With Retirement Costs Consuming One-Fifth of Discretionary Spending, California Must Reduce Un-Accrued Pension Benefits

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Advancing A Free Society Pensions and other retirement costs will consume more than 23% of discretionary state spending in fiscal year 2012-13, according to the budget recently passed by the California State Legislature and signed by Governor Jerry Brown – nearly three times the share taken up by retirement costs just ten years […]

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Rein In Benefits Now and Tax Californians Later

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Bloomberg Governor Jerry Brown’s proposed $50 billion tax-increase initiative won’t solve California’s budget problems. Neither will anything else on the state’s ballot in November, nor will more cuts to child care, courts, parks, college and welfare programs repeatedly slashed by the state Legislature. Solving California’s budget woes requires addressing five root causes: unfunded health-care […]

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California’s Bad Bet Makes JPMorgan’s Look Minor

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Bloomberg Congress ordered JPMorgan Chase & Co. (JPM)’s chief executive officer, Jamie Dimon, to testify about $2 billion that his bank lost on an investment bet. Worrisome as that gamble was — after all, the banking crisis was largely due to bad bets by banks — it is unfortunate that Congress has never […]

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When You Hate Your Taxes but Can’t Name Your Legislator

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Bloomberg Who do you think has more influence over the education, safety, health, welfare, transportation, justice, recreation and economic well-being of 40 million Californians? U.S. Senator Dianne Feinstein or California State Senator Loni Hancock? That’s easy: Loni Hancock. How can it be that someone so powerful is so unknown? The answer is that few […]

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New California Taxes Pay for Pensions, Not Schools

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Bloomberg Most Californians would be surprised to learn that 100 percent of education’s share of the tax increase proposed by Governor Jerry Brown will go to pensions instead of classrooms. But that would be no surprise to longtime observers of the California State Teachers’ Retirement System, which administers teacher pensions. Here’s why: After retirement, […]

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California must Address Leaks in Budget before Raising Taxes

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Crossposted on Sacramento Bee In an effort topreserve existing services, Gov. Jerry Brown has proposed a temporary tax increase to generate new revenue of $9 billion per year for seven years. The Legislative Analyst’s Office says the proposed tax increase will yield less. Either way, little of the new money will help existing services for […]

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How About a Race to Reform State Pensions?

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Originally Published in the Washington Post President Obama has proposed that the federal government provide $35 billion to assist state budgets. It’s a fine idea — provided there’s a carrot. Many states have been hit hard by fast-rising retirement costs for public-sector employees, forcing those states to divert money from services such as education and […]

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Hiding Their Books

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

In their magnificent study about eight centuries of financial folly
("This Time Is Different"), economists Ken Rogoff and Carmen Reinhart
lampoon the low level of accuracy with which governments maintain their
books: ""Think of the implicit guarantees given to the massive mortgage
lenders that ultimately added trillions to the effective size of
national debt, the trillions in dollars in off-balance sheet
transactions engaged in by the Federal Reserve . . . not to mention
unfunded pension and medical liabilities. Lack of transparency . . . is
almost comical."

It’s also expensive. In a recent study, Alicia Munnell, a member of
President Clinton’s Council of Economic Advisors and now director of
the Center for Retirement Research at Boston College cited one example:

"In 1999, the California Public Employees’
Retirement System (CalPERS) reported that assets equaled 128 percent of
liabilities, [after which] the California legislature enhanced the
benefits of both current and future employees. If CalPERS liabilities
had been valued at the riskless rate, the plan would have been only 88
percent funded. An accurate reporting of benefits to liabilities would
avoid this type of expansion . . .."

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CalSTRS’s Extra Hurdle

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

In May 2008, Federal Reserve Vice Chairman Donald Kohn
delivered important remarks about an obscure but
consequential issue:

"Public pension benefits are essentially bulletproof promises
to pay. The only appropriate way to
calculate the present value of a very-low-risk liability is to use a
very-low-risk discount rate.  However,
most public pension funds calculate the present value of their liabilities
using the projected rate of return on the portfolio of assets as the discount
rate. This practice makes little sense from an economic perspective [and] pushes
the burden of financing today’s pension benefits onto future taxpayers, who
will be called upon to fund the true cost of existing pension promises."

To the vast
majority of Americans those remarks were hardly understandable, much less relevant.  But not to some public pension fund
officials.  Later, the CEO of the California
State Teachers Retirement System (CalSTRS) labeled as deserving of a "letter
grade of F" a study from Stanford University that adopted the Kohn methodology
for measuring California’s pension liabilities.  

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Lights, Camera, Inaction

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

Some politicians must think Californians are fools. Either that or they
must believe the Titanic wouldn’t have sunk had just the tip of the
iceberg been removed while the rest of it stayed hidden below the
surface.

The politicians I’m referring to are those engaged in vigorous
grandstanding about the city of Bell’s compensation abuses.

So far
we’ve heard calls to publish every government employee salary and to
make Bell give its citizens refunds. But we haven’t heard anything that
would actually make a difference in solving our state’s financial woes.

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