Encinitas is waaaay waaaay better than any other town. We are genetically superior and immune from poor planning because we are driven by an economic dream team.
CLAREMONT’S PENSION TIDAL WAVE IN THREE ACTS
John J. McDermott III
Prologue: “Party Like Its 1999”
The year 1999 was a heady one for California. The Internet Bubble was rocking and the stock market was shooting to the moon. In this festive mood Governor Gray Davis signed into law SB 400, which dramatically increased the pension benefits for California public workers.
Calpers assured us at the time that this generous pension party would not cost the state or cities a dime in extra taxes. As part of the sales pitch for the new pensions Calpers projected that the stock market would achieve an annual average rate of return of 8.25% in the years following1999. This allowed them to claim that the enhanced pensions would remain fully funded without taxpayer support. Implicit in the Calpers return number was that the Dow would reach 25,000 by 2009. This projection, made near the very peak of the Dot.com Bubble with the most overvalued stock market in history, was pure deception on the part of Calpers. This deception allowed them to convince gullible legislators voting on SB 400 that no new taxes would be used to fund the new pensions. But, not mentioned publicly was the fall back provision. That provision was to come to the taxpayers to fund the plan if stocks or real estate did something really crazy and unpredictable over the ensuing years, like fall back to their historical fair value.
Present Day: “The Hangover”
This is the situation our state finds it self in today: billions of dollars flowing out of the state general fund to Calpers. And this is money that will not be spent on our universities, parks, or healthcare for our poorest citizens.
It is not just the state that has to come up with more money to fund pensions due to Calipers’ malfeasance. Claremont, like all cities, has to cough up more dough as well. So where is the money going to come from?
This brings us to a recent city publication: “The Mayors Ad Hoc Committee on Economic Sustainability”. This report is obviously the product of many hours of hard work and I appreciate the authors’ frank recognition of the fiscal problems we face here in Claremont. However I disagree with the committee’s characterization of our fiscal problem as a revenue problem. Further, I disagree with the committee’s proposal to fix the problem by raising the utility tax instead of recommending that city employees immediately begin paying the employee portion of their pension. Currently the city picks up 100% of what is supposed to be the employee’s contribution.
The city’s problem really is not a revenue problem. The city reaped a windfall of taxes during the housing bubble due to its attendant effects on property tax revenue and retail sales tax. Property tax revenue to the city went up from around 2.5 Million in 2003 to close to 7 Million in 2007 (Appendix A of the Committee’s report). This was a onetime windfall based on an unsustainable housing and credit bubble. However, the city budgeted as if this boom would continue forever: city general fund spending per capita outpaced inflation by a wide margin from 2003-2009.
Much of this growth in city spending has been on increased employee compensation and benefits. I encourage you to visit the State Controller’s website to review the city of Claremont salaries. Sixty-eight city employees had an annual direct compensation of greater than $100,000 in 2009 (newest data available). These employees will be receiving pensions that will be worth up to 70 to 90% of these salaries. For example, our assistant city manager made $199,919 in 2009 and will soon be eligible for a pension based on that pay level. His pension would be worth approximately $140,000 per year if he were to retire today. An equivalent annuity would cost you or I anywhere from $2.3 to $3.5 MILLION to purchase.
Some would have us believe that Calpers will “earn” its way out of its funding hole. The chances of that occurring are slim. Even at current levels equities are far above their historical fair value based on long-term earnings and dividend yields. Astute money managers, such as Jeremy Grantham and Bill Gross, feel it is likely we will not see pension investment returns beyond 5% annually from 2011 to 2020.
Before concluding, I want to be clear on one point. The older Calpers retirees, who did not get in on the 1999 SB400 bonanza, have very reasonable pensions. Thus when you hear Calpers propaganda such as “the average Calpers pensioner only has a $25,000 annual pension” you need to remember that number includes these older retirees as well as the many other retirees that were only public employees for a few years.
The Future: “It’s In Our Hands”
In addition to requiring employees to immediately pick up 100% of the employee pension contribution, the city needs to dramatically increase retirement ages and reduce pension percentages of final pay on a going forward basis. Retirement at age 50 or 55 for city workers at 70-90% of pay is frankly ridiculous. A plan is needed that is not dependent on taxpayer bailouts or stealing funds from important budget items such as parks, after school activities for children, and senior citizen programs.
These changes will require negotiations with a variety of bargaining units. Make sure your chosen city council candidate is up to the task. The message he or she should be sending to city workers should be clear: Claremont’s citizens love their city and appreciate the work you do. But, they are in no mood to pay additional taxes to fund extravagant pensions.