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Jan. 15, 2021 - Epoch Times
27:46
Public Pension Timebomb, Explained | Former Mayor of Costa Mesa Jim Righeimer
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So the basic economic theory is that which cannot continue won't.
The pension plan that they've been promised to give you 90% of your pay with increases in it, and you're going to live, we know, to about 80-something.
We know that.
There's no math to make that work.
It's an unsustainable model.
So at some point, what you're seeing happen, and it's already happened here in Orange County, you have a half a dozen cities in Orange County that have raised their sales tax, and the pitch they make to the public is very simple.
They go right to the fear factor.
They say, we can either fire a bunch of police officers and firemen and you won't be safe, or you can pay more sales tax.
What are public pension liabilities?
And how could they potentially become one of the biggest economic time bombs in our lifetime?
Why aren't government officials questioning the unfunded pension liabilities?
And just how challenging is it to tackle the pension crisis?
Today we sit down with Jim Rickheimer, the former mayor of Costa Mesa.
He will offer his insider insight into the public pension crisis and what it means for the future of Californians.
Welcome to California Insider.
Great to be here.
So we want to talk to you about pension liabilities.
We should hear unfunded pension liabilities and can you tell us what pensions are and then get into what these unfunded liabilities are?
So basically a pension system is a system that a government, a city or an employer will say that as long as you work for me I'm going to take a certain amount of money and I'm going to invest it every year in a pension fund so that when you retire, and you as the employer will probably put some money in that pension fund too, but when you retire, there'll be a payment to you every single day until you pass away.
So you'll have a pension.
You'll have money that will help out.
The private sector kind of got rid of pensions a while ago, and there's very few private sector pensions anymore because the problem with them is that they're not real portable.
They're not like a 401K is what most people in the private sector have.
So what is the difference between 401Ks and the pension?
So in a 401K, you actually own the account, and the employer says, hey, I'll put 3% in, you put 3% in, and then you can invest it wherever you want, and it can grow however it grows.
And then if you When you pass away, you can give it to your kids or do everything you want with that money.
Where a pension, once you pass away, unless there's a clause for the spouse to get some percentage, that money cuts off.
You know, let's say you worked for 30 years and you got in a car accident two years later, financially it wasn't a real good deal for your family, right?
Because you put all this money in and you never got it out.
But the basic theory behind a pension is that the money's put in, let's say, over a 30-year period, and about 65% of the payments they make out were made through the earned interest in the pension.
So the point is the money has to earn money for a long period of time, compounds, and that's how it works out.
And so what we see, so it seems like 401k is you are responsible for it as an employee.
Right.
But pensions, the employer guarantees that you will get a certain amount of income after you retire, right?
Yeah, so there's a defined benefit, which is a pension.
I'm defining what your benefit is going to be, a certain percentage of your pay.
No matter what happens in the return, okay?
And then there's the amount that you contribute, which is a defined contribution, meaning the employee says, I'm just going to put this much money in, period.
So there's a big difference.
How much money I'm going to put in or guaranteeing how much you're going to get at the end.
So if the pension plan doesn't work out, as an employer, whether you're a city government or a private company, you're responsible for backfilling that money to make sure that employee still gets that pension amount.
And why do we have this problem now?
A lot of cities are facing this problem that they're short on their pension payments.
Is that a problem currently?
Oh, it's a massive problem.
It's a massive problem that nobody wants to talk about because a pension is the perfect example of kick the can down the road.
It's a payment you have to make 30 years from now, 25 years from now.
And so you can play a lot of games during that time frame when you really don't have the money.
So cities now, it's by law, they're required with the government now to actually put on what their pension liability is.
So let's say the city that I was mayor of, Costa Mesa, our pension liability was like $600 million.
And we had $400 million.
So we had an unfunded liability.
We owed $600 million, but we only have $400 million, so we were negative $200 million.
That was our unfunded liability.
But because it's such a long time, we have money we can keep on paying people their pensions, As long as we keep on feeding more and more money into the pension system to kind of keep it afloat.
And you can have an unfunded portion, but you can't have it forever.
You can have it for a short time, the market dips, those kind of things happen.
The problem that's happened now is the market dips, the low, low return that the government pays on like a 10-year T-bill.
It's so low.
It used to be pensions could just buy T-bills from the government, a 10-year note from the government that says you're going to get 4% interest, and that was what's considered to be zero-risk money.
