady background. Read about it here from this 2011 article about him illegally funneling money to a friend.

Par for the course for demorat politicians in California.

From Sacramento Bee (by Adam Ashton): The elected leader of a California tax agency urged its executives to speed hiring for a project in late 2012 so new employees would benefit from more generous pension plans, according to documents obtained by The Bee.

Emails show that Board of Equalization member Jerome Horton wanted the agency to quickly fill positions for a new customer service call center in Culver City during the fall of 2012 before less lucrative pension rules kicked in Jan. 1, 2013.

The documents show that the agency did not have office space for new employees. Horton, who was chairman of the board at the time, nonetheless wanted to bring on new employees for the call center and train them at other sites around Southern California. The agency ultimately hired 25 workers the last week of the year, with some of them assigned to the call center.

During the week of September 2012 that Gov. Jerry Brown signed a pension reform law, Horton wrote an email that read, “I would recommend that we do everything possible to excellerate (sic) our hiring process and assist our team members with retirement plans.”

That email and others were uncovered by auditors at the Department of Finance, who released a report earlier this year describing how elected leaders at the Board Of Equalization intervened in daily decision-making at the tax agency. The audit prompted lawmakers in June to strip the agency of most of its power and almost all of its 4,200 employees.

Until the Legislature gutted it this year, the Board of Equalization managed dozens of tax programs, collected about $60 billion a year in revenue and settled disputes between taxpayers and tax collectors.

The call center in Horton’s district stood out to auditors because they found that the five-member board that managed the agency never voted to open the site. Auditors wrote that Horton was “involved” in its creation and cited the call center as an example of an elected board member overstepping boundaries.

“The practice of individual board members intervening in the daily BOE operating activities creates inconsistencies in operations, breakdowns in centralized processes, and in certain instances result in activities contrary to state law,” the audit said.

Next week, the call center is scheduled to close. The department that the Legislature created to replace the Board of Equalization chose to consolidate the call center’s responsibilities with a larger customer service center in Sacramento.

The last two employees who worked at the Culver City call center will be reassigned to other offices by Monday, Department of Tax and Fee Administration spokesman Paul Cambra said. At some point, the new department plans to add staff at its primary Sacramento call center.

The documents that describe the Culver City call center’s creation shed light on a late 2012 hiring spree at the Board of Equalization, when 25 new employees started their jobs in between Christmas Eve and New Year’s Eve.

Ten of the hires reported for their first day of work on Dec. 31, 2012, securing the more generous pension plans that were phased out for new state employees a day later. A Board of Equalization spokesman previously told The Bee that several of the New Year’s Eve hires went to work at the Culver City call center.

Hiring spiked throughout California government in the holiday week of 2012, with people beginning public-sector jobs at triple the normal rate for the last week of the year, according to a Bee analysis of records from the California Public Employees’ Retirement System. The trend was especially pronounced at the Board of Equalization and at CalPERS.

Brown’s pension reform law rolled back some of the generous incentives lawmakers granted to public workers during the dot-com boom. As a result, public employees who started their jobs after Jan. 1, 2013 have to work seven years longer to retire with a pension that gives them 2 percent of their salary for each year service. Previously, most public employees could get that rate at age 55.

Although the Board of Equalization did not cast a vote on opening the Culver City center, documents show that Horton and the agency advanced it publicly. In November 2012, the agency published a press release announcing a job fair for the customer service center.

“What better gift to receive than a job for the holidays?” his 2012 press release read.

Horton’s messages to Board of Equalization executives in late 2012 show that he knew the agency did not have real estate for the new office. He pitched a proposal to place new workers in other offices for temporary assignments where they could learn from the agency staff members who worked for elected members.

A 2014 Board of Equalization report on the Culver City center said it opened and began taking calls on April 2, 2013.

Horton, who worked for the Board of Equalization for more than 20 years before going into politics, said the agency’s executive team approved the project and discussed its development with board members at different times in 2012.

“Although I have no authority over the hiring, training, or construction process, according to the administration, the agency followed proper protocol and obtained approval from (the state human resources department) to commence the hiring process and authorization to actually hire the employees in question,” he wrote in an email to The Bee.

