Mike Kueber's Blog

April 2, 2013

Compton, California – a cautionary tale for San Antonio

Filed under: Issues,People,Politics — Mike Kueber @ 7:04 pm
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Compton, California has been making news as the largest city in America (almost 300,000 people) to receive bankruptcy protection.  According to most reports, the bankruptcy was caused by a combination of extravagant pensions for city employees and declining tax revenues.  On Monday, a California judge held that the city would receive bankruptcy protection, but he deferred deciding whether the city would be allowed to continue paying 100% of its obligations to the state pension fund while forcing all other creditors to accept pennies-on-the-dollar.

From a practical state-wide and nation-wide perspective, this is an important issue because if the city is allowed to cut its payments to the state pension fund, that fund will be put in jeopardy.

From an individual pensioner’s perspective, this issue has reduced importance because most individual pension benefits are guaranteed by state and federal governments.

And finally, from San Antonio’s perspective, Stockton’s predicament is a cautionary tale of what can happen when a city is too generous in providing extravagant pensions. 

How much is extravagant?  Across California, as reported by Bloomberg News last year, cities were providing pensions that paid 90% of public-safety employees’ top salary after working 30 years, so they could retire and take jobs elsewhere while still in their 50s.   

San Antonio wouldn’t be so profligate, would it?  Yes, it would.  According to a city website:

  • The SA Fund‘s defined benefit structure provides benefits based upon the member’s earning history and length of service to the City of San Antonio. Current pension law indicates officers will be paid according to the following schedule:

                        Years of Service                      Percentage of Total Average Salary

                        20                                            45%

                        23                                            60%

                        25                                            70%

                        27                                            80%

                        30                                            86%

  • Keep in mind pension benefits are available regardless of age. A 21 year old can retire at 51 with 30 years of service and receive an 86 percent pension for the rest of his or her life.

How does this affect the City’s finances?  According to Sam Dawson, San Antonio’s 2011 Chamber of Commerce chairman, in a 2012 op-ed piece in the Express-News:

  • At present, police and fire personnel make up approximately 38 percent of our city’s workforce, but consume nearly 62 percent of its general fund. The average annual pension cost per civilian employee is approximately $6,800. The average annual pension cost per uniformed city employee is approximately $18,300. Health care costs and benefits are similarly disproportionate. Additionally, in 2012, the city will pay approximately $25 million toward the civilian pension plan for 6,000 employees and $65 million for 3,800 public safety employees. If these costs are not addressed sooner, rather than later, the end result will be less money to hire future qualified police officers and firefighters, fewer city services and a city that suffers economically. 

My sentiments exactly.

During my interview with the Express-News last week, I strongly expressed my position in favor of transitioning the City from defined-benefits pensions to defined-contribution pensions, which most of the City’s residents feel lucky to have.  As support for that position, I indicated that even the American military is in the process of shifting to a defined-contribution pension. 

When the Express-News asked my District 8 opponent Ron Nirenberg about my position, he lamely responded that the idea was worth exploring, but that it should not be discussed in the campaign because would politicize the subject.  Instead, he would consider quietly exploring the idea with a task force or study after the election.  

Nirenberg’s position reveals a lot about his political philosophy.  He thinks “politics” means something corrupted by special interests and that all disagreements will disappear if elected officials are transparent, accountable, and fair and they do their homework. 

By contrast, I think that conflicts are inevitable, even among elected officials who are acting with utmost honesty and integrity.  Principled differences can’t be resolved by task forces and doing your homework.  Instead, they need to be resolved by the ballot box.  That is what real transparency means.

April 30, 2012

Texas alimony and justice

Filed under: Culture,Law/justice — Mike Kueber @ 8:52 pm
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The state of Texas is famous for not allowing alimony following a divorce.  Instead of alimony, it affords justice to both parties by splitting in half the marital estate (property acquired during the marriage).  This is what is meant in calling Texas a community-property state.  There are nine community-property states in America, and all but one (Wisconsin) are on the southwestern rim of this country stretching from Louisiana to Washington.

In 1995, however, Texas decided that, in addition to splitting the community property, a narrow form of alimony – so-called spousal maintenance – should be allowed in limited circumstances.  Spousal maintenance has a three-year maximum of $2,500 a month or 20% of gross income, whichever is less.  Many critics of the law made the slippery-slope (or camel’s nose under the tent) argument that once a limited alimony was adopted, it would be only a matter of time before Texas adopted the full-scale, lifetime alimony that some other states allow.  Well, I guess that slope wasn’t as slippery as suspected because the authorized amounts have not been adjusted, even for inflation. 