So you get your money in from the city, the pension fund just buys T-bills at 4%, 5%, and that's a guaranteed base money they have.
And then they invest in other things to kind of get that return up to 7%, 8%, which is what you need To pay that pension out at the end.
You need about a 7 or 8 percent return over 30 years to give that pension that you told the employer you'd give them.
So now, with the current situation in the markets, either pension funds have to take much riskier bets, I guess, or they won't be able to deliver that 7 percent or that percentage of return, right?
Both.
Absolutely both.
So what happens is The zero-risk return money, your 10-year notes with the federal government, are less than 1% right now.
So you go to the government and say, I'll buy a 10-year note from you, and I'm going to get less than 1%.
And you need to have 7%, 8% return to pay it.
So now pension funds have to get into riskier and riskier things.
We have to be involved in to get that return up.
And so that causes a massive problem because, you know, how many apples are there to buy?
How many, you know, Googles are there to buy or companies that do real well and that are big enough for these big pension funds to buy?
You know, California, CalPERS is so massive, it can't buy some little company.
It owns the whole company.
You know, they need to move around 50 and 100 million dollar chunks of money.
They can't, you know, buy a little stock like you and I would do.
And now, would it make these cities, so then the cities have to contribute more.
If they can't, if the returns are not going to be there, then the cities have to contribute a lot more to the pension.
Correct.
So the city, with their employees, has made an agreement of what the pension is going to be.
Now, how they get to that agreement is a whole nother mess.
But the cities have negotiated with their employees, this is the pension we're going to give you.
In the place of police and fire in California, it's 90% of your pay after 30 years.
So basically you take how many years you work, Times 3%, and that gives you the percentage of what you're going to get of your highest check.
So if you made, you know, $200,000 a year, which is not unusual for firemen, you're going to get 90% of that for the rest of your life, and that amount's going to go up by a CPA or a COLA. And so you've agreed to that number.
Now the city has to say, well, to CalPERS, how much money do I have to give you to make sure you can pay that?
And CalPERS gives a number.
The problem is CalPERS doesn't give The real number of what it really takes to pay that for political reasons.
What are those reasons?
Well the reasons are is that the CalPERS board is run by the board members unlike say a Goldman Sachs or a Morgan Stanley or one of those firms.
The boards are members of the unions, the associations, the public employee associations put their own members on the board.
So they vote to have that member on.
And they vote to say what the return's going to be that CalPERS is going to make.
Unlike the private sector, you get a report at the end of the year that says what the return was.
At CalPERS, they vote their return.
And if they vote the return, they say...
We're going to have a lower and lower return, try not to get too much in the woods here, but if we've got a lower and lower return, the cities are going to have to put more money in, right?
Because remember, you made an agreement to pay this employee so much money after 30 years.
If they make a lower and lower return, you have to put more and more money in.
The cities can't afford that.
So politically what will happen is they just go to kick the can down the road, they vote, To keep the rate higher than the return they're really making.
So the rates, the rate of return is essentially somewhat fake so that they have, they give, they let the cities contribute less money.
Less.
And now, what the government officials are doing about it?
Do the government officials that run these cities know that this is a problem, this is going to catch up to them?
Yeah, so what happens and what happens politically is it's a virtual cycle.
It's basically, especially in California or states that are one party rule, let's say more so in those kind of states, is that the political cycle to get into office, the major donors to every campaign in your city or your town you're at is not the citizens of the town.
By a long shot, it's all the employee associations.
Because think about it.
Is that the unions?
That's the unions, and they call them employee associations.
But the unions basically spend more money in every city, anywhere, in general, than the actual public puts into a race.
Why?
Because it matters more to them.
So here's how it works.
You want to have a certain pension plan, you want to have a certain amount of money as an employee, your association backs a candidate.
And if it's a, the best ones are police or fire because people love their firemen.
They save their lives.
They're all good looking, right?
We joke about it.
But, you know, and these are all great fine people and they are great fine people.
There's no issue with that.
The issue is, is that they want to have more money.
So they tell the public Or the police will tell the public, the police union will tell the public, you want to be safe?
Vote for Joe Smith.
He's going to keep you safe.
Well, the only reason they're saying it is not because Joe Smith's going to keep you safe.
