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Benefit Promises that are Hard to Keep

Original post made by stephen levy on Jul 14, 2012

Town Square has been filled with posts about city employee benefits for pensions and health care. The Weekly did a long article on the situation in Palo Alto. There are five main causes of the fiscal challenges caused by rising benefit costs:

1) Agreements were made about benefit levels and the cost sharing responsiblities of employees that now look unsustainable and out of step with changes in private company benefits

2) Health care costs have continued to rise far above the rate of growth in the economy.

3) Investment returns on state and local pension contributions have declined below levels assumed by pension fund managers.

4) The number of aging and retiring workers is growing as the large baby boom generation is aging.

5) There were years in the early 2000s in which cities and the state did not make pension contributions.

The last four causes have nothing to do with employee behavior, public unions or any cause that can be reasonably be construed as the public employees fault.

Yet most posters on Town Square blame public employees and city council and staff and offer a series of choices for whcih they have, as the saying goes, no skin in the game. Theyoffer cuts in employee pay and benefits, outsourcing and elimination of programs THEY find unnecessary. What should be a matter of shared responsibility (including changes in employee benefits and contributions) is, instead, a denial that much of the penskon/health care unsustainabilty is no one's fault or everyone's fault.

So let's slightly change the focus to the other and equally or much larger set of benefit promises that are hard to keep--the ones in Medicare and, to a lesser extent, Social Security.

First there are many similarities. Benefits have been promised and are being paid that are unsustainable in the long term.

I and other eligible residents get cost of living increases in Socail Security and the amount I pay for Medicare has not kept pace with cost of benefits I receive.

These imbalances will increase as more baby boomers become eligible for Medicare and Social Security. Current tax levels are not sufficient to meet rising health care costs and growth in the agin eligible populaiton.

Sounds a bit like public employees and benefit costs except this time WE are the public employees (the ones who got benefits that are not sustainable) and the Congress representing us (like the council represents voters) passed the benefits.

I think both sets of unsustainable benefit proises require shared solutions. For Medicare and Social Security I am willing to have additional means testing (which would require me to pay more) and some means of reducing duplicative or medically unnecessary test by having Medicare tighten approval requirements. Just as new city employees throughout the country are accepting benefit packages less generous than long-time employees have, I am open to some changes in benefit levels for future Medicare and Social Security recipients. And I think the Social Security tax should be levied on incomes above $110,000 just as the Medicare tax is.

Similarly I don't think the entire burden of bringing city employee benefits into sustainability should fall on the employees or reducing services that othere may like.

Do posters have any ideas about shared solutions to lcoal employee beneifts and those we as Americans are or will get from Medicare and Social Security--both sets of which are unustatinable as currently organized. Shared means we all put some skin in the game.

Comments (41)

Posted by Peter Carpenter, a resident of Atherton
on Jul 14, 2012 at 3:13 pm

Peter Carpenter is a registered user.

Shared solutions require that the public agencies and the recipients of the unsustainable compensation and pension benefits negotiate new compensation and pension benefits which are both fair and sustainable. In many cases that has occurred but where it has not occurred then other measures must be taken.

It does not matter, except to historians, how these unsustainable compensations and pension benefits were granted/achieved; what matters is that they are no longer affordable.


Posted by Peter Carpenter, a resident of Atherton
on Jul 14, 2012 at 3:26 pm

Peter Carpenter is a registered user.

Daniel Mitchell, professor-emeritus at the UCLA Anderson Graduate School of Management, blamed poor planning by those who negotiated the contracts.

"There is the Warren Buffett quote that when the tide goes out, you find out who has been swimming naked," he said. "Pensions are a problem because they weren't properly funded in the past, and now the bills are coming due when dollars are scarce."


Posted by stephen levy, a resident of University South
on Jul 14, 2012 at 3:39 pm

stephen levy is a registered user.

Interesting posts Peter.

The point I am making is that with regard to Medicare and Social Security WE are the recipients of these unsustainable arrangements.

In both cases these arrangements are contracts (legal or social) and between TWO parties.

How would you share responsibility between recipients and others re moving toward sustainability with regard to Medicare and Social Security?

And what parallels if any do you draw between public employees and Medicare and Social Security recipients as the beneficiaries in shared responsibility solutions?