DCG

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CalPERS post gain of less than 1% for latest fiscal year

Liberal logic: Investment gain well below official target?  We’re pleased and proud!

CalPERS exec Marcie Frost

CalPERS exec Marcie Frost

From Sacramento Bee: CalPERS reported a 0.61 percent gain in investments in its latest fiscal year, well below the big California pension fund’s official target.

The results are in line with expectations following a bumpy year in the stock market. A few weeks ago Chief Investment Officer Ted Eliopoulos told the Wall Street Journal that CalPERS essentially broke even for the year ending June 30.

CalPERS’ annual investment performance matters because a lackluster year increases pressure to raise contribution rates from state and local taxpayers. The 0.61 percent gain contrasts with the annual target of 7.5 percent, and follows a gain of just 2.4 percent the prior fiscal year.

In the past few years CalPERS has imposed significant rate increases on the state, local governments and school districts. The state’s annual bill rose by $600 million this year, to $5.4 billion a year. Besides dealing with lingering effects of the 2008 market crash, CalPERS also has cited longer retiree lifespans and the growing state and school districts’ payrolls. All told, CalPERS is about 76 percent funded, which means it has 76 cents available for every $1 in long-term pension obligations.

Another factor at play in the fund’s finances: CalPERS has said it expects investment markets to become increasingly uneven in the coming years and has implemented a plan to gradually reduce risks in its investment portfolio. That same plan is also expected to reduce its annual target of investment gains.

“We can expect a low investment return environment … in the coming years,” newly hired Chief Executive Marcie Frost said last week. “There are challenges ahead of us.”

Still, CalPERS officials said they were pleased with the latest results in light of the difficult investing climate. “Positive performance in a year of turbulent financial markets is an accomplishment that we are proud of,” Eliopoulos said in a prepared statement.

The fund lost 3.4 percent on its stock portfolio, which makes up the largest share of its $302 billion asset base. “Over half of our portfolio is in equities, so returns are largely driven by stock markets,” Eliopoulos said.

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California state scientists reject Jerry Brown’s contract offer

If these scientists really don’t like their pay, they are quite free to negotiate a 5 percent-plus raise for the next three years with a private employer.

kick the can down the road

Sacramento Bee: California’s state scientists have resoundingly rejected a new contract with Gov. Jerry Brown that would have given them a total 15 percent in salary increases over three years but included a new requirement that they begin contributing toward retiree health benefits.

Nearly three-quarters of ballots cast voted against ratifying the deal, according to the union. The results frustrated, at least for the moment, the administration’s attempt to implement Brown’s plan to begin saving for future retirees’ medical care, a debt currently pegged at roughly $71 billion.

math is hard

The vote also underscored the dissatisfaction of scientists who have long complained about earning 70 percent of what those holding similar governments jobs are paid.

Patty Velez, who chairs the bargaining team for the California Association of Professional Scientists, said in a press statement that the contract “was far short of what is needed to bring an equitable and satisfactory conclusion to these negotiations.” California Department of Human Resources spokesman Jim Zamora said that the Brown administration’s bargaining arm would have no comment.

A centerpiece of the now-rejected contract would have put the union’s 3,000 members into a pension-style fund to offset retiree health-care costs. Employee contributions to the fund, which the state would have matched, would have incrementally increased to a total 2.8 percent of salary by mid-2019.

The terms also required 25 years of service to become fully vested in the retiree health-care program, five years longer than current employees must wait. And the amount of the state’s health-care subsidy for those future employees in retirement would have been substantially reduced.

Brown wants to build similar terms into all the contracts covering the state’s 180,000 or so unionized state employees. The administration can impose those conditions on its non-union employees. The changes to retiree health benefits and requiring employee contributions for them are key elements of the governor’s plan to begin whittling down obligations for retiree medical costs that, unlike pensions, are not offset by investments.

Union leaders knew that they had a hard sell when they announced the tentative agreement last month. Their members last year had rejected one contract and then accepted another less-lucrative, short-term deal, believing that once Brown won re-election in November he would spend more freely on salaries.