(Incidentally, child support in Texas is typically limited to $1,200 a month or 20% of income, whichever is less.  I wonder why an ex-spouse of a high-income person deserves more than twice as much as the child of a high-income person.  That difference doesn’t make sense.)

I have friends who complain that a spouse shouldn’t automatically be entitled to half of a marital estate if the other spouse generated nearly all the income.  For example – Michael Jordan.  I disagree, and instead subscribe to the statement made by a California divorce lawyer:

  • In California, we live in a community property state. Community property exists to ensure that the roles of each party to a marriage is given equal importance for purposes of dividing the property that was acquired by the marriage.

Just because Mitt Romney’s wife stayed at home raising their five boys while he was making $700 million, it is ludicrous in my mind to think that she is not entitled to half of that money if they were to divorce.

Last week, it dawned on me that there is a strong argument that awarding half of the marital estate to the low-earning individual is inadequate.  The argument came to me when I was discussing with a friend USAA’s elimination of its pension a few years ago.  USAA acknowledged to us older employees that the value of a pension balloons in an employee’s last few years of employment, and therefore those of us over 45 years of age would be seriously and negatively affected by the elimination of the USAA pension just as we were entering those years.  To make up for that negative effect, USAA promised to provide us older employees with a so-called bridge-to-retirement benefit.  As I recall, the bridge benefit was an additional 8% contributed to our 401k for about eight years.

Why does the value of a pension balloon at the end?  Everyone knows that the value of a 401k grows greatly at the end because of compounding, but pensions grow almost exponentially because their payout is based not only on years of service, but also on final average pay.  Thus, instead of calculating the pension payment on what an individual has earned, and thereby contributed, to the pension, a pension payout considers only what individuals earned in their highest 1, 3, or 5 years of pay.  In almost all situations, an individual’s compensation continues to rise all the way to retirement (sometimes dramatically), and those highest years are considered for the calculation and those low-paying years are disregarded. 

If you apply this thinking to divorce settlements, it becomes obvious that the low-paying spouses are short-changed because often the divorce will take place at a time when the couple has been spending their income on their family and have not yet entered the asset-accumulation phase.  In such situations it seems that justice would be served by either giving more than half of the assets to the low-income spouse or to require a more significant amount of alimony.

October 5, 2011

A fresh perspective

Filed under: Business — Mike Kueber @ 2:12 am
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Following a recent blog posting that focused on the obscene pensions granted to police and fire personnel in San Antonio, an Austin friend chastised me for failing to mention the obscene compensation granted to Wall Street types and failed CEOs.  Although I could have gotten defensive and countered that my single blog posting didn’t purport to be a comprehensive indictment of all obscene compensation in America, I accepted the chastisement because in my heart I knew that obscene pensions of my San Antonio neighbors caused me more heartburn than the millions of dollars that the failed CEO of Hewlett-Packard received as a going-away present.  And I admitted to my friend I felt the same way about the mortgage mess – i.e., I was amenable to bailing-out the greedy bankers, but don’t think about restructuring my greedy neighbor’s mortgage.  I don’t understand the sub-conscious psychological reason for my thinking, but until I figure it out, I will need to consciously remind myself to occasionally skewer the economic aristocrats in America.

The current protests on Wall Street provide me with a great opportunity.  Consistent with my heretofore forgiving attitude toward Wall Street greed, I have completely ignored this movement, and I am completely ignorant of who is protesting and why.  I will forthwith attempt to correct that deficiency.

P.S., I am currently on the receiving end of a morphine drip as a result of a partial knee replacement that I received this morning, but this posting is has nothing to do with a morphine-induced epiphany.  The posting was drafted pre-surgery, and I am merely publishing it post-surgery.

October 2, 2011

Supply & demand or asleep at the wheel

Filed under: Economics,Issues,Politics,Retirement — Mike Kueber @ 2:10 am
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Supply & demand generally ensure that a person receives a fair salary – not too little and not too much.  Occasionally, though, our capitalistic system becomes distorted, and some privileged people are excessively compensated even though other capable and qualified people would be willing to do the same job for a fraction of that amount.