If you are asking public employees to shoulder all of the burden of finding sustainability are you then asking seniors to reduce their current Medicare and Social Security benefits as the ONLY part of shared solutions to that long-term budget dilemma?


Posted by Jon, a resident of Midtown
on Jul 14, 2012 at 4:12 pm

Stephen,


What does "sustainability" mean to you? I don't recall that our anestors, in this country, had such a guarantee. Do you?



Posted by stephen levy, a resident of University South
on Jul 14, 2012 at 4:31 pm

stephen levy is a registered user.

Jon,

I don't understand what point you are trying to make.

By sustainable I meant levels of benefits and contributions to pay for them that did not create budget deficits over the long term.


Posted by Peter Carpenter, a resident of Atherton
on Jul 14, 2012 at 4:37 pm

Peter Carpenter is a registered user.

"How would you share responsibility between recipients and others re moving toward sustainability with regard to Medicare and Social Security?"

Our elected representatives are constantly negotiating this issue and they wil be forced to make changes in the current system. They will, in the process, find a formula which shares the pain.

"And what parallels if any do you draw between public employees and Medicare and Social Security recipients as the beneficiaries in shared responsibility solutions?"

Again it should be a negotiated solution - but if the unions (like the MPFPD union) refuse to negotiate then they will be faced (as was the MPFPD union) with an imposed solution.


Posted by Jon, a resident of Midtown
on Jul 14, 2012 at 4:39 pm

> Current tax levels are not sufficient to meet rising health care costs and growth in the agin eligible populaiton.

Tax receipts, or tax rates, Stephen? You need to expalin.


Posted by common sense, a resident of Midtown
on Jul 14, 2012 at 6:02 pm

Stephen,

Many of your premises are incorrect:

1) The unsustainable pension & medical benefits were foreseen & could be predict, especially in such an educated community as Palo Alto; all of our elected officials, and the "top-notch" management staff know that our economy goes through cycles, yet they have approved benefit increases never factoring in the times when we will have a recession.

In the past, many of these elected officials and senior city management knew they would be long gone when the pension & medical benefits would blow up, and decided it was easier to kick the can down the road with the unions, especially since some of these politicians were supported by the union in their election campaigns.

2) Obamacare was suppose to hold down health care costs - how did that work out? it hasn't.

3) Several recent articles on CalPERS & CalSTRS have said the professionals wanted to lower the rate of return from 7.75% to 7.25%; the politicians would only let them lower it to 7.5% - why? a lower rate of return means the state and city governments would have to contribute even higher amounts and that would mean even greater cuts to services - More kicking the can down the road by politicians, and you don't hear unions raising any issue about this either, because they don't want to see more layoffs.

4) It not the aging baby boomers causing the retirement issue; it's the generous benefits of allowing government workers to retire as early as 50 years old. What if public safety people had to wait until 67 like everyone else who pulls social security? Or what if those public safety workers who retire at 50 because of the physical demands of the job were to take over functions like dispatch, customer service jobs, etc?

5) There were years that politicians decided not to budget contributions - instead they spent the money, instead of saving for a rainy day; buying votes.

Many of these have to do with union behavior - who are some of the largest campaign contributors - government worker unions. And they contribute to politicians who will vote for more benefits for the government workers. So to say "... nothing to do with employee behavior, public unions or any cause that can be reasonably be construed as the public employees fault." is at best naive, at worst being a shill.

You state most posters don't have "skin in the game"; most posters probably pay income taxes, capital gain taxes, sales tax, property taxes and inheritance taxes - so yes, they do have skin in the game. And many of these posters have been warning for years about the public sector worker benefit bombs, but politicians haven't been listening.

But if you want an idea for a solution, here's one: the city should pay the penalty or tax mandated by Obamacare (around $2000 per employee), and have the employees purchase their own health care on the exchanges that are suppose to be set up. Since these unions are such big supporters of Obamacare, let's see them walk the walk.


Posted by Jon, a resident of Midtown
on Jul 14, 2012 at 6:35 pm

> By sustainable I meant levels of benefits and contributions to pay for them that did not create budget deficits over the long term.

Stephen, if the level of benefits are not sustainable, then how can they be sustained? You seem to be offering a circular argument. Please explain. Aren't you really talking about raisng taxes?


Posted by Sigh..., a resident of College Terrace
on Jul 14, 2012 at 9:55 pm

"2) Obamacare was suppose to hold down health care costs - how did that work out? it hasn't."

