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The Agenda - Steve Paikin

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The Canadian election is nearing completion and one of the big issues has been pensions. Steve Paikin
covered the issue on his show, The Agenda. I have posted the video below. The show is an excellent discussion but completely neglected the 800 pound gorilla in the room... public sector pensions.

Pensions have been discussed in the current election but the big issues have been neglected. As Catherine Swift recently Tweeted:

Gonna be one interesting election. Unfortunately the big issues continue to be ignored - healthcare, public sector pensions unsustainable.

After the election public sector pensions will be back on the agenda. They are unsustainable and as taxpayer awareness grows people are becoming more resentful and envious. 

Public Pensions, Once Off Limits
The New York Times notes that public sector pensions are on the agenda in a big way. Please see the article below it is a good read. Public Pensions Face Budget Cuts.

When an arbitrator ruled this month that Detroit could reduce the pensions being earned by its police sergeants and lieutenants, it put the struggling city at the forefront of a growing national debate over whether the pensions of current public workers can or should be reduced.

“These things do tend to be herd-oriented,” said Sylvester J. Schieber, an economist and consultant who studies pensions.

The mayors of some hard-hit cities have said that the high costs of pensions have forced them to lay off workers: Oakland, Calif., laid off one-tenth of its police force last year after failing to win concessions on pension costs.

Elsewhere there is pension envy: some private sector workers, who have learned the hard way that their companies can freeze or reduce their pensions, resent that the pensions of public workers enjoy stronger legal protections. But government workers, many of whom were recruited with the promise of good benefits and pensions, say that it would be unfair — and in many cases, very likely illegal — to change the rules in the middle of the game.

Avoid Change At All Costs
Despite the fact that Ontario will pump a record amount into it's public sector pensions, unions will jump up and down denying there is a problem. This year the top 3 Ontario pension plans will attract $4 Billion in taxpayer payments and employees will contribute the same. In addition there are several more pensions requiring taxpayer money such as universities, colleges and the Ontario Hydro and OPG giants, all sucking up huge taxpayer dollars for pensions. Many argue the money that the union members have to put in their contribution came from taxpayers too.

The union tactic will be to deny that changes to pensions can be made. This is wrong but it gives them time to postpone pension changes as they try and take the issue into the courts. Changes cannot be made to past pension accruals but pensions can be changed going forward.

A good example of pension changes was brought to my attention in a article from Kansas. Little relief for Kansas pension woes seen for 10 years Kansas has two proposals in front of it, one from the State Senate and one from the State House. Comparing the plans is a good exercise in investigating and understanding pension plan change options. 

A full detailed report on the plan change options is covered in a Fiscal Impact Report.
The report details the changes investigated by the Senate which actually would worsen the state's pension situation and the House changes proposed.

Note that the Kansas pension has $11 Billion in assets for 277,000 Kansas teachers, state and local government workers, and police officers, fire fighters and judges. The plan has a had an unfunded actuarial liability of $7.7 billion and a funded ratio of 64%.

Contrast this with Ontario Teachers plan which has $107.5 Billion for 295,000 active and retired teachers in Ontario. It has a $17 Billion pension shortfall. You can see how badly Ontario taxpayers have been taken to the cleaners by our public sector pensions. Yet the unions jump up and down denying there is a problem and politicians are deathly afraid of addressing the issue. Until this changes you are going to be paying pensions for your public sector neighbor forever! 

In Kansas the average teachers salary is at $42,000and in Ontario the retiring teachers salary is at $95,000. In Kansas the teacher will get 65% of salary or $ 27,195 on in Ontario the retiring teacher will get $66,500. Each $10,000 of pension costs about $200,000 so the Kansas pension costs about $540,000 and in Ontario $1.3 Million.

Kansas Proposals

Senate Proposal:

• Investment return in future years is assumed to be 8% on a market value basis, unless
  otherwise indicated.
• Tier I Members - Employee contributions for Tier 1 members increase annually by 1.0% until 2015, the
  contribution rate for Tier 1 would be 6.0%. Beginning January 1, 2014, raises the benefits formula multiplier from 1.75% to 1.85% for all future years of service credited to Tier 1 members.
• Tier 2 Members - Tier 2 members who are first hired before July 1, 2013, would be provided a 90-day period of time established by KPERS to choose between two options:
• Option 1: Continue to pay a 6.0% employee contribution rate, but forego the cost-of-living
  adjustment (COLA) currently associated with Tier 2 and retain the existing 1.75%
  multiplier.
• Option 2: Increase employee contributions by 2% with an employee contribution rate of 8% by CY 2015. Retain the COLA and receive higher 1.85% multiplier for future service, effective January 1, 2014.

