Thursday, May 22, 2008

Sacramento Housing Demographic Timebomb

A well-placed source who works for a large state government agency here in Sacramento sent me this age distribution graph:


My source assures me this distribution is typical for most state agencies, and it illustrates two problems. First, there will be a huge wave of state worker retirement beginning now and continuing for at least the next 10 years. Since California taxes are so high relative to nearby states, many retirees are choosing to move to Oregon and Nevada where the burden on those with a fixed income is much lower. (California is ranked the 12th highest tax state for retirees. Nevada is 36th, and Oregon is 37th.)

Look closely at the graph, and you can see why I said "at least 10 years." During the "golden era" of state government that began under Jerry Brown, the state government expanded, and several new agencies were created. This occurred just as the baby boomers were graduating from collage in large numbers, and many bright young people in their mid-20s were hired.

Flash forward 30 years, and things are remarkably different. Retiring government workers are not being replaced by recent college graduates, but by people in their mid to late 40s. (This is clearly a failure by state agencies to implement the Workforce Planning Model which addresses the age demographic issue as a problem, but cannot directly advocate the hiring of younger staff as a solution. I won't get in to the insanity that is the California State hiring process, or why management fails to hire anyone under 40 who isn't "connected" somehow. If you want the details, ask in the comments. :) This hiring of older workers will result in a continuous wave of retiring workers that will last indefinitely.

According to census figures, nearly 25% of all employment in Sacramento is provided by the state. When this retirement wave begins in earnest, I predict it will depress housing for years to come as retirees take their precious fixed incomes to other states with lower prices and tax burdens.

30 comments :

Patient Renter said...

Max, this is really good stuff. It's a wonder to see this stuff coming from a "well-connected" blogger, and not from a journalism outlet. Since you mention that this distribution is typical for most state agencies, does that make it difficult to fault California?

I won't get in to the insanity that is the California State hiring process, or why management fails to hire anyone under 40 who isn't "connected" somehow. If you want the details, ask in the comments. :)

I'd LOVE to hear more about this. If it's not something you even want to post publicly about, I can shoot you an e-mail. It might be best for me to do that anyways...

Gordon Gekko said...

This is a great article. Finally this shows the stats that I have been suspecting for years. Beyond the mass exodus from Sacramento from the retirees, what's going to happen to CalPers when the massive withdrawals happen and there are no younger workers to make up the difference.

Sippn said...

So what are the real numbers. Reading the report, even adjusted to the low numbers, the state expects net hires at 2200 per year - worst case.

Of your assumptions, what % move out of state? We pay state workers, retired officially or not, more than most other retirees, so living in Sac is relatively cheap, especially if their tax base is old, BTW, did the study take into account prop 13? Did you know you can move your tax base in some counties if you are at retirement age?

What are your assumptions? All state workers are in SAcramento? Govt will stop growing? No replacement of retired workers? All retirees move from state? nobody wants to live here? boo hoo.

Max said...

I'd LOVE to hear more about this.

I figured somebody would have to ask. :)

First, understand that that age spread leans very far to the right for hiring managers vs overall staff. For the agencies I'm aware of, I can count the number of managers under 40 on one hand, and those under 50 on two. Back when these guys were young, most hiring managers were only 10-15 years older than the new staff, and they tended to look at new prospects as younger brothers and sisters. Now, they're 30+ years older than recent college grads, and they see their sons and daughters instead. Remember, these are baby boomers we're talking about. Besides the typical generation gap stuff, there's a huge technological and philosophical divide to overcome. Simply put, hiring managers are scared to death of anyone under 40.

Secondly, since agency leadership is rapidly nearing retirement, they don't want to make things harder for themselves in their final years. Why spend your last five years working hard training some young hire on the ways of the world when you can bring in some 40-year-old former grad student or corporate refugee?

A corollary to this problem is the lack of any formal promotional track within state government, so agency leadership has been resting on its laurels. The last thing upper managers want in their final five are a bunch of high-energy "young guns" moving up the ranks stirring the pot and creating work. So they tend to promote people in their 50s instead, and workplace stability suffers. Thus the focus on "Succession Planning," which is failing miserably since the root problem (recalcitrant leadership) remains unaddressed.

Truthfully, this all boils down to outright cynicism in the upper ranks. Agency leadership doesn't believe in or care about their agency's mission enough to act proactively to halt the decay. All they see the brass ring of retirement approaching.