What are you talking about? Most of the provisions haven't even gone into effect yet.


Posted by anonymous, a resident of Duveneck/St. Francis
on Jul 15, 2012 at 2:20 pm

I have to say, I typically disagree with Mr. Levy's assertions.

When it comes to government's ability to run government, California is a doozie at just about every level. There are so many angles to all this.

I get the sense that with numerous government entities (city of Stockton, et.) there was negligence with full knowledge that taxpayers would be "on the hook" or have to "bail out" or "deal with it" -- in future, down the line when wildly generous med/pension schemes, capital building expenditures, etc., etc. prove outrageously costly and unsustainable. It's not just a question of being a bit optimistic, it's about sweetheart deals with unions to the extreme detriment of taxpayers.

I am really conerned about those government officials who deal with/negotiate with union officials - AND many of the union officials. We already went through some well-documented horror situations with country treasurers. These people don't seem too accountable - however, we really need to find ways to make decision makers more accountable (start with city councils). Please study issues and candidates closely and always vote.
It isn't merely a slowdown in the economy or some such excuse to account for difficulties we taxpayers now face with regards to outrageous union agreements (bennies, health, retirement schemes)- it's out and out negligence, lack of reasonable business acumen or even caring about public dollars. Look no farther than the California state legislature. It has nothing to be with being a "tea-bagger" I am nothing of the kind - but anyone with any common sense knows the state of California has exceptionally poor leadership and representation and the fiscal situation is disgraceful.


Posted by Wayne Martin, a resident of Fairmeadow
on Jul 15, 2012 at 2:33 pm

> It does not matter, except to historians, how these unsustainable
> compensations and pension benefits were granted/achieved;
> what matters is that they are no longer affordable.

On the contrary, it matters immensely. We need to know exactly how this happened, so that we can construct the necessary policy/legislative structural changes to try to avoid these pitfalls in the future.

We certainly know that there was a time that public sector unions were no legal. It certainly would benefit us all to have a very detailed history, name-by-name and law-by-law, that got us into this mess. It's not clear that we can hold the politicians accountable, but we can unravel the legislative structure which they have put in place that generally protects public sector unions, and their cost escalations.

We also need to have it etched in stone that this mess was created by politicians, who took money--in one form or another--from unions, and other special interest groups, like trial attorneys, to create laws that have driven up the cost of medical care, for instance, in ways that we now call "unsustainable".

Yes, it very much matters how we got here. The same goes for the current financial system meltdown. Saying, for instance, it doesn't matter finding out how the LIBOR was manipulated, it just matters admitting that it was will only lead to other financial frauds in the future. Same is true with this matter of unsustainable government spending.


Posted by Wayne Martin, a resident of Fairmeadow
on Jul 15, 2012 at 3:02 pm

Steven Levy writes:
1) Agreements were made about benefit levels and the cost sharing responsiblities of employees that now look unsustainable and out of step with changes in private company benefits

2) Health care costs have continued to rise far above the rate of growth in the economy.
3) Investment returns on state and local pension contributions have declined below levels assumed by pension fund managers.
4) The number of aging and retiring workers is growing as the large baby boom generation is aging.
5) There were years in the early 2000s in which cities and the state did not make pension contributions.

The last four causes have nothing to do with employee behavior, public unions or any cause that can be reasonably be construed as the public employees fault.
-----
Assumption #2 is clearly false, since labor costs are the most significant driver of health care costs. Labor unions are a significant portion of the health care labor force. Moreover, there is the issue employee individual behavior that contributes to health care claims. Smoking, leading to various cancers, is something that drives up health care costs. To what extent public sector unions can influence their rank-and-file is an open question, but to suggest that the unions should have no influence here is just na´ve, or misguided.

Assumption #3 ignores the fact that unions have members/representatives placed on pension fund boards of directors. While the average rank-and-file member doesn't have much say in who this representative is, or does, none-the-less, these people have influence in the direction of how CalPERS/CalSTRS manages its money. The locals should be paying attention to the direction, and results, of CalPERS/CalSTRS, since its their money on the line. If they don't, then they have failed, to some extent, to help direct the pension funds to the fullest of their capabilities.

Assumptions #4 and #5 suggest that the unions could not have hired their own economists and made projections about the financial health of their pension funds in the coming years.