Joe Smith is going to agree to give them any pension, any pay raise, anything they want.
So the virtual cycle is the person runs for office.
In order to win, you need money behind you and endorsements.
They give you those things.
You win.
You stay in office.
And then you negotiate.
You negotiate.
You quote unquote negotiate.
You give them what they want.
They keep you in.
Now, if you don't give you what they want.
What will happen?
They'll take you out.
How do they do that?
They do it in all sorts of ways.
In my case, they tried to set me up for a DUI. They actually came to my house and took me outside and tested me to see if someone called in that I was drinking and driving.
I wasn't.
And one of our other council members, they put a tracking device on his car.
This is the police association.
How did he find out that they put a tracking device?
It was interesting.
Once the district attorney got involved in our whole case, when I realized there was something corrupt going on, the district attorney actually did a raids on the association's offices, got some computers, and on those computers they had data from a tracking device.
And they realized the tracking device showed his house address on it.
So they met with, it was Councilman Mensinger, who was mayor at the time, they met with him and they said, bring out your day timer, tell us where you were on these dates.
And he went through it and they asked him, did you allow someone to put a tracking device on your car?
And he said, no.
And he says, well, here's all the places you were for these several months.
And that data was found on the police association's computer system.
I see.
So were they trying to, so they were trying to track you guys down because you guys were not willing to negotiate with them?
We were willing to negotiate.
And one of the things that I always say is, my brother being a retired police officer, my dad who's passed away was a deputy sheriff.
I love the men and women in blue.
Police and fire, I think they're the greatest in the world.
But now we're talking about money.
And just like my kids, I love my kids, but when we talk about money, I separate them.
So the unions statewide, nationwide, don't like people like myself or Steve Mensinger or other people in office who get the math and understand how ridiculous this problem is.
So if you win, They can kind of figure well in a couple years you'll be gone.
The problem they had is we were able to keep the majority on the Costa Mesa City Council for several cycles.
So at that point they needed to take us out.
And so if they can't win politically then they're going to win by- Other ways of- Right.
They're literally going to try to shake you down.
So there's other- I've heard stories of other officials.
Can you tell us more about the officials that get on the City Council and then they- They get in trouble for wanting to touch or talk about this issue?
Right.
So again, what I told you is that the virtual cycle is they get you elected.
And then if you don't do what they want, they get you unelected.
Right here in Orange County in Santa Ana, Cecily Iglesia ran for the city council and she won.
Sharp, bright lady, nice.
Not a massive firebrand, but understands the issues of pensions and those type of issues.
And so, there's a seven-member council in Santa Ana, and they had two issues coming forward.
One issue was their contract.
She voted no, and it was a 6 to 1.
They didn't need her vote.
It was a 6 to 1.
It was done.
But also, this is a year ago, a year and a half ago, the city of Santa Ana had paid out millions and millions of dollars in lawsuits For things that their police officers had done that were problematic, not nearly to the point of Minneapolis, but problematic where you're paying millions and millions of dollars.
She wanted to look into that somehow and solve that problem, whether it was a board she would use or something else.
The union said absolutely not.
The council voted on it.
It was 6-1.
She was the lone person.
So the union could have just left it at that.
The union wanted to make it a point.
That you don't do that to us.
Here's a woman who did nothing wrong, had just been elected to council, and they went ahead and started a signature drive, which they pay for.
They get paid signature gatherers.
Spent the money to do a recall of her.
They put it on the ballot during this COVID season.
They had the election.
She was recalled.
She did nothing wrong.
Now, did they need that vote to knock her out?
Did they have to have that?
They got everything they wanted anyway.
Their point was to make it very clear to elected officials.
We can take you out anytime we want to.
Here's a Hispanic woman in a Hispanic district who's very close to the community, was a former school board member, had been involved in a lot of things.
Taken right out of office.
And their point was, that's a scalp and we want to show elected officials what we can do to you.
If you just want to be your Joe local official and you want to be on your local city council, you don't want that fight.
So you just kind of let it go.
And so in Orange County, quote unquote conservative Orange County, city councils roll left and right and give away pensions and obligations.
There's no way they can pay for it.
But they continue to do it because they don't want to have happen to them what the unions did to her.
From what I gather now, it seems that this problem, the compensation model is not realistic unless they're going to raise the taxes significantly, right?
Is it realistic to have these packages?