Deflationary Jane said...

I see you rattled Sippin's cage. When he starts sputtering, you know you hit a nerve >; )

smf said...

Frankly, I have seen more people 'retire' to where family is, that at times does happen to be in lower tax states.

But I have seen more evidence of sticking close to family.

This does point out to a well known if not under reported fact.

Simply speaking, the population of most developed nations is not really growing at all. Hence, housing prices should remain stagnant for years to come.

Cue in those who will justify how a decreasing population will not necessarily reflect lower home prices...(check out population stats for the Bay Area)

Max said...

Of your assumptions, what % move out of state?

...

What are your assumptions? All state workers are in SAcramento? Govt will stop growing? No replacement of retired workers? All retirees move from state? nobody wants to live here? boo hoo.


The old Sippn is back! Let me try and answer some of these:

- There are about 400,000 retired members of CalPers
- 50,000 or 12.5% live out of state
- From the census, 25% of all Sacramento workers are state employees.
- Using just those numbers, 3.1% of all retiring workers in Sacramento will be moving out of state when they retire.
- The number will certainly be higher than that because: Sac is much closer to OR and NV than other major California cities, and there are plenty of local government employees using CalPERS retirement employed in Sacramento as well.
- According to my demographic data, 50% of state workers will retire within 10 years.

In addition:

One of my points is retired workers are being replaced by older workers than before. These people won't work until they're 80 years old; they'll be retiring within 20 years or so.

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Sippn said...

From observation, the state and any other civil job around here is looked at as the "benefits" portion of the career. . . . where one goes after the previous private company failed, downsized, lost the retirement plan, etc. That's where the 40-50 year old applicant pool is coming from. . . .

Speaking of, may be I should be looking for a college instructor job hmmm... Professor Sippn. . . . either that or look for an opening for part time rock star. . . after all, I am younger than Sammy Hagar.

DrDoom said...

I think sippn is asking the right questions. Although the expense of State retirees might be bad for the state I don't see why it would be bad for Sacramento. Please someone tell me.

The number of state workers is not going to decline in the long run... there is always more regulation. If the largest portion of the retirees stay in their homes in Sacramento and recieve good monthly benefits paid for by the rest of the state then there is going to be a net increase in jobs, wages and retirement payments in Sacramento. This is not a local negative but a positve.

Max said...

That's where the 40-50 year old applicant pool is coming from. . . .

I agree with that 100%. It's hard to fault anyone in that age range who took the "honorable" career path 20 years ago only to be downsized and pensionless trying to land a govt job.

after all, I am younger than Sammy Hagar.

Sorry, I didn't mean "old" in the literal sense. You've just been a lot nicer than usual the last couple of months. :)

I have no idea how old you are.

Anonymous said...

The UCs are in much the same situation. They have a different pension plan, and is supposed to be in good shape. Whatya think DJ?

DarthToll said...

drdoom: Here's a dirty little secret for you. CALPERS is bankrupt and its just a matter of time before the unions bust out the torches and pitchforks. Turns out they were invested in a lot of...ahem...structured finance products, and there has been a large exodus of CALPERS investment and senior management recently (CIO, CEO, numerous directors, etc). This is never a good sign. Are there huge losses in there? To offset a ballooning retiree base they have been chasing yield with ultra-risky and non-transparent investments. Boy, this sure sounds familiar. Now they are levered up in the commodities bubble too, lol! Might I suggest the following:

http://tinyurl.com/5dbkt2

The state workers will definitely need to move to a cheaper area (like the Nevada desert or something) when they discover that the pension they believe is sacrosanct is actually an empty bag and all of the CALPERS chiefs have skipped town.

Sippn said...

No offense taken; however, I am offended by Jamie Leigh Curtis appearing on the cover of AARP (Mom's copy) That b***h has no self respect! She's much younger than old Sammy...

Hear the line from the new Indiana Jones movie.... "you must be 80 or something.."

One thing about state workers.... it and UCD are our exports.... employment provided with dollars from elsewhere! I'm not too worried about funding it as long as LA and the Bay/Silicone Valley/Napa Valley are doing OK.

Its so unfair, huh.

Wadin' In said...

I do not see the real problem here as the migration of retired workers taking their pay out of state. It does not happen at a meaningful level. Most retired people stay and live in the area where they worked. Max's 3.1% example really confirms this point.