Chicago's Union Pension Scandal — A $56 Million Scam On The Taxpayers:
Web Link

As Chicago's pension system spirals out of control after years of overpromising and underfunding by politicians, a scandal involving union leaders and their powerful political allies underscores the corruption that threatens many states and cities across the country. TheChicago Tribune recently exposed a scheme in which 23 former unionized city employees stand to earn upwards of $56 million in pension benefits because of a sweetheart deal enacted by the Illinois legislature.
---

The number of pension-fund frauds that have been perpetrated by union officials, with the general knowledge of the rank-in-file, ultimately has resulted in untold billions disappearing from taxpayer-backed funds. Mr. Levy's suggestions seem to ignore these facts, or perhaps he doesn't pay attention to these contributions to our current state of affairs.

Additionally, pension "spiking", including fraudulent disability claims by predominately public sector employees, also has generated untold billions in additional pension liabilities. To suggest that "employee behavior" is not responsible for "spiking" and fraudulent claims defies the imagination.

As to Levy's attempts to deflect the argument away for the mess here in Palo Alto by dragging Social Security in the picture—that's old news. Every year the CBO/GAO, as well as each of the individual agencies, outlines the financial health for these particular benefits in our "social net". In all cases, these agencies are destined to run out of money within the next thirty years. Why? Because they are a Ponzi scheme, and no one in the US seems to have the courage to do anything about it. As Pogo said a long time ago: "We have met the enemy, and they are us!"


Posted by curmudgeon, a resident of Downtown North
on Jul 16, 2012 at 10:26 am

"the state of California has exceptionally poor leadership and representation and the fiscal situation is disgraceful."

In a democracy, people get exactly the government they deserve. (Who first said that, BTW?)

Our city leaders have to negotiate with their employees, but they are not required to negotiate stupidly. And it ain't the union types who are getting the big checks, it's the pensioned-off management slickies.


Posted by Paul Losch, a resident of Community Center
on Jul 16, 2012 at 1:17 pm

Paul Losch is a registered user.

We must get past the partisan rhetoric, think and execute public employee benefits going forward that are sustainable.

One of my adult children is starting a job next month as a public school teacher. He and his cohort need a different arrangement for their benefits if they work in public service.

Elected officials at all levels, local, state, national, threw too many bones for decades. Not to denigrate the hard working people who have been critical to our country's accomplishments.

But, the current formula needs a reformulation. It will ugly and difficult.


Posted by Peter Carpenter, a resident of Atherton
on Jul 16, 2012 at 1:20 pm

Peter Carpenter is a registered user.

"execute public employee benefits going forward that are sustainable."

The only way to do that is to convert all existing and new employees to a defined contribution pension where there is no unfunded liability.


Posted by CapAndTrade, a resident of Community Center
on Jul 16, 2012 at 3:56 pm

Stephen,

The solution for public pensions is the same for Social Security and Medicare: Cap the expenses at a fixed percentage of GDP.

For Medicare - cap the expense at a limit of 4% of GDP. Cut benefits in the formulary, drug benefits, payments to companies, procedures to doctors, death-spending, etc. until the limit is met. (Rationing)

For Social Security - let's recognize it is a generational transfer, and there is no benefit beyond transferring a certain amount. 7% of GDP is the most recent value. Let's just cap it. Then make trade-offs within that cap - trade off retirement age, means-testing, benefit levels. (rationing)

Once the cap is set, then the fair thing to do is to make negotiated tradeoffs in service vs need.

For public pensions - same deal: cap the expense at a percentage of annual tax revenues. Then negotiate between prior employees (pensioners) and new employees. The current unfairness is that current retirees get all the take with established long-term contracts; while new employees get jacked. The taxpayers is not here to bail anyone out.

That is one reason why defined benefits are most useful: it pushes ALL the decisions and information into today's dollars. By avoiding long-term, unknown, undefined commitments, you can have a fair negotiation. Once everything has been moved to today's dollars, and capped at a limit that is sustainable, then let the negotiations begin fairly.


Posted by CapAndTrade, a resident of Community Center
on Jul 16, 2012 at 3:58 pm

ugh - typing too fast. One correction:

"that is why defined CONTRIBUTION is most useful: it pushes all the decisions and information into today's dollars."




