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MMWD
MMWD has a serious public pension problem like everyone else
The support for generous public pensions is based on two assumptions:
- The first one is that public employees' wages are much lower than what they could earn in the private sector. So, public pensions are to compensate for this shortfall;
- Public employees do not participate and benefit from Social Security. Thus, they need an alternate Government-sponsored pension plan.
Those two assumptions do not apply to the Marin Municipal Water District (MMWD).
MMWD employees are well-paid. Their respective salaries are competitive with San Francisco salaries. Several of MMWD's junior positions such as Customer Representatives are paid well above market. More senior positions are typically at market. If you want to study this issue in greater detail, I invite you to read my attached report "MMWD Human Capital Cost Analysis".
Additionally, MMWD employees do participate in Social Security. Thus, they have no need for a second Government or District sponsored pension plan.
The MMWD's participation in Social Security is the result of a decision made several decades ago. And, such a decision is irrevocable. I understand that many California agencies are in a similar situation whereby they also participate in the Social Security system in addition to offering very generous defined-benefit public pensions to their employees.
As a caveat, none of my analysis can serve as a direct criticism of the current MMWD Management. The ongoing MMWD brewing pension crisis is due to the implementation of an excessively generous California public pension system that was set up without any prudent fiscal considerations. And, this public pension crisis is not just a California phenomenon. It is pretty much nationwide impacting all 50 States.
Within the remainder of my analysis, I will focus on the financial implication of such pensions on MMWD. I will also look at the water resource management implications.
I will look at pension contributions' financial impact on the MMWD. I will not look at related unfunded pension liabilities on MMWD's balance sheet. I will also not review in detail the impact of the Public Employee Pension Act of 2013 (PEPRA). If you want to dig a bit deeper into pension issues, I invite you to read my attached report "Pension Economics Analysis."
Regarding PEPRA, I will simply advance that its impact is rather minimal. Think of the MMWD's pension situation before PEPRA as a car crash at 50 mph. After PEPRA, the car is still crashing at 35 mph. PEPRA has slowed down the inevitable California public pension crisis. It is very far from resolving it. For more on the subject, please go to the mentioned report.
For the MMWD, the ongoing pension crisis behemoth is CALPERS. In the graph below, you can see how the MMWD CALPERS contributions have risen very rapidly from 23.3% of payroll in 2015 to 41.3% in 2022. That is an increase of 18 percentage points in just seven years.
If the CALPERS contribution trend continues at the same pace, CALPERS contributions would reach 67% of payroll in 10 years, and 92.7% of payroll in 20 years.
If the CALPERS contribution trend going forward grows at only half the speed it has in the past, contributions would still reach 54.2% in 10 years, and 67% in 20 years.
The MMWD pension challenge is not just limited to CALPERS. MMWD also makes contributions to other post-employment benefits (OPEB) and Social Security. OPEB are mainly healthcare benefits (medical, dental). As shown below, these other contributions are still substantial. The OPEB contribution went down in 2022 from close to 20% of payroll to just under 15% of payroll. This is partly a mirage associated with favorable market movements a full two years ago that reduced the OPEB plans liabilities and contributions. Next year, we can expect the OPEB contributions to bounce back up close to 20% of payroll.
The graph below discloses what these aggregate pension contributions look like when they are stacked up, which is what matters. As shown, they now total over 60% of the payroll for the past three fiscal years. And, they are bound to increase going forward because of the underlying trend in CALPERS contribution and the expected rebound in OPEB ones to the 20% level.
Pension contributions impact on MMWD water management
Is the MMWD a water utility with a burdensome pension administration system? Or, is it a pension administration system with a water-side business to generate pension income for its beneficiaries (the employees)?
When you just look at the numbers, the distinction between the two considerations is unclear.
As shown in the graphs below, over the past five years MMWD has spent a lot more on the pension programs (including OPEB) than on purchased water from Sonoma.
For years, the MMWD has purchased as little water from Sonoma as possible because water from Sonoma is expensive. That argument does not make sense to anyone familiar with the basic principles of inventory management. Buying water from Sonoma for about $1,600 per acre feet (AF) is a very profitable undertaking when the MMWD resels that water for $2,500 AF. You could even waste up to 36% of that water, and still break even. Given the very predictable seasonality of consumer demand, such waste could be reduced to a minimum.