The bigger issue, IMHO, is the burden to the state for paying all these retired workers, while they must also pay the new employees coming in behind them. It will be interesting to see what percentage of the state budget goes to the labor pool and how that increases as all the employees retire.

Darth Toll is correct about Cal PERS, though I don't think they are BK, and I believe the state is obligated to fund the shortfall. A few years ago, I took the value of CalPERS' portfolio and divided it by the number of members. It totaled $143,000/member. If you go to any retirement calculator, the critical mass for retirement is usually around $2,000,000/person. That way, they can draw down about $80,000/year gross without touching principal. Is that too much you say? Consider paying 14% SS tax, $6,000/yr health insurance, and all the other benefits normally provided by work, You will be lucky to net $3,500/mon after taxes.

The smart folks are paying off their mortgages, so they don't have to pull taxable income out of their IRAs just to cover basic housing expenses. This allows them to stay down in the lower tax brackets.

It is going to be an interesting time as the costs associated with housing and living in the US are going up, but real income is dropping. There are pressures on many, many fronts.

Max said...

Most retired people stay and live in the area where they worked. Max's 3.1% example really confirms this point.

I freely admit that a lot of this is conjecture, but it's difficult coming up with hard numbers from the government that support negative conclusions these days. When there's an absence of data, there's probably a hidden problem.

FWIW, I the 3.1% number was for all PERS retirees. I think the number would be higher for Sacramento simply because we're closer to the other states (two hours to Reno/Carson City).

Darth Toll is correct about Cal PERS, though I don't think they are BK, and I believe the state is obligated to fund the shortfall. A few years ago, I took the value of CalPERS' portfolio and divided it by the number of members. It totaled $143,000/member.

Here, here. There was a famous quote by the Orange County, CA pension finance guy complaining that retired workers were living too long and it was costing too much. If only the taxpayers knew they were on the hook for the PERS shortfall and understood what that means...

One thing I didn't even address (while going for the more sexy conclusion) is the simple turnover in housing that could result from the retirement wave. I know people in Land Park would disagree (median age is like 85 there :), but there should be a lot of downsizing in the near future as well.

All in all, I don't see a lot of positive trends on the demographic front when it comes to housing. Add retiring state workers in Sacramento to the list.

Deflationary Jane said...

UC is about the same pickle though UCRP is better shape then CalPers.

I also think our demographic is slightly older in the academic depts and about the same in the service depts.

As to people moving out of the state, what we have is a historical trend during a period of relative affordability. I do know that my woefully incomplete and utterly unscientific "Jane survey" says that about 3 out of 5 retirees plan to or have already moved out of the state. About 2 in 11 are moving out of the country. Of these retiring, again 3 out of 5 are planning on taking the 1 time cash out.

Given the 3% number Max was able to get, this is demonstratable recent change in attitudes. Whether these attitudes persist and are accompanied by follow through remains to be seen.

As to hiring, UCD openings has shrunk by about 70%. I know of several positions that will not have rehires as new technology has made them unnesessary and the people in those jobs currently are just skating along until forced to leave. While businesses have become leaner due to technology years ago, the state is just now catching up. This will definately impact hiring patterns going forward.

UCOP is really trying to push the new START program but depts are fighting it. The higher ups may have time to spare but the worker bees (accounting/purchasing/office of research/admin staff) are backed up paperwork wise.

If staffers do take the 20% time reduction, faculty will howl like banshees that there is noone to fix the copier, order them a new stapler, or approve their travel reimbursements RIGHT THIS SECOND. I just don't see folks like me being able to make use of the start program but we're on the lower side of the payscale so it's not much of a savings for the campus.

Patient Renter said...

Regarding state employed retirees moving out of state, my only anecdotal evidence is my parents (father is state employed) who plan to move back East shortly, where they can get an equal house for half the cost (pocketing the difference) along with a lower overall cost of living.

If you have no employment obligations here, why not? I'd probably do the same.

Patient Renter said...
This comment has been removed by the author.
Darth Toll said...

dj, FWIW, both sets of my folks moved out of state immediately after retiring and selling the primary residence, one to Oregon and the other to Arizona. This was a slam-dunk decision for all of them and they didn't hesitate. If CALPERS folks are looking at $143K/person you can bet they'll move out of state and take whatever RE "winnings" they can. Personally I think the CALPERS folks are looking at less than $143k but the result will be the same if it is less (exodus).