(not defined benefits. Sorry)


Posted by curmudgeon, a resident of Downtown North
on Jul 16, 2012 at 5:33 pm

"convert all existing and new employees to a defined contribution pension where there is no unfunded liability"

Please give us some background so we can judge your cred, Mr. Carpenter. What type of pension do you have, how was it funded, who managed the investment details (not the overall allocations, but the day-to-day details), and how has it fared in this economy?


Posted by George, a resident of Downtown North
on Jul 16, 2012 at 10:15 pm

@ Peter Carpenter who wrote, "There is the Warren Buffett quote that when the tide goes out, you find out who has been swimming naked."

Not a pretty picture if you think this is the Palo Alto equivalent of Harry Reid's "17 angry old white men".


Posted by stephen levy, a resident of University South
on Jul 17, 2012 at 11:08 am

stephen levy is a registered user.

There are five main causes of the fiscal challenges facing local and state governments across the country caused by rising benefit costs:

1) Agreements were made about benefit levels and the cost sharing responsiblities of employees that now look unsustainable and out of step with changes in private company benefits

2) Health care costs have continued to rise far above the rate of growth in the economy.

3) Investment returns on state and local pension contributions have declined below levels assumed by pension fund managers.

4) The number of aging and retiring workers is growing as the large baby boom generation is aging.

5) There were years in the early 2000s in which cities and the state did not make pension contributions.

I think it is interesting that the same situation is true for the promised benefits for Social Security and Medicare. As the baby boomers age and more and more people become eligilbe for Social Security and Medicare, the promised benefits are not matched by existing revenue streams.

Social Security and Medicare beneficiaries (current and future) did not cause the rise in the older population, did not cause the rise in health care costs, and did not cause the slow economy that reduced revenue growth. Just as public unions did not cause these parts of the retirement benefits challenge.

Probably we are ALL participants in not enacting solutions sooner--either for local and state governments or for Social Security and Medicare.

While there are differences in the detaisl most state and local governments and most people who talk about reforming Medicare and Social Secuirty agree that agreements for new people coming into these programs should change to reduce future costs.

But what about existing participants either who are now eligible or will become so soon and who have made plans around receiving current benefits.

Posters are quick to change plans for current public union employees regardless of earlier promises and contracts. Do you also favor changing Medicare and Social Security arrangements for people who are now or will be shortly eligible? If so, how would you do that and why is it fair?

One poster above did notice the similarity between public employee benefits and Social Security and Medicare promises. While I don't agree with his solution it is directly responsive to the common challenge of promised benefits not sustainable under current financing procedures.

Are there other posters not so consumed with hatred for city employees, managers and the council who can suggest arrangements that they would apply to themselves as current or future Medicare and Social Security beneficiaries and public employees.


Posted by Peter Carpenter, a resident of Atherton
on Jul 17, 2012 at 11:23 am

Peter Carpenter is a registered user.

Stephen asks " Do you also favor changing Medicare and Social Security arrangements for people who are now or will be shortly eligible? If so, how would you do that and why is it fair?"

Thanks for getting us back on topic.

YES I favor changes in Social Security that include increasing the income limit on withholding and changing to later retirement dates.

Yes I favor changes in Medicare which increase pre-enrollment contribution rates and some adjustment of co-pay for individuals who are still receiving higher levels of current income.


Posted by Slevy@ccsce.com, a resident of University South
on Jul 17, 2012 at 12:06 pm

Thanks Peter for staying on point and putting some of your skin in the game for solutions.

These are thoughtful proposals as is considering defined contribution plans for new public employees as part of solving retirement fisca challenges.

Steve


Posted by musical, a resident of Palo Verde
on Jul 17, 2012 at 4:28 pm

I question the ethics of Social Security withholding. The average person is led to believe that their retirement benefit will be proportional somehow to their lifetime contribution. Turns out to be something like replacing 90% of your average annual wage up to $9000, then maybe 32% of your next $45,000, and only 15% of amounts above that up to the income limit. Few people are aware of how diminishing their return is. I would suggest that the very progressive part of this tax be subsumed into the federal income tax where it belongs. FICA withholding should phase out, to say maybe just 2% of wages exceeding $54,000. The shift could be revenue neutral and we'd see our 28% bracket jump to 40% (to include the so-called employer's half of the 12.4%), more accurately reflecting that our tax money is going into the big pot rather than our own account.