A prime example of distorted capitalism is the compensation to people in an auto union.  Historically, unionized auto workers (UAW) have received generous salary and benefits even though non-union people would do the same work for half the price.  This travesty survived for so long because the UAW negotiated the same salary and benefits with all American car manufacturers, and thus no manufacturer had a competitive advantage or disadvantage, and the manufacturers were able to pass the exorbitant labor costs on to the hapless American consumers.  Only with the advent of competition from overseas, nonunionized manufacturers was this cartel broken.

A similar situation of dysfunctional supply & demand can be found today in San Antonio, where our police and fire personnel are compensated far beyond what the city would have to pay to maintain a high-quality workforce.  These employees, who are generally high-school graduates, are paid like college graduates (more than teachers).  According to a Texas Tribune analysis of SAPD salaries:

  • The highest salary was $185,321, the lowest salary was $22,048, and the median salary was $57,804.
  • 824 employees (unclassified) made 20-40k; 1210 employees (from call takers and dispatchers to police officers) made 40-60k; 1069 employees (detective investigators and  sergeants) made 60-80k; 71 employees (lieutenants and captains) made 80-100k; 1 administrative person made 100-120k; 8 employees (deputy chiefs and assistant chiefs) made 120-140k; and the chief made 180-200k.

Interesting stuff.  Not only are police personnel better paid than teachers, they are given a better career path, with more than one-third of them in lead/manager positions.

As generous as their salary is, it is their pension that is almost obscene.

Texas teachers are thought to have a generous pension because they are entitled to an annuity of 2.3% per year of service, receivable in their early 50s (when their age and years of service equal 80).  For comparison, my pension at USAA (before USAA dropped it a few years ago) was for 1.5% a year, up to a maximum of 45%, but only after reaching 62 years of age.

San Antonio police and fire pensions put teachers and USAA to shame.  Police and fire personnel in San Antonio are entitled to an annuity whenever they have 20 years of service, which could be as young as 38 years old.

If that weren’t enough, the percentage of their annuity will knock your socks off:

  • 20 years – 45%
  • 27 years – 80%
  • 30 years – 86%
  • 33 years – 87-1/2%

Although you might think a 45% annuity to a 38-year-old retiree would be mighty tempting, a closer examination would suggest that the youngster should stick out his job an additional seven years, by which time the 45-year-old person would be entitled to 80% annuity.  A 45-year-old retiree with an 80% annuity (plus medical insurance) for the rest of their life – you’ve got to be kidding.

The next time some conservative tells you that many of America’s problems will disappear if we shift responsibilities from Washington to private enterprise or to state and local government, just remind them of the United Auto Workers and the police and fire personnel.  Or the United Way, for that matter.

Misfeasance or malfeasance can be found wherever and whenever the people let down their guard.

October 1, 2011

The Golden Fleece Award #1 – Southern California lifeguards

Filed under: Issues,Politics — Mike Kueber @ 1:38 pm
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When I was growing up, Senator William Proxmire of Wisconsin gave out a Golden Fleece Award whenever he noticed a particularly egregious case of government spending.  Recently I was prompted to remember the award when I was reading about the government pensions awarded to municipal lifeguards in Southern California.  Over $100,000 a year, plus medical benefits to guards retiring at age 51.  I wouldn’t have believed it if the article wasn’t in a reputable newspaper – the LA Times.

Government gone crazy.

July 28, 2011

David Wu’s pension

Filed under: Issues,Media,Politics — Mike Kueber @ 5:55 pm
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Just yesterday, I posted an entry about misleading statistics, which are especially disturbing when propagated by the mainstream media.  Today, I was confronted with another example.

USA Today reported that disgraced Congressman David Wu, who was forced to resign because of charges that he had an unwanted sexual encounter with a teenage daughter of campaign supporter (Wu claims it was consensual), would be entitled to more than $1 million in retirement benefits.

Obviously, the article will inflame the fiscal conservatives in America who already have pitchforks in hand because of public-employee pensions.  Only those who read the fine print of the article will discern that the 56-year-old, 13-year congressman’s pension will be only $23,871 a year.  This is less than one-seventh of his current salary of $174,000, and while it is certainly a nice pension in an America where pensions are becoming the exception instead of the rule, it is not the princely sum suggested by the $1 million headline.