MMWD Management has advanced that such incremental purchases of Sonoma water are not in the budget because of their high cost (won't go into my inventory management rebuttal a second time). However, the MMWD would have plenty of money within its budget for such water purchases if it was not for its excessively onerous pension setup.
If the MMWD was a private entity, its pension contributions would be far lower. It would contribute 7.65% for Social Security & Medicare, and let's say a 3% matching on a 401K plan. And, it would be done. This would represent just 10.65% of payroll or about $2.4 million per year vs. the $16 million per year that the MMWD spends in contributions to its existing pension programs.
You can see how the contemplated private sector pensions spending would be so much lower than water purchases. This would leave so many additional funds for water purchases.
When you compare MMWD pension costs vs. private sector ones as a % of water purchases, you can see how MMWD pension costs are so much higher.
MMWD pension contributions are likely to go up because of demographic forces
The implications of the old-age dependency ratio
Let me share a bit of demographic background. As we know the whole world population is aging rapidly except for Africa and the Middle East. This aging has profound fiscal implications as it is putting much stress on all pensions and national healthcare programs worldwide.
To measure this aging-related fiscal stress, demographers look at the old-age dependency ratio. The numerator consists of individuals that are 65 years or older (namely retirees). The denominator consists of the 20 to 64-year old (a proxy for the ones in the labor force). Ideally, you want a few retirees whose pension programs are supported by the taxed wages of a large labor force. So, you want the old-age dependency ratio to be low.
Let's look at this old-age dependency ratio for the US and Japan.
Since 2000, this old-age dependency ratio has risen from about 20% to 30% in the US and from 28% to 53% in Japan. The OECD projects that in 2050 this ratio will reach 40% in the US (double what it was in 2000) and 80% in Japan.
This trend is why you will constantly hear of fiscal solvency issues at the national level regarding pensions and healthcare programs. This is a big debate in Congress as we speak (how to shore up the solvency of Social Security and Medicare).
For more, see; Social Security solvency issue
This is happening worldwide. As we speak, the French are demonstrating in Paris to fight Macron's pension proposal to delay pension vesting from 62 to 64 years old.
For more, see; French demonstration against Macron's pension reform
An old-age dependency ratio at the MMWD level
In earlier blog posts, I shared that Marin County, from a demographic standpoint, is a lot more similar to Japan than the US. Marin County and Japan are very close in average age (around 47 years old). They are both a lot older than the US (38 years old). Marin County and Japan have populations that already started to contract because of their respective age, low fertility rate, and low in-migration rate.
Given the above, you would expect the ratio of MMWD pensioners to active employees to be somewhat similar to Japan's old-age dependency ratio. That's because they would be both measuring the same demographic phenomenon. Thus, we would expect this ratio to be about 0.53. In other words, we would expect that the MMWD would have about 2 active employees to support the pension benefits for 1 retired MMWD pensioner.
Let's look at the actual MMWD data since 2015.
As shown above, MMWD has far more pensioners than active employees. And, the MMWD pensioner population has grown far more rapidly than the active employee population which has remained flat.
Next, let's figure out how MMWD Pensioner/Active employee multiple or ratio could evolve by 2050. This multiple is currently at 362/226 = 1.60 or 160%. Using different annual growth rates ranging from 1.0% to 3.o% (historical trend rate is 3.3%), this multiple could reach 2.12 at the low end and 3.66 at the high end by 2050.
Next, let's compare these MMWD scenarios with Japan's old-age dependency OECD projections. As shown, if one believes that Japan is under serious fiscal stress to support its aging population, the MMWD is under far greater stress than Japan is.
Below I am showing how the US and Japan old-age dependency ratios are forecasted to rise till 2050 (OECD forecast). And, I compare those to the MMWD pensioner/active ratio over the same time horizon (till 2050). To make the MMWD projections I use three different annual growth rates ranging from 1% to 3% which are all lower than the historical trend (3.3%).
The MMWD pension situation is unsustainable. This is a problem that needs to be resolved in Sacramento. We urgently need an upgraded PEPRA pension reform. And, it does not seem to be on Sacramento's radar screen.
A few months ago, I watched the CO$T-sponsored debate between Damon Connolly and Sara Aminzadeh moderated by Dick Spotswood. Overall, it was an excellent and heated debate between two formidable candidates. They disagreed on most issues. But, the one issue they both wholeheartedly agree on was that the California pension system was just fine as is!