I'm not in my area of expertise (if any) here, but I'm compelled to challenge raising the income limit on Social Security withholding. It's an underhanded way to extract another 6.2% from high wage earners while accusing them that their federal tax bracket remains unchanged at an historically low 28% (or 33-35 for those way up there). If higher income taxes are truly deemed necessary, then let's raise the income tax rates where everyone will see it, not hide them and feed the flames of envy. (An opposing view is expected from people with substantial interest or dividend income.)


Posted by CapAndTrade, a resident of Community Center
on Jul 17, 2012 at 10:50 pm

Stephen - I appreciate your blog, but why the assumption that taxpayers have to put MORE skin in the game? Some of us are being skinned alive already.

We are taxed for services; not for the purpose of resolving bad faith corrupt negotiations; not for guaranteeing health care costs; not for aging populations! These are all risk items that every private sector employee carries.

Why the assumption that somehow public workers can foist these risks off onto taxpayers?

Same goes for Medicare and social security. We ALREADY provide the benefit of these programs. Our skin is 100% of all the skin in those games.

Cap the costs, lower the benefits to live within the cap. Update annually for people already retired.

Public emoyee unions: I would do the exact same if law allowed.

What we can do is tax state pensions over $75k at a rate of 70% . That is still well above median income and will return excess funds back to the state. Such a scheme is legal and fair - it returns at least a small fraction of the corrupt bargain that unions gamed from politicians.


Posted by Perspective, a resident of Greater Miranda
on Jul 18, 2012 at 5:59 am

Gotta say. I spent a lot of time writing 2 on-topic posts re: Medicare and SS reform, and how the principles relate to our pension/promises reform. They were there yesterday, and gone today. What happened? On topic, respectful, part of answering the question asked about supporting Medicare/SS reform..why removed? Long, yes, maybe too long and detailed?..but these are not topics for soundbites.


Posted by stephen levy, a resident of University South
on Jul 18, 2012 at 8:19 am

stephen levy is a registered user.

Perspective, here is the post you wrote for the other pension blog. Thanks for responding to the topic with your ideas.

Steve


Yes I favor both SS and Medicare reform to SAVE the programs for the next generation coming up.

1) No reason to give full benefits at 65. Anyone 55-60, works till 66 for benefits, with an incentive ( like now) for every year of delay until 70.

2) 50-54 works till 67, with incentives to 71.

3) 45-49 works till 68, with incentives to 72

4) 40-49 works till 69, with incentives to 73

5) under 39 works till 70, with incentives to 74.

Change the SS contribution system..let us buy into PRIVATE investments that we KEEP and use as we choose, that we can then will to our children or charities or whoever we wish. Those who don't want to do this, fine..rely on smaller govt payouts. Those who do know that 40 years in a private investment for retirement gives a much higher return on the money than our govt. And it is OURS. Don't trust folks to do it? Have an automatic SS withdrawal like now, but give an opt-out into a private investment account for some percentage of the money.

Medicare: Let us buy insurance we want to buy, and KEEP IT our whole lives, that covers what we WANT to cover depending on what we are willing to insure against. It is insane that we, the taxpayers, spend 50% of the Medicare dollars on the last 6 months of life. Why? There is no stop to the medical intervention that happens when people are clearly failing and dying..monthly hospitalizations for heart failure or pneumonia are common. How to control it? Not the government telling me I am "too old" or "too sick" to get treatment..ME deciding what level of insurance I am willing to buy. Give me voucher, if you insist on government paying..let me buy the insurance I want with it. I may choose to not pay for insurance when I am 80 that covers heart transplants, dialysis, total hip replacements and major cancer surgeries. My choice.

If that is too scary for government-dependent folks, there is no solution other than to limit services based on age and/or illness.There needs to be a limit on at what level of function a total hip or heart surgery is useful. The problem is that if we have govt deciding this "limit", there will be people who do NOT get these surgeries who are actually quite capable of living 10 more useful years. That worries me. There needs to be a limit on how long one can be paid for in nursing homes. We now have a system where the nursing homes have no incentive to get the patients strong enough to return home..and keep them the "100 days" that they are "entitled to" by Medicare A, especially if they are covered for the other 20% by MediCal or private sub-insurance. Everybody is happy with it..the patient for staying, the nursing home for the money. No incentive to work and get OUT to home. Time for a PPO system like was instituted for hospitals in the 90s.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 10:55 am

In today's Daily Post there is a headline stating that each and every Palo Alto citizen owes more than $9k to service exisiting benefit obligations. This grim estimate, by a public benefits expert, assumes a better than 7% internal return by CalPers. This past fiscal year, CalPers returned only about 1%.