But as talks dragged on past that contract’s expiration date a few months ago, it became apparent that money was again snagging the negotiations. During the final week of talks, about 100 scientists staged an unsanctioned march at CalHR’s Sacramento headquarters. A few days later, Velez announced the new tentative agreement with a near-apology, acknowledging the deal “still falls well short of closing the huge salary gap between scientists and their engineering counterparts at the state, as well as scientists at the local level and in the private sector.”

Of the ballots cast, 72 percent rejected the agreement, according to the union. By state law, the scientists will continue to work under the terms of their expired contract. Velez said negotiators plan to return to the bargaining table. A date to resume talks has not been set.

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I bet the majority of these scientists believe in global warming yet a $71 BILLION debt doesn’t scare them.

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DCG

Questions about California state retiree health benefits asked and answered

Unicorns are flying!

This chart illustrates how saving and investing for state retiree health benefits can save billions of dollars over time. The dotted line represents costs under the state’s current pay-as-you-go system. The solid line shows what happens when extra money set aside in a trust fund grows through investments and then is applied to retiree health benefits in about 30 years. Revised budget proposal, May 2015 Department of Finance

This chart illustrates how saving and investing for state retiree health benefits can save billions of dollars over time. The dotted line represents costs under the state’s current pay-as-you-go system. The solid line shows what happens when extra money set aside in a trust fund grows through investments and then is applied to retiree health benefits in about 30 years. Revised budget proposal, May 2015 Department of Finance

Sacramento Bee: It’s done – and it’s just beginning. The Legislature has approved the terms of new labor agreements for California state engineers and scientists that include contributions to their retiree medical benefits, extend how long new employees must work to vest in the program and, for the first time, lower the state’s share of cost for future retirees’ medical, dental and vision coverage.

With those contracts pending member ratification, the governor’s attention now turns the remaining unions with expired or expiring labor pacts. During a Senate committee hearing last week, administration officials acknowledged that Brown wants to bargain similar terms with the other groups.

The State Worker watched the Senate Budget and Fiscal Review Committee hearing and later spoke to Department of Finance staff, looking for answers to questions that blog users and Facebook and Twitter followers are asking. Here are some of your most common questions and the answers to them:

How does this work?

A: Assuming members approve the tentative agreements reached with Brown, the engineers and scientists would begin paying an incrementally increasing percentage of their pensionable pay into a retiree benefits fund starting July 1, 2017. The engineers’ contribution would top out at 2 percent on July 1, 2019, and the scientists’ contribution would top out at 2.8 percent on that same date. The state will match employee contributions dollar-for-dollar.

Why the different percentages?

A: The percentages meet what state-contracted actuaries have determined is appropriate to fund the benefits, given the demographics and wages of each group. Since the scientists earn less than engineers, their payment is a larger percentage of their wages.

How much might I have to pay into the retiree-benefits fund?

A: Generally speaking, actuaries figure most state employees need to kick in somewhere between 3 percent and 4 percent of pensionable pay to fund the benefit. Remember, however, that demographics play a role. Law enforcement officers, for example, will likely pay a higher percentage because they retire at younger ages. And this stuff has to be bargained unit by unit in the context of the state’s overall budget health, which always adds x factors to the equation.

My pension contributions have gone up in the last few years. Could that happen with the new retiree health contributions?

A: Yes. They also could decrease. As the state gathers real data and experience, future actuarial estimates could require higher or lower employer/employee contributions. Since the contributions are bargained and not legislated, they could change up or down in subsequent contracts.

Where will the money go?

A: Into the California Employers’ Retiree Benefit Trust. CalPERS is a third-party administrator of the fund, which has $4.4 billion in assets and serves about 460 local government employers. State maintenance workers, physicians, dentists and Highway Patrol officers are already paying ahead on their retiree health benefits, accounting for about $100 million in the fund.

CalPERS? Does that mean my retiree health benefits will be subject to the same political pressures and policy wrangling as my pension?

A: Unlike the pension fund it administers, CalPERS wields little power over the retiree benefits trust fund. CalPERS is essentially a third-party contractor managing the health benefits fund. It competes with Vangard, Fidelity and other financial services companies for the business.

Does this take care of the state’s long-term $72 billion unfunded liability for retiree health care costs?

