California Public Pension Bombs Grow Ever Larger as Funds Post Uninspired Returns

Just what Californians needed to hear (via the Los Angeles Times):

The nation's two biggest public pension funds reported meager returns for the last fiscal year, raising the prospects that state and local governments and school districts may have to contribute more toward their workers' retirements.

The California Public Employees' Retirement System [CalPERS] posted a 1% return on its investments for the fiscal year that ended June 30. The smaller California State Teachers' Retirement System reported a 1.8% annual return.

CalPERS needs a 7.5 percent average return in order cover its pension commitments for its members. State and local governments must make up any difference, so devastated budgets will be devastated further. (I have had arguments with retired California public employees who do not grasp/utterly refuse to accept this detail and incorrectly believe their pensions are not a current taxpayer burden. It’s akin to trying to argue with retirees who refuse to recognize they’re drawing more from Social Security than they ever put in.)

The latest awful pension news adds more steam to the speculation about which cities will be the next to file for bankruptcy. On Saturday, the San Francisco Chronicle noted eight cities that have warned the bond market they are facing significant financial hardships. The watchdog crew over at the Orange County Register have looked at financial reserves of cities in their county and put Stanton on the watch list.

In San Bernardino, City Council is delaying its declaration of fiscal emergency in order to try to actually figure out what happened before filing for bankruptcy. Via The Sun (San Bernardino):

City Attorney James F. Penman said at last week's meeting that 13 of 16 years of budget documents were falsified, then declined to elaborate. Monday, within council chambers again, he and other officials explained what they think happened.

Money was habitually borrowed from restricted funds -- areas of the budget that legally can be used only for certain purposes -- to meet payroll and other expenses during months when cash was short, then repaid as the revenues flowed in later in the year, Finance Director Jason Simpson said.

At some point, Simpson indicated, those internal loans could not be repaid within a fiscal year.

Under questioning from Councilwoman Wendy McCammack, Simpson -- who, like Interim City Manager Andrea Travis-Miller, has only been in office several months -- said other cities do not do such borrowing and that there was no indication of this borrowing in the budget or other documents given to the council.

McCammack said she repeatedly asked officials what the balance was in those restricted funds and wasn't answered.

Penman made the case more explicitly.

"State of California law prohibits cities from engaging in deficit spending. You, the council, were engaging in deficit spending ... and the budget did not show that," he said. "You, without knowing it, were acting on false information, misleading information. In my definition, if you have a document that contains false information, misleading information, you have a false document."

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  • John||

    They don't care. They figure when they finally go bankrupt aunt Nancy and uncle Barrack will bail them out with everyone else's money.

    I am now actively rooting for California to finally go bankrupt.

  • Chloe||

    Can we just actively root that a massive earthquake causes it to fall off the map? Nobody I know lives there, so I wouldn't care.

  • $park¥||

    Even knowing sloopy lives there still doesn't make me care.

  • The Hammer||

    Sloopy lives there? Doesn't that mean Banjos lives there too?

  • EDG reppin' LBC||

    If there were such an earthquake, Sloopy would end up living on beach front property. I on the other hand, would be floating on my sofa, drifting along the California Current, practicing my Japanese.

  • Chloe||

    Well, you should hand it to the dolphins, they just wanted it more.

  • ant1sthenes||

    Well, I would feel bad for the kid. But maybe there would be a 2012-style escape sequence that they could film on their camera phone for us.

  • Mrs. Kravitz||

    Why do Reason's Californians continue to reside in that cesspool?

    If they had any self respect and integrity, they'd put their money where their mouths are and leave!

    Wouldn't they?

  • Public Citizzen||

    Have wanted to leave the stinking quagmire that used to be the Golden State since 2007.
    I'm trapped here by the Workers Comp. System.
    Due to a disabling injury I can't work, can't get medical care if I leave the state, and can't get the system to move any faster toward a resolution that will provide for my family.
    Thanks to the collusion of a bought and paid for Dr. and the insurance company Liberty Mutual I've lost my house and most of the things I worked a lifetime to acquire.
    Some of us don't have many good choices available. For those that do, may you have good fortune and God speed.

  • The Hammer||

    I'm rooting for the entire state to be given to Texas in receivership. The state falling off the map would be a waste of a lot of beautiful wilderness.

  • John||

    I agree. I hold out hope the government will go bankrupt and the people living there will move away.

  • Chloe||

    Aren't people already moving away?

  • John||

    By the 1000s. Sadly, it is mostly the wrong people.

  • fish||

    By whose standards?

    Productive people depart. This hastens the collapse.

    Productive people can then return at a later date.

    I see no downside.

  • Night Elf Mohawk||

    We'll take the land but not the people. We can call it the Western Counties or something.

  • Scott S.||

    This could make a fun "Parks and Recreation"-style sitcom. Just saying.

  • ||

    Well, you could go all supervillain and pull a Lex Luthor on California.

  • fish||

    I always wanted to live in Otisburgh!

  • R C Dean||

    I am now actively rooting for California to finally go bankrupt.

    Technically, I'm not sure we have anything in the bankruptcy code for a state that goes bankrupt. Without something be legislated in DC, I'm not even sure its possible.

  • John||

    Sure it is. It is called default. The state just walks away from its debts. They have sovereign immunity. There is nothing the bond holders or the unions could do about it.

  • BC||

    Nope. The state constitution prioritizes the repayment of bond debt over all other state spending. Creditors would have a constitutional claim against Sacramento in the event of an attempted default, that sovereign immunity wouldn't operate to defeat.

  • juris imprudent||

    It’s akin to trying to argue with retirees who refuse to recognize they’re drawing more from Social Security than they ever put in.

    Beliefs are never trumped by evidence or logic.

  • Romulus Augustus||

    Some of us have run the numbers and find our contributions (and that of our employers) would have produced an annuity on retirement that is twice (or more) as much as we can expect from social security. Hell, when I
    went to work, the Dow was about 700. Now it is 12,800. Reinvested dividends in an SP500; fund would make
    me a several times millionaire and I wouldn't even need S.S. But, then, they laughed at Goldwater's s.s. ideas in 1964.

  • goneGalt||

    It's worse than that. Forget about inflation, interest, or time value of money. Given what I've already put in and what I will put in over the years to come, I'll need to collect for 16.5 years just to break even on nominal dollars.

  • Invisible Finger||

    sCALPers

  • $park¥||

    Hey, it's all just shifting numbers around on a piece of paper anyway right? None of this eleventy kabillion dollars is in real money, they can just take a zero from one spot and move it to another spot and BOOM, budget fixed and bankruptcy averted.

  • Spoonman.||

    City Attorney James F. Penman said at last week's meeting that 13 of 16 years of budget documents were falsified, then declined to elaborate.

    So, who's in jail or under indictment? Better be somebody.

  • ||

    Keep dreaming. And if they actually do prosecute someone, it'll be a scapegoat.

  • Jerry on the road||

    7.5%? That's fucking crazy. There are not enough emerging markets to make cover for that return, especially not a fund size of what, $200B?

  • Fluffy||

    The pension return estimate number is a deliberate lie designed to allow them to claim the pension