Also, due to falling RE values and reduced property taxes and sales tax receipts, the budget shortfall is growing larger by the day, so the choice will either be to cut services and lay off boatloads of state workers (hits Sacramento RE hard) or to raise taxes which will also hit Sac RE hard by making other states seem even more attractive for retirees, or some combination of raising taxes and cutting services.

Max is being conservative in his estimates, but the term "timebomb" seems to fit well.

Anonymous said...

ANyone know what 1022 44th street, 95817 went pending at?

Anonymous said...

UCD put in a hiring freeze about a month or two back, so I'm sure that dried up the postings. The job I was short-listed for was re-opened as a contract, which I wasn't interested in.

The problem with getting a younger workforce isn't just hiring them but retaining them. These days not everyone wants to stay with the same employer for 40 years. You're lucky to keep a technology worker for 5 years before they want to try something new.

Technology can replace FTEs, but the technology must be maintained and grown, and that takes harder to find FTEs.

Gordon Gekko said...

Darth is right on. I don't know if any of you remember 4 years ago when the CalPers CEO was out touting how they were moving aggressively into commercial real estate. Wonder how that's working out for them? Wonder how many CDO's they own? Ever wonder why there's no annual report to their stake holders like mutual funds have? They're able to hide their losses now with few retirees, but 10-15 years from now, watch out for huge benefit cuts and yet another government bailout.

mndean said...

anonymous-
1022 44th Street is in 95817? That's news to me, since the 95819 postoffice is about four blocks from there, and the fab 40s are in 95819. I think your zip is wrong.

Deflationary Jane said...

I'm pretty sure CalPers was a stakeholder in the Saca tower disaster.

Wadin' In said...

DJ,

CalPERS owns the ground now. Saca bailed....or perhaps was bailed out of the deal.

That is a nice piece of ground and someday it will be worth what CalPERS paid for it. I have heard that is $25 million which is $231/sf for land. Saca transferred title to his development company in 2005 for $20 million.

Sippn said...

Cal Pers kicked Saca out of the deal. They're in plenty of real estate deals and I bet theres a lot of CDOs and other junk in there. How else do you think they got those great returns over the past few years... black magic? There's more to the story when top bosses leave several times over the past few months.

The real crime is when Cal Pers OKed higher benefit pay outs on the temporarily (a few years) higher returns. Did the people recommending the higher payouts directly benefit? Likely.

Follow the money.

Anonymous said...

This is hardly a secret - most agencies have been tasked with succession planning for the last 5 years. It is well understood within State service that about 30% of the workforce will retire in the next 5 years.

As far as any conspiracy by older managers against hiring younger workers - HA and HA! The reason that more workers are hired in their 40s is that most of these people are, like me, "retreads." I had an entirely different career prior to going back to graduate school. The State welcomes retreads because they can't get the younger workers prized by private industry because the starting salaries are too low.

The real problem is that the State needs more skilled workers and has not kept up the salaries necessary to attract skilled younger workers. When I say skilled, I mean scientists, auditors, IT, and analysts - the type of workers that are recruited at college job fairs.

As a supervisor who is working in a classification series that always has a 25% to 50% vacancy rate, I can vouch that the State is not keeping up with the private sector. And yes, this holds true even when the retirement benefits are included.

Retirement costs about 22% of each worker's salary, and the worker pays 5%. That means the State portion is 17%. If a private sector salary is at least 17% higher than the State salary for the same job, the State is not competitive. It's even worse if the private sector employer offers 401K matching.

I know that all the State worker haters won't believe me, but some State jobs, especially entry level jobs, pay 17% less than the private sector equivalent.

The good news is that workers hired in their 40's are likely to continue working at least 20 years so they get full medical benefits, so they will be retiring in their 60's rather than their 50's like some of the current workers. Also their pensions are less because the rate is based in part on the total years of State service. Few years of State service = lower pensions.

PeonInChief said...

A couple of notes:

1. State workers who were hired before the benefits reform get full medical benefits after 10 years. Most of those workers, however, will stay until 65 or 66 for the pension payout.

2. Housing prices will have to fall a lot to enable young workers to move here and buy a house. Remember that many state workers began their careers when Sacramento housing prices were just about the national median. That's not true now, and state wages have not kept pace.

Anonymous said...

Did you graduate from "collage"?