MOORLACH UPDATE — Pension Tax Begins — December 21, 2016

Budget bills matter. They can be sold as one thing, only to fund another. So much for transparency. This past year’s budget bill, SB 826, was no different and included a motor vehicle registration fee increase of $10 (see MOORLACH UPDATE — 2016-17 Budget Bill — June 15, 2016 june 15, 2016 john moorlach). I voted against the bill.

Was the fee increase needed to fix potholes? Perhaps. Will it actually be used to fill potholes? No. It will fund the California Highway Patrol’s ever growing pension liability. And we can thank SB 400 (1999) for getting California into this fine financial mess. Bloomberg News provides the story below, with excellent graphs. Newsmax Finance picked it up and included an excellent graphic worth passing along.

SB 400 created the now infamous “3% @ 50” retirement formula, retroactive to the date of hire. For a primer, I would recommend that you read the LA Times/CalMatters/Capital Public Radio pension series opener at http://www.latimes.com/projects/la-me-pension-crisis-davis-deal/.

Since the CHP Department was the first agency to implement this 50 percent increase in retirement benefits (from “2% @ 50” to “3% @ 50”), it would only make sense that their plan would be the worst funded.

Let me try an illustration. When you take a fully funded plan (comprised of two 50 percent blocks) and increase the benefits by 50 percent, you now have a two-thirds funded plan.

The taxpayers already paid for blocks 1 and 2. Now they need to pay for block number 3. That’s what a fifty percent retroactive increase will do. And is why the Public Employee Pension Reform Act (PEPRA) no longer allows retroactive increases.

Regretfully, the public employee unions will demand that this formula stay in place because the successful candidates, that they funded, voted for this benefit increase. And, a promise is a promise. Don’t blame the unions, blame those that they funded and placed into elected office.

This nonsense must be addressed. That is why this coming year, I will be continuing the process of recommending the reforms that Governor Brown started a few years back, by introducing a package of bills that will finish the job he started. We’re referring to it as PEPRA II.

However, starting this April, plan to make another $10 gift to Sacramento for the privilege of driving. Thanks for being in the gift giving mood. Thank the majority party, and its major funders, for the privilege of giving more. Merry Christmas.

California Drivers Pay Up for Underfunded Highway Patrol Pension

By Romy Varghese

  • Pension is the lowest funded among those in largest U.S. plan
  • Motorists will pay $10 more in April to meet rising costs

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Training officers watch over cadets as they march in formation at the California Highway Patrol Academy in West Sacramento, California.

Photographer: David Paul Morris/Bloomberg

Californians in April will start paying more to register their cars — not to help maintain roads, but to keep the pension checks rolling for the motorcycle cops who policed them.

The retirement fund for the California Highway Patrol is worse off than any other managed by California Public Employees’ Retirement System, the largest U.S. pension, as payments by the state and employees fail to keep up with benefits locked in during the dot-com bubble. As a result, the state’s contributions jumped 14 percent this year to $415 million and are projected to continue rising. A $10 increase to registration fees will help cover the expense.

“It’s a pension tax — call it what it is,” said state Senator John Moorlach, a Republican who introduced a bill that would implement measures to cut pension costs. “It’s like a tumor that’s growing inside the budget.”

The situation facing the Highway Patrol underscores the consequences to taxpayers whose state and local governments have about $2 trillion less than they need to cover promised retirement benefits. On Tuesday, Calpers staff recommended that the board lower the target investment return by half a percentage point to 7 percent over three years, which would require larger contributions from California and its municipalities.

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Jon Hamm, who in May retired as the chief executive officer of the California Association of Highway Patrolmen, said before the meeting that Calpers should lower that target to below 7 percent “so we can deal with real numbers.”

“We want to do everything in our power to make sure our members get what they’ve been promised, and everything in our power includes what we can do as an entity to fix the problem,” such as possibly higher contributions from officers, said Hamm, who continues to work for the union.

The fund for the patrol, whose officers gained some fame from the late-1970s television series “CHiPs,” had 62 cents for every dollar in obligations as of the year ended June 2015, according to a September report. The state must pay about 50 percent of its costs this year, compared with a rate of 13 percent in 2000.

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Moorlach, the state senator, lays part of the blame on deciding to boost benefits during the Internet stock bubble, wagering that the market’s gains would pay for them. The change allowed officers to retire at the age of 50 with pension checks based on a higher percentage of their salaries. The average pension received by an officer who retired in 2015 was about $77,000, according to Calpers.

Although stocks are again at record highs, the combination of enhanced benefits, longer lifespans and fewer employees paying into the system has left many pensions underfunded. For the past decade, beneficiaries of the highway patrol pension have outnumbered active members, documents show. At the same time, Calpers’s 20-year investment return is lagging its goal, forcing individual plans to make up the difference.

“It creates a financial hole, a very deep financial hole, very quickly,” said Joe Nation, a pension researcher and professor at the Stanford Institute for Economic Policy Research. “Unless you respond very quickly, it’s hard to get out of it.”

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While California meets pension obligations for many workers through its general budget, for the Highway Patrol’s operations it taps the motor vehicle account, funded mostly through revenue generated from cars and licenses. The patrol takes up about 78 cents out of every dollar in registration fees drivers pay.

Governor Jerry Brown requested the increase to the base vehicle registration fee by $10 to $56 to deal with the agency’s rising costs from salaries and pensions, said H.D. Palmer, a spokesman for the finance department. He declined to say what action the administration may take if Calpers reduces the investment return.

“We just had that increase,” Palmer said. “We want to evaluate how that is addressing some of those issues.”

Moorlach thinks it’s inevitable that fees will rise, although the drivers may not understand why. “Everyone will think, we’re fixing roads, but that money is going to be diverted into pension plans,” he said.

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