A: Yes, but it will take up to 30 years. The new contributions will go into the trust fund and grow via investments. In the meantime, the state will continue paying the bills year-to-year as they come due. Because the state is prefunding future benefits, the unfunded liability will eventually stop growing and begin to shrink.

math is hard

Some day, about three decades hence, the trust fund money will kick in and presto! Virtually no more unfunded liability – assuming the actuaries hit their marks.

Of course, all this assumes governors, legislators and labor unions hold fast to the prefunding principle. Bargaining or legislation could change the rules of the game any time.

Governors have sometimes given raises to at least partially offset higher contributions to pensions. If that happens here, isn’t the retiree medical solution creating more trouble for the pension system by hiking wages that lead to higher pension payments?

It’s true that any wage increase ups pressure on the pension fund. But, as Finance budget analyst Eric Stern and Erika Li, the department’s assistant budget program manager, told the Senate committee on Friday, there’s not a clear dollar-for-dollar correlation between benefit contribution increases and pay raises, particularly over the last 10 years.

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Sacramento County bond debt highest in state

Take a wild guess as to the culprit…

Timer bomb isolated on white background 3D

Sacramento Bee: The so-called Big Build – the expansion of the Sacramento International Airport – was the biggest public works project in local history at a cost of $1 billion. Yet the debt for the new terminal is not Sacramento County’s biggest.

The county has assumed an estimated $2 billion in debt to try to shore up its underfunded employee pension fund.

Pension and airport financing combined have given Sacramento County the highest bond debt out of California’s 58 counties, The Sacramento Bee found in an analysis of data collected from the counties by the state controller’s office. At the end of June 2014, Sacramento County owed $1.84 billion in bond payments, not including interest, more than half of which came from pension obligation bonds.

In January, the Government Finance Officers Association recommended that state and local governments not issue pension obligation bonds. Bond proceeds are invested in the stock market, and the investment returns might not exceed interest rates for the bonds themselves, the association says in its advisory, which characterizes the bonds as “risky” and “complex.”

California municipal finance expert Michael Coleman agrees with the association’s recommendation. “We’ve got enough problems with pension programs; we don’t need to add to them,” he said. “Pension costs should be paid as benefits are earned, not put off into the future.”

Pension obligation bonds allow local governments to borrow against future tax revenue to make sure they have enough money available to pay present and future pension obligations. The idea is that the borrowed money can be invested and earn a return higher than the interest rate on the bonds – an income stream for the pension fund.

In practice, pension obligation bonds have contributed to deep financial distress in some California cities, Coleman said. San Bernardino and Stockton, both of which filed for bankruptcy, have issued the bonds. According to the state database, 25 counties and 65 cities have outstanding debt for pension obligation bonds.

Sacramento County’s pension bond debt started with a $538 million bond issued in 1995. A staff report recommended that county supervisors approve the bond because the pension plan was underfunded by about the same amount as the bond. In 2004, the county issued another pension bond worth $426 million. A staff report said the money was needed to pay for an increase in pension benefits given to employees the year before.

denial

Don Nottoli, the only current member of the Board of Supervisors to vote on the bonds, defends the decision to issue them. He said they were necessary to fully fund retirement benefits. “We took on a mortgage of sorts to maintain our responsibility to our employees,” he said. “The payback is sizable, and we need to keep a keen eye on the bonds and be financially responsible.”

Each year, local governments are expected to make payments to retirement funds with the goal of covering the expected benefits for current and future retirees. Those payments come on top of the bond payments. In the current fiscal year, Sacramento County expects to pay $195 million to the pension fund, and another $123 million to the pension bond debt.

Pension-change advocate Marcia Fritz said the recent battering of the investment market shows the foolishness of using bonds to pay for retirement funds. “It’s like borrowing on your home to invest in the stock market,” she said. “I’m very apprehensive about the county’s ability to provide any level of service in the future.”

Sacramento County owes $974 million on its pension bonds, not counting interest. In 2011, the county estimated it would pay $1.2 billion in interest on $1 billion in bond principal. The county largely uses its general fund to pay off the pension bonds, while the airport expansion bonds are paid by user fees and other airport revenues. The question is whether the pension bond investments will earn more than the interest rates by 2030, when the county is expected to pay them off.