This sort of exaggeration reminds me of the marketing of the Texas lottery.  Although the advertisements proclaim a $1 million prize, the fine print reveals that the winner only receives a fraction of that amount unless they agree to accept annual payments over 20 years.  That is the sort of fudging math you expect from marketers, and you might even expect it from the National Taxpayers Union (NTU), which is publicizing the Wu pension numbers to further its special interests.  But I expect more from USA Today.

Not only did USA Today emphasize the total probable payout instead of the more understandable annual amount, it relied on NTU to provide some additional so-called perspective on the situation:

  • Some perspective: Congressional pensions are two to three times more generous than those offered to private-sector workers who earn the same salary, the NTU says.”

Why would the article’s author, Catalina Camia, rely on NTU for such a subjective assertion?  Based on my understanding of pensions, I question the accuracy of the claim, and obviously, NTU is not a disinterested party and is the least likely to provide good perspective.

Come on, Catalina, let’s do better.

May 16, 2011

Federal-employee pensions

A recent article in the Washington Post reported that VP Biden’s deficit-reduction talks with Congress are looking at federal-employee pensions.   Although these pensions aren’t as generous as pensions for state & local government employees (such as those in rebellion-state Wisconsin), they are extravagant when compared to those few private-employee pensions that still exist in America. 

The group headed by Biden is exploring the possibility of increasing the amount that employees contribute toward their pension.  Currently they pay 0.8% of their salary toward their pension, whereas the Biden group is considering increasing the employee contribution to 6.0%. 

Opponents of the proposal claim that this would be equivalent to a 5.2% pay cut and would make federal careers less attractive.  I agree.  No employee would be happy about a significant put cut, and most employees decline a generous pension if they have to pay for it.

I think a different approach to reforming federal pensions would better serve the interests of employees and the federal government.  Employees don’t want to have their pay effectively cut, so leave their pay alone.  The federal government wants to rein in its pension costs, so do that by modifying the age at which an employee is entitled to a full pension, which is the real extravagance, if not an outrage.

Currently, federal employees can retire with a full pension at age 50 if they have 25 years of service and at age 55 if they have 20 years of service.  I think that is outrageous.  Such employees will likely receive a full pension for more years than they worked.  Can you imagine if Social Security included a similar benefits formula?  Working for the federal government should not be a financial nirvana. 

Speaking of financial nirvana, the Texas legislature is continuing to flounder with its budget shortfall as it approaches crunch time for its 140-day session, but I have not heard a peep about reforming our generous state-employee pensions.  Perhaps that is because the legislators are beneficiaries under that system, and it provides them with the lion’s share of their compensation.  Although they are supposed to be part-time citizen-legislators who are paid only $600 a month, plus a per diem of $150 a day during the session, the legislators have finagled the system to give them the same pension as a district judge, whose annual pay is $125,000.  Thus, a 20-year, part-time citizen-legislator can receive a pension of almost $60,000 a year at age 50.  Talk about financial nirvana.

Getting legislators to reform their pension is like getting them to vote for term limits.  In many states, these problems could be addressed through an initiative, but the Texas form of government, unfortunately, does not authorize this type of direct democracy.  I am left hoping that a grassroots uprising like the Tea Party or talk radio adopts the issue.

December 7, 2010

Government pensions – are they a thing of the past?

When I was running for Congress, people often scolded me over the obscene pensions that Congress had awarded itself.  After researching the matter, I started responding that it was an urban legend that Congressmen could retire at full pay after only two years of service, but I’m not sure they believed me.

The issue came up again a couple of weeks before my March primary at a candidate forum in Del Rio, and I reiterated to the audience that Congressional pensions vest after five years of service.  This didn’t satisfy one of the candidates, Dr. Lowry, who proclaimed that no one else has a pension vest in five years, so why should a Congressman.  To this I responded that federal law required all pensions to vest in five years.  I happened to know that because when I worked for State Farm Insurance (for six years) in the 80s, the vesting requirement was ten years, so I lost my pension when I moved to USAA.  Then shortly after I started working for USAA, I learned that the vesting period was reduced to five years.  Bad timing!  Regardless of those facts, I suspect that in the eyes of those who attended the candidate forum I lost the argument with the doctor.  Their point was that Congressional pensions were too generous, and it’s hard to argue against that.

The federal government has a reputation on providing the most generous pension plan extant.  This reputation was confirmed by a recent news report that showed the average job in the federal government paid $80,000 a year in salary and $40,000 in benefits while the average private-sector job paid $50,000 in salary and only $10,000 in benefits.