Unless I am missing something important, we are facing a crisis!


Posted by stephen levy, a resident of University South
on Aug 10, 2012 at 11:07 am

stephen levy is a registered user.

The Post article is a good reminder of a fiscal challenge not yet solved.

I think everyone agrees that the current level of benefits (health and pensions) reflect promises that are hard to keep. The Daily Post cites Joe Nation as referencing three causes---high levels of benefits, years in which cities did not contribute and overly optimistic assumptions on rates of return--at least in light of the recent recession.

I think the debate is over how to move toward sustainability for the future and how the costs should be shared among beneficiaries and the public.

I have argued in this thread that both parties contributed to the unfunded liabilities and, like with Medicare and Social Security, beneficiaries will need to contribute more and new enrollees should expect lower benefit levels. I also think the broader public will need to put something in the pot as our share of a problem we all allowed to be created.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 11:55 am

Stephen, if the actual return on CalPers internal return is %3 (possibly optimistic), instead of over %7 (the current absurd prediction by CalPers), how much will every Palo Alto citizen be obligated to pay?


Posted by stephen levy, a resident of University South
on Aug 10, 2012 at 12:07 pm

stephen levy is a registered user.

Jon, there is no clear answer to that. Residents will probably not have to shoulder the full burden as employees are and will be asked to contribute more and benefit levels for new employees will be lower than currently.

So the unfunded liability will begin to shrink (hopefully). And I think a reasonable expectation for rate of return coming out of a recession is in the 5-6% range but probably not 7 1/2%.

But no doubt this is not an easy challenge to solve.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 12:25 pm

Stephen, I have some market-based CD investments (about $200k) spread out through various models through my local bank. The principal is protected (FDIC), since I am risk averse. Of the three current models, my highest rate of return is about %3; my lowest is 0.9%. Since CalPers should be largely risk averse, in order to make sure that its principal is not eroded, how do you suggest that 5-6% is a reasonable rate of internal return? Isn't CalPers being absurdly unrealistic about its estimates? Aren't you, a professional economist focused on California issues, also being optimistic?

I just don't see it, Stepehn. Where is safe growth, above %3 (for CalPers) going to come from? California is sinking, not rising. If you accept, for the sake of argument, the %3 internal rate for CalPers, where does that put us? Remember, last year it was only 1%.


Posted by stephen levy, a resident of University South
on Aug 10, 2012 at 12:43 pm

stephen levy is a registered user.

Public pension funds manage for total return over the long run. They have a mix of fixed income securities, stocks and physical assets. They are not all or primarily invested in short term fixed income securities.

Yes, fixed income yields are very low now but that is not expected to last over a 10-30 year horizon. If they do, I will indeed be optimistic. Yields will remain low for a while but the big jump in payouts is also not expected in the near term.

Also if economic growth does not return to normal levels my rate of return assumption will be optimistic.

But all folks who do the forecasting out 10-20 years expect a return to full employment and normal economic growth.

Still it is reasonable to plan for lower returns than 7 1/2% per year.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 1:27 pm

Stephen, the assumptions of the past, when our economy was in high gear(e.g dot.com, real estate bubble), should not be relied upon. It is much safer to assume a 'new normal', then deal with the fundmentals on the ground. The figure of 3%, or less, seems to me to be about right.

BTW, my investments are not fixed income based, they are market based, with principle protection. I invest in commodities, BRIC, etc. Yet, my top return is 3%, which is why I suggest 3% as a target model for discussion, and this may be optimistic for CalPers.

So, Stephen, for the sake of argument, and assuming a 3% CalPers internal rate of return, how much do we Palo Alto citizens owe in obligations? Joe Nation says about $9k per citizen, based on much higher rates of return. At 3%, how much do we owe? A simple, back-of-the-envelope calculation suggests about $20k. Do you agree? Or is it even worse?