A 2014 report by the Center for State and Local Government Excellence looked at whether pension bonds met the expectations of governments issuing them. The Government Finance Officers Association based its recommendation against pension bonds in part on the report.

The study concluded that the success of the bonds depended on when they were issued: Those coming out toward the end of the market run-up of the 1990s and around the market crash of 2007 were not successful, while others have generally produced positive returns.

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Most public pensions may run out of money in 30 years

pensions

Watchdog.org: Public pension systems across the country may be heading toward a financial meltdown, according to a series of stress tests conducted by a respected hedge fund.

Bridgewater Associates, based in Wesport, Conn., estimates it will take about $10 trillion for public pensions to meet their financial obligations in the coming decades as an aging population retires, but according to Bridgewater’s report there is only about $3 trillion in assets to invest.

In order to cover the coming expenses, Bridgewater estimates pension plans would need to earn an annual return of 9 percent.

The report said most states’ public pension systems work on a presumption of a 7-8 percent annual return on their investments, but Bridgewater says a more realistic goal is 4 percent — or even less.

Given all those factors, Bridgewater’s report concludes that as much as 85 percent of public pension plans could run out of money within three decades.

New Mexico’s two big public pension plans — the Public Employees Retirement Association and the Educational Retirement Board — work on presumptions of annual returns of almost 8 percent.

On the other hand, New Mexico is one of the few states that have passed a pension reform “fix” to try to tackle the looming financial problem.

In the 2013 legislative session, Republicans and Democrats — working with PERA, ERB and the state’s chapter of American Federation of State County and Municipal Employees — hammered out bills aimed at shoring up pension solvency.

“We haven’t let ours go completely in the cellar,” said state Sen. Stuart Ingle, R-Portales, who sponsored the ERB fix. “We tried to tackle the problem and I’m hopeful that we solved it. But our investments have to make some money. If not, we’ll have to come back and change them.”

State Sen. George Muñoz, D-Gallup, spearheaded PERA pension reform in the 2013 session, but worries about the annual rate of return assumptions.

“I think the 6 percent range, 6 and three-quarters” is more realistic, Muñoz told New Mexico Watchdog. “You’re floating that line. The economy is such a rollercoaster, there are no flat line projections where you can get a solid smoothing over for a three to five year period.”

The ERB plan works on a presumption of 7.75 percent a year. That’s pretty high, but last month ERB reported its investment portfolio returned 11.7 percent for the calendar year.

Ingle said adjustments may be needed in the future, but is relieved New Mexico passed the pension bill. “Before, it was a like a gusher,” he said. “Now there’s a certain stream of money going out, but the pipe’s cut down from 12 inches to maybe three.”

DCG

Why there will be many more Detroits – in one chart

Short answer to the question is:

Because America’s cities and states are in debt up to our eyebrows from unfunded pensions to public employees — pensions that, without exception, are based on the expectation that whatever money that’s paid into those funds gets 7% to 8% interest.

But the reality is the Federal Reserve is artificially suppressing interest rates because of the Godzilla-sized national debt of $16.9 trillion. That’s the official figure, according to our feral gummint. The real figure, according to a U.C. San Diego economics professor, is $70 trillion.

If the Federal Reserve lets interest rates go up, then our gargantuan national debt will balloon even quicker.

That is why the interest rates on bank savings, certificates of deposit (CD), and U.S. Treasury bonds and notes are so anemic. The highest interest rate being offered for a one-year CD currently is 1.05%. As for treasury notes, rates are going up. The latest 10-year Treasury note has a yield as high as 2.866%, a level not seen since July 29, 2011. But 2.866% is still a far cry (5.134% to be precise) from the 8% interest rate on which are based our public pensions.

Below is a chart showing how underfunded public pensions are, compared with private retirement funding. As Tyler Durden of ZeroHedge puts it:

The chart below explains, in the simplest possible terms, why there are many more “Detroits” on deck. It shows the underfunded status of public vs private retiree healthcare plans. It needs no commentary, although it may deserve one question: what happens when all those public servants who have been promised over a trillion in healthcare benefits upon retirement, realize it was all a lie? And then come… the pensions.

pensions~Eowyn