Comparing federal and private pensions

To separate fact from fiction on pensions, the following is a comparison of two plans for federal employees – one for Congressional employees and another for non-Congressional employees – and my USAA pension, which is generally acknowledged as a top-of-the-line plan.  :

  • All three plans vest after five years of employment, but you can’t start drawing on the pension until you reach the plan’s retirement age (or a discounted amount at the early-retirement age).
  • The retirement age for a full, undiscounted Congressional pension is 62 for employees with 5-20 years of employment, age 50 if for employees with 20 years of service, and at any age for employees with at least 25 years of service.  The retirement age for the non-Congressional pension is 62 for employees with 5-20 years of service, age 60 if for employees with 20 years of service, and age 55 for employees with at least 30 years of service.  The retirement age at USAA is 62 period.  Thus, the Congressional plan is out-of-this-world great, the federal plan is fantastic, and the USAA plan is good.
  • The base amount for both Congressional and non-Congressional federal plans is the annual average for the highest three-year period.  USAA uses the annual average for the highest five-year period.  This difference seems minor.
  • The multiplier for a Congressional plan is 1.7% of the first 20 years, and 1% for each year above 20, with a maximum of 80%.  The multiplier for the non-Congressional plan is 1.0 or 1.1% for federal pensions (depending on the age at retirement).  The multiplier is 1.5% for USAA, up to a maximum of 45%.  Thus, USAA has the best multiplier, but the maximum of 45% discourages long-tenure.  My ex-wife is a teacher, and their multiplier is 2.3% a year.
  • Congressional and federal employees pay for one-fourteenth of the cost of their pension plan (1.3%) of their salary toward their pension; USAA employees contributed nothing.  Again, USAA’s plan is slightly better.
  • All three plans include COLAs.

In addition to these defined-benefit pension plans, the federal government and USAA both provide a defined-contribution, 401k-type plan to their employees:

  • The Congressional and federal plans include a 1% payment to the government’s Thrift Savings Plan (a defined-benefit, 401k-type plan), then a full 3% match, and finally a 50% match of 2%.  This is essentially a 5% match, whereas USAA had a 6% match.  Again, USAA’s plan is slightly better.

Because federal and USAA employees contribute toward Social Security, they are able to develop a solid, three-stool retirement plan:

  1. A defined-benefit pension;
  2. A defined-contribution plan that they manage; and
  3. Social security.

Most people know that pensions are a thing of the past.  My previous employer USAA is nationally renowned for providing one of the best benefits packages in the nation, but even it discontinued its pension several years ago.  USAA, like most generous private employers, has shifted to providing a beefed-up 401k plan.   Currently, only 33% of private-sector employees are covered by a pension, whereas 98% of public-sector employees have a pension.

Because the federal pension is so out of step with private employment, it was totally expected that Obama’s deficit-reduction commission would treat the federal pension as low-hanging fruit to be picked, and they did not disappoint us.  The commission made the following sound recommendations:

  • The base amount for pensions should be the high-five years of salaries instead of the high-three years.  Although this seems like a nominal change, an employee union is arguing this change will reduce benefits by 3-5% and will save the federal government $5 billion by 2020.  (An example in the other direction – NYC allows its police officers to draw a pension based on their highest year.  That is why the officers will traditionally work an exorbitant amount of overtime during a single year and then base their retirement pay on that year.  Only in NYC!!!)
  • Federal employees should pay for one-half of the cost of their pension instead of the current one-fourteenth.  This will save the federal government $51 billion by 2020.
  • Defer cost-of-living increases until the employee reaches the age of 62 instead of triggering the COLA as soon as the employee retires.  In place of annual increases, provide a one-time catch-up adjustment at age 62 to increase the benefit to the amount that would have been payable had full COLA been in effect.  Surprisingly, this would save $17 billion through 2020.

I have previously commended the Obama Commission for the high-quality work that it performed.  My closer look at this smaller issue – federal pensions – provides further evidence of that high quality.  Although I would have suggested that the federal government go the route of USAA – i.e., eliminate the defined-benefit pension and replace it with a beefed-up 401k – I think the Commission recommendation reveals its strategy to accomplish its objective while minimizing fundamental structures.  Some have criticized the Commission for failing to take on ObamaCare or to restructure the tax code, but I think they were wise to avoid those battles when they could.  Those fundamental battles can be fought another day.  Today let’s get the deficit under control.

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