Posted by stephen levy, a resident of University South
on Aug 10, 2012 at 2:04 pm

stephen levy is a registered user.

Jon, I am going to stop now since I have given you my answers and you seem intent on arguing with me.

If you want to do hypothetical math exercises, do them yourself.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 2:15 pm

Stephen, when the going gets tough, the tough get going. Why have you stepped out of a very rational discussion?. I simply asked you about a 3% internal return for CalPers, given that last year it was 1%.

Simply taking your marbles out of the game will not change the game. You are a professional economist, yet you refuse to consider realist potential models. 3% is a realistic potential number for CalPers, maybe even optimistic.

I think you owes us better than that, Stephen.


Posted by Ex-employee, a resident of another community
on Aug 10, 2012 at 4:35 pm

If I may be so bold. I believe Steve can't waste his time debating with someone who is totally clueless about Calpers.

Jon, here's a good place to start: Web Link it's a link to a Calpers press release. It's obvious you have been drinking the media and Jim Keene Kool Aid trying to blame pensions for the economic downfall.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 5:19 pm

"The 124 billion dollars of income in the nine-year period 1999-2007 has been reduced in half by the combined losses of 67 billion in 2008 and 2009. This totals to 57 billion dollars of investment income during this 11-year period, or about 5.1 billion a year on an investment portfolio of 261 billion in October 2007 and down to 186 billion in October 2008. This is a 2.5% return on investment over the 11-year period." (Wikipedia)

2.5% is less than 3%. I want to know what Palo Alto citizens will owe, if the CalPers internal return is 3%. I am not asking for fairy dust, which is what helped to get us into this mess.


Posted by Jon, a resident of Midtown
on Aug 10, 2012 at 9:03 pm

In case Stephen or "Ex-employee" do not understand, a 7% internal return for Calpers will double the investment principle in about (10)years (with no subtractions for beneficiaries); however, if the return is 3%, then it is about 24 years. These are huge differences, in terms of local budgeting decisions. CalPers requires contributions from its participants, like Palo Alto.

A reasonable analysis would suggest that Palo Alto is in a HUGE hole, and we will not be able to dig ourselves out without major budget cuts and large tax increases. Stephen Levy does not like to talk about it, seriously, but Joe Nation has raised the issue, in a light-weight way. Both of them have rose-colored glasses on, though.

Think about 3% CalPers growth, which is larger than in the past decade or so, then calculate how much of our City general fund will be spent on supporting CalPers. It's ugly, but we need to face the ugly, going forward. It's not going away.


Posted by WOW, a resident of Another Palo Alto neighborhood
on Aug 12, 2012 at 12:24 am

Stephen Levy, while I appreciate your contribution to the discussion of both a corrupt CalPERS and mis-information , I can't more emphatically disagree with you point (5):

"5) There were years in the early 2000s in which cities and the state did not make pension contributions."

Every city in this state has made every pension contributions CalPERS has required and they are the organization that sets the rates, and many have paid significantly more by trying to buy down their debt (CalPERS charges 7.75% interest on unfunded liabilities) or selling Pension Obligations Bonds, a gamble, in an attempt to reduce their debt service. At NO TIME have cities paid anything less than what CalPERS charges.

Your knowledge is either suspect or your opinion is self serving, and I'm guessing your comments are self serving.

What really happened is CalPERS was 132% funded in 1999-2000 (32% more funds than what was required to meet current/future pension obligations). BUT...The public employee unions viewed that money as their own and wanted a distribution - even though the excess dollars really represented a taxpayer reserve (the taxpayers assume ALL the risk). Using their financial muscle, CalPERS (and the unions control CalPERS because they control the CalPERS Board due to their majority voting power) pushed legislation -SB 400 & AB 616 that increased pension benefits by 50%, and in many cases retroactively, which essentially consumed the entire taxpayer reserve.

Now that the markets have struggled, and the reserves have been consumed by the ridiculous level of increased benefits, and funding levels are down to sub-sixty percent levels, we get to here from people like you that claim it is all someone else's fault.

BS!

And what taxes are you asking me to support? BTW, The PD contract is a JOKE - who negotiated that mess?


Posted by Jon, a resident of Midtown
on Aug 17, 2012 at 10:00 pm

Moody's is now seriously considering a general downgrade of California municipal bonds. It just keeps getting worse for our cities, including Palo Alto.


Web Link


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