Note: Ontario pensions generally accrue at the rate of 2% per year. Some have faster accruals. So for 35 years of service in Ontario an employee gets 70% (2% per year times 35 years) 

House Proposal 

• Reduced Benefit Formula Multiplier. For both Tier 1 and Tier 2 active members, reduces the
  benefits formula multiplier from 1.75% to 1.40% for all years of service earned on and after July 1, 2012.
• Sale of State Surplus Real Estate Groups.
• Defined Contribution (DC) Plan for Future Members. On and after July 1, 2013
• Employee Contributions. Active members would be required to contribute 6.0% of their
  compensation to their individual mandatory contribution accounts. The contributions would
  be pre-tax for federal income tax purposes. All employee contributions vest immediately.
• Employer DC Contributions. Employers would contribute 3.0% of each active member’s
  compensation to an employer contribution account for that member. Employer contributions
  would vest after five years of service.

In the proposed changes we can see huge differences. Even though the House plan is much more drastic, the article states that "neither will restore full financial health to the pension funds for at least another decade,"

Big challenges Ahead

As you read through this article you can get a taste of the challenges that need to be made in Canada as well. Unfortunately it is a very complicated issue and most politicians and union member have no understanding of the issue.

If you are able to understand the issue from the Kansas examples, it is imperative that you make your voice heard. Politicians don't want to touch the issue, unions have no remorse about plundering your pocketbook and most of us can't understand the details.

The next move is for governments is to study the issue so they can understand it. It is a national travesty that in Canada over the past few years we have had several Expert Commissions on Pensions, two federal government studies, the Quebec Pension Plan report and all provinces have completed major reviews of retirement savings. Yet not one word was written on the biggest crisis of all, public sector pensions. 

The next move? In the words of one politician about the Kansas situation:

Kansas state Sen. Jeff King, an Independence Republican serving on the conference committee said that because of projections like that one, he favored going along with another recommendation in the Senate package, which calls for the establishment of a six-month blue ribbon commission formed specifically to weigh such alternatives.

University Pensions Driving Tuitions Higher

It appears that Dalhousie is suffering from the same financial problems as many universities across the country. The pension costs for an aging workforce are killing them. Dalhousie spending big bucks on university brass

We are now seeing the conflict plaguing all government organizations. The gold-plated defined benefit pensions that the staff in the public sector enjoy have melted down and are no long sustainable without large injections of cash. It creates a choice between more services for students or more gold-plated benefits for management and staff.

The large increases in tuition are expected to generate an additional $14.6 million in revenue. It happens to coincide with a $11 Million injection (Note C)  into the pension staff planned last year. This is on top a regular annual pension contributions of $19 Million. It appears that the pension fund is short in excess of $100 Million and the administration is worried about being able to retire in comfort.

In 2002 the university contributed $4.7 Million into the pension fund and it has increased every year since then and last year the regular pension payment was $19 Million. Despite more than $135 Million of taxpayers money going into the fund since 2002 it is still woefully short. The employees contributed $91 Million over that same period.

The Economist this week featured a report on pensions of the kind offered at Dalhousie. They noted "A pension promise can be easy to make but expensive to keep. The employers who promised higher pensions in the past knew they would not be in their posts when the bill became due" Well the bill is due and at most universities the numbers of retirees is reaching record numbers. These easy promises are becoming expensive.

The pensions plans are not sustainable and it is unfair to ask students to pay more or suffer less services to pay for these gold-plated plans.

Pension contributions on the plan are woefully short and they will suffer shortfalls for many years to come. That is why the request to the government for solvency relief is so important. Solvency relief is like a mortgage that is amortized over 30 years instead of 10 or skipping a payment on your credit card.

Why not have employees pay their fair share?

The taxpayer (university) funds 16% of employee salaries into the pension fund and the employees only have to come up with 6.15%. The CD Howe has estimated that the true cost of these pensions are 34% of annual salary. The shortfalls are built in at these contribution rates. Even worse, as salary costs skyrocket so do pensions. Pension funding is like trying to chase a rocket, unless pensions are capped it will never happen.