You know, when I, one of the ways I won my campaign is I showed people what public employees actually made when you added in their pension dollars into it.
And so we went through a list of like the top 30 employees in the city and everybody thinks it's the city manager and it's not.
It's all sorts of firemen that you've never heard of making $250,000, $300,000 a year total compensation.
And their whole come-from was, well, some of that's just my pension.
Well, yeah, but my employer doesn't put $60,000, $70,000 in a pension account for me.
That's crazy.
That number doesn't make any sense.
So in general, the whole dollars don't make sense.
So what I showed, the public was not employees' names, but just showed the top 20 employees making $200,000 to $300,000 a year They're like, oh my God, I thought a police officer made a hundred grand plus some overtime.
I had no idea how upside down the system was.
And what we were doing is we were exposing that.
And so the public, you know, said this is crazy and that's what, you know, kept us in office for as long as it did.
And from what it seems like, at the rate that things are going, some of these employees that are promised these pensions, they may not make it, right?
They may not get those.
Well, yeah, so the basic economic theory is that which cannot continue won't.
You can't, the pension plan that they've been promised, you know, 90% of your pay at as early as 50 years of age, that's as early as you can go out, but say you're 52, 53 basically, you started in the department at 23 years of age, retired 53, to give you 90% of your pay With increases in it, and you're going to live, we know, to about 80-something.
We know that.
There's no math to make that work.
It's an unsustainable model.
So at some point, what you're seeing happen, and it's already happened here in Orange County, you have a half a dozen cities in Orange County that have raised their sales tax by at least 1%.
And the pitch they make to the public is very simple.
They go right to the fear factor.
They say, we can either fire a bunch of police officers and firemen and you won't be safe, or you can pay 1% more sales tax.
In all the cities in Orange County, they passed overwhelmingly.
So even in a conservative area, when people have fear, they'll pay for it.
But at some point, you can't keep on charging 1%.
You can't keep on adding on these costs and thinking somehow it's just going to magically work out.
Math is math.
And now, do you think, to address what we have, based on some, and if you just give me some ballpark ideas, what percentage tax increase does it need to, what percentage does the sales tax need to go up by to cover for what we are compensating?
Okay, so it depends on different cities.
In my city of Costa Mesa, we have a thing called South Coast Plaza.
South Coast Plaza is the number one sales tax generating mall on the planet Earth.
We're a small city of $115,000.
And we have a large car dealership.
So where other cities our size would get $10 or $12 million a year in sales tax, we're getting $50.
So for our city, a 1% sales tax increase would give you $100 million.
Other cities, to go the same size, 115,000, to go from $12 million to $24 million with 1% sales tax, won't even keep up with it.
Santa Ana just increased their sales tax, and it was to do all these great things for the department.
So far, almost the vast majority of the money they did on their sales tax is paying previous year bills.
It hasn't even been used before.
To pay in the future for the pension issues or to solve the issues or to pay for the pay increases they got is literally paying old debt that they were carrying on their books.
So what happens is Giving more money to the beast doesn't solve any of the problems, because the beast keeps on asking for more money.
They want to have what they want to have.
I'll never forget the one meeting I had with one of the union officials with the police association, and I said, at some point, cities are going to go bankrupt.
And remember, most of your employees don't live in your city, so just understand that.
And his comment to me was, you won't go bankrupt.
I said, why not?
He says, you still have parks to sell.
His point was, we were going to sell our parks for housing developments or something to bring in more money for the city.
That's the come from.
And so that's not your Joe average police officer or fireman or government worker.
That's the union person who's a hardliner on it.
The rest of the employees are just doing a great job.
I mean, our city, Costa Mesa, finest police officers around, and I can tell you by how, we don't have shootings, we don't have problems.
Our fire department, the finest people around, the pick of the litter, there's no doubt about that.
That's not the issue.
The issue is giving people That's not realistic.
And the employees will say, well, you negotiated that.
But it's not really a fair negotiation.
See, what they're doing is they're putting a tracking device on Mayor Menzinger's car to get rid of him.
They're setting Mayor Righimer up for a DUI to get rid of him.
That's hardly fair negotiation tactics.
Okay, now, how do we, how can we get the public informed of what these costs are to them so that they have a better idea?
Yeah, so you just have to keep on talking about it and getting it out.
We were able to stay in office over several cycles because of that.
But in the end, we did lose.
We couldn't keep it.
The pounding...
Was too much.
But the public just has to know.
So one of the things that I always talk about is that Joe Average Citizen is just trying to pay their bills, get their kids to school, get them to soccer, go on with their life.
And what we have to do now with the craziness that's happened in the world is we have to go to the public and say, you need to start waking up.
Because it's very easy and obvious to solve these issues.
These aren't complicated issues.
Once the public says, wait a second, I'm getting a mailer from the police association say, vote for this person because they're better on crime.
I guarantee you there's nothing better on crime.
There's nothing they can do The association's not doing it because they're going to buy them better equipment or better cars.
It's because they're going to give them more money.
Simply, on public mail or groups, find out who's funding who.
Once you find out who's funding who, it's pretty simple.
And that's all transparent.
That's all out there.
So we need to have more people talk about it.
We need shows like this where you can have a little bit more in-depth time than when I go on a A broadcast station and I get, you know, a minute and 45 seconds to kind of explain a complicated issue.
You need to talk about it.
This is not hard math.
This can all be fixed.
This can all be worked out.
One of the big things that we have to do, like with our police departments, again, I love our police officers.
I love what they do.
I grew up in that family.
I'm fine with that.
But also in their negotiations, the unions have gone ahead and put in that you literally can't fire a police officer for no matter what they do.
There's a structure set.
So in Minneapolis, an officer can lean on some guy's neck for eight and a half minutes who has 17 verified complaints against them and he's not fired.
Why?
Because the unions vote into their contract how they will be disciplined.
So in a standard contract in Southern California for the associations, it has things like if you're going to bring in an officer to reprimand them or to go over something they did wrong that could ever negatively affect their employment, you have to notify them, give them 48 hours to get their own counsel, and then you have to give them all the evidence you have against them before they make a comment.
They've basically set it up that they're not going to get in trouble and there's no way to get rid of them.
In the United States, when officers are fired, the worst of the worst who get fired.
Every four officers that gets fired, one of them gets their job back.
In our situation, Mayor Mensinger and myself, when we were being tracked down for DUIs and the tracking devices, those were two officers that had been fired from their departments, who now work for the law firm, right?
And basically when they were fired they couldn't fire but they couldn't fire them so they ended up retiring them at forty something on a medical disability because that's the only way they could get rid of them and then they worked for the law firms that you know track other city councilmen and do all these derogatory things.
So you know my comment to the associations and the unions is You know, there is a problem with the police department.
It's not the 99% of the police officers.
It's having a system where you can't get rid of the bad.
So when are the good officers going to say, hey, this is crazy.
Why do we negotiate these things that bad guys Take advantage of it.
And the reason it is is because in the back of their minds they're thinking if I kind of make a mistake I'd like that kind of protection.
Well you're going to have to give up that kind of protection for the average police officer so that you can get rid of the bad ones.
And that's a hard message because if you talk against you know the unions or the associations people think you're negative police which I'm absolutely not negative police.
But this one thing has to be fixed.
Do you actually think the public employees, like the police officers and fire department, do you think they actually know what's going on with their pensions?
Do they know what these cities are doing financially, how they're doing?
Yeah, it's interesting.
So many of them do.
Many of them follow it.
I mean, when you're getting police and fire in, let's say, Orange County, you're getting a pretty high quality person.
These people are bright, sharp.
Many of them college educated.
They understand some of these issues here.
But, you know, I talked to one guy once who was a police officer and he was the head of the union.
He was looking to go to Wall Street or go in the police.
Wall Street or the police.
He looked at the pension plan and he says, I could never make that kind of money on Wall Street.
I'm going to go be a police officer.
So the young people coming in are going, this is an unbelievable deal.
I retired 50 years of age at 90% of my pay.
So they do know it.
They know there's a problem with it, but nobody wants to give up what they have.
And they're afraid if they open up the door at all, they're going to take away what they have.
The reality of it is there's going to have to be some rejiggering of how this works.
You know, you can't work till 50.
You may have to work to 57, 58, something different.
In fact, new officers have to work.
To 57, 58 years of age.
But the existing ones on the planet don't.
But something has to change.
But they don't, yeah, they just don't want to give it up.
Thank you, Jim, for coming on the show.
Thank you for having me here.
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