The pensions are based on 70% of the last 3 years of salary of the retiring employees. The faculty at the university is earning an average wage over $100,000 per year,  this means a pension in excess of $70,000 per year including CPP. Many of these employees are eligible to retire at age 55 and will earn this pension for the rest of their lives. If they live to age 80 this will be over $2.3 million in pension income when indexed for inflation. To fund a pension like this takes pool in excess of $1 Million.

Then there are the Super Sized pensions, those of the senior administration staff. The article mentions that one income is at $360,000. This income level will generate a pension in excess of $250,000 for life and will require a pool of  $4 Million.

Its time to change these pensions. Firstly, convert them into defined contribution, the kind most taxpayers have. Limit them to a reasonable amount say $80,000 per year, twice what the average wage earner makes. Make the employees pay their fair share and not rely on the generosity of taxpayers who will never see a pension close to this. Why allow workers to retire at age 55 when government around the world facing the same crisis are raising the age of retirement?

Our students deserve better than this, its time for a change. 

Bill Tufts 

Fair Pensions For All 

Rising gas prices sandbag economy

 

Rising gasoline prices are having a dramatic effect on the Canadian economy.  A $1 rise in the price of gasoline will suck $32 Million a day out of goods and services that Canadians would otherwise be spending money on. This adds up to over $11 Billion  a year. 

There is a multiplier effect on this money as Canadians decide to use their car less and stay home When they stay home they are not spending money in restaurants, amusement parks, cinemas or other places we go to for entertainment. Alternatively for some markets there may be a rise in spending as Canadians choose less costly alternatives for spending their money. For example, MacDonalds over a full service restaurant. 

My contention is that overall the cost of gasoline will be a big drag on the economy as it sucks money from other areas of spending. If that money was spent in a restaurant for example, the restaurant will be using it to pay salaries and food and beverages. This would all contribute to the growth of our GDP. True the money spent on gasoline will be considered part of our GDP, but how much of it will truly go back into the economy. will gas stations be hiring more staff or building more stations? Probably not. 

Some interesting information for this analysis come from Statscan - Motor vehicle fuel sales and Gas Buddy. Canadian spend about $4 Billion a month eating and drinking outside the home Food services and drinking places

Bill Tufts
Fair Pensions For All

The media is starting to get it.

One of the key purposes of this blog is to bring attention to the growing pension problem and to try educate those who make policy (politicians) or report on pensions (media). It is a complicated issue that has concepts and a language that is difficult for many to understand. In interviews with other pension experts one of the interesting aspects of pensions is that most employees who have defined benefit pension plans have no idea of the value of the plans.

Clarity is required to have a well educated public discussion on pensions.

To try an bring about clarity the CNPA association for newspapers in California focused on the issue at a recent conference. The coverage of the conference was reported on in Publishers preview pension problems The article pointed out: 

• Public employee unions want to deny the problem but the truth is dawning on them and their members.
• Many politicians underestimate the problem either because they don't understand it or don't want to tell the voters they have to cut services and raise taxes to correct a problem they didn't see coming when they gave away the store.
• Some politicans do get it. They are bargaining hard with unions and pushing reforms. They are having luck reducing the pensions of employees who will be hired in the future.

At the pension portion of the conference one presenter was Dan Borenstein. Dan is a veteran in the pension battles reporting for the Contra Costa Times. He has brought to light many pension problems in the state of California.

There continues to be a litany of problems for public sector pensions. Not only in the US but here in Canada as well. In Canada we need reporters who will become pension crusaders. Until that happens the issue will remain under the sight lines of most Canadians and politicians who hate the issue will continue to sweep it under the carpet until there is a rising crescendo of taxpayer voices that demand to be heard. In the meantime the problem will float merrily along with more and more lip service being paid to it, without any real action being taken.

In the meantime we hope that more article like this one will be seen in the Canadian media. There was no recession for gov't pensions. The article points out that: 

Only government-employee union officials at this point are denying the reality of California's pension crisis, as public pension debts estimated as high as a half-trillion dollars are crushing state and local governments and threatening to increase the burden on already hard-pressed California taxpayers. Meanwhile, the disparity keeps growing between government employees, who retire with guaranteed cost-of-living-adjusted benefits that too often top $100,000 a year, and private-sector employees who must rely on 401(k)-style plans supplemented by the increasingly shaky Social Security system.

As you are aware the issue is as big a problem in Canada. A 401K is the US version of our RRSP. Lets hope the media gets on board with a thorough discussion of pensions and begin to address the issue more. Oh well, maybe when the election is done. We remember Kim Campbell stated, an election campaign was no time to discuss serious issues!

BIll Tufts
Fair Pensions For All

The Roadmap for the Future

As our book nears completion and the last details are put in place and polished up there is some apprehension about whether we have covered all the necessary material bases and whether the concepts that we have developed and the ones we have used are appropriate. It is nice to be vindicated with news that covers some of our ideas and adds strength to our concepts.

A recent article in the Financial Post garnered much attention over the past week and was mentioned in the Daily Reckoning newsletter in the article from Bill Bonner. I recommend you sign up for the free newsletter from the Daily Reckoning. It is focused on investing but also provide great political and social commentary and how it relates to our investments. 

Bill Bonner noted an article from Christopher Caldwell in the Financial Times called, A Bankrupt Nation Wakes Up. In the article Caldwell quotes an up and coming new Republican from Wisconsin who is ringing the alarm bells about the sustainability of  social security, pension and healthcare costs:

Mr Ryan views debt as an “existential threat”, a great drama whose cause is self-indulgence and whose end is enslavement

“We face two dangers: long-term economic decline as the number of makers diminishes and the number of takers grows and, worse, gradual moral-political decline as dependency and passivity weaken the nation’s character.”

In retrospect, the story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity but luxury. As Mr Ryan sees, they face the serious and open question of whether they are morally capable, over the long term, of living within their means.

 Please check out Ryan's program and analysis called Road Map for America it is an excellent work that outlines the dangers of the  coming demographic timebomb. You will be hearing lots about it in the months to come!

Bill Tufts 

Fair Pensions For All

Total government spending on Wages and Salaries

In dong some research for my upcoming book I found some interesting statistics about the total cost of government employees.

In 2010 the Province of Ontario spent $118 Billion. Of this amount $71.2 Billion went into the wages and salaries packet of provincial employees. This means that 60% of the total spending in the province of Ontariowas for wages and salaries. Does this include the benefits and pensions as well? I suspect not.

The province spent another $ 9.5 Billion or 8% of its money on debt service. This means that the operating budget on discretionary items in the province was $110 Billion. This moves the wages and salaries up to 65% of spending and then we can add in another $8 Billion in pensions this year. So it appears the government spending amount for the compensation package of it's employees is in excess of 70% of total spending.

I guess we know where Drummond has to look.

You can find this information here. Statscan Tables by Subject

Laurentian Medical College makes cut backs on staff to pay for pension

There was an article in the Sudbury Star that shows the increasing danger of gold-plated pensions.

24 jobs cut at Northern Ontario School of Medicine. 

NOSM is operated by Laurentian University in Sudbury. It is unacceptable for the people of Ontario at a time when there is a strain on our health system and a shortage of qualified health care employees to be cutting back staff to pay for gold-plated pensions.

This came out on the same day that the province released its Sunshine List and shows over 240 staff at Laurentian earning over $100,00 per year. This is up from just 180 in 2008. Each one of these positions comes with a pension worth 70% of this income.

One manager at the University earns $304,000 which does not take into account the gold-plated pension. A manager will be entitled to a pension valued at $212,000 per year or 70% of his final salary when fully qualified. This type of pension has a cash value of about $3.4 Million.

Last year the college contributed $ $11.7 Million into their staff pension funds. This amount is up from $5.9 million in 2008, an increase of $5.8 million or 98%. If used to hire additional administration staff at $50,000 per year, this amount would allow for an additional 116 staff members.

Management decides to allocate this money in pensions and benefits rather than hire more staff. This was not money going into enhanced student services but to bolster the personal pension accounts of managers.

We are now seeing the conflict plaguing all government organizations.   It is the choice between more services for students or more gold-plated benefits for management and staff. Being forced to cut back and create savings where do you think the money will come from, compensation packages or services.

It appears that the students and taxpayers of Ontario will lose on this one.

Bill Tufts
Fair Pensions For All

Is the Air Canada pension plan too rich?

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In 2009 the Air Canada pension plans were short $2.9 billion despite the fact between 2004 and May 2009 the company had pumped $1.7 Billion into the plan. 

Now they are requesting money from Canadian taxpayers. With Ministers, high level officials senior government officials and Members of Parliament. All of whom have gold-plated pensions funded by you. 

What do you think their response was? I you know please send me an update.

See the video here.

The Conversation Continues

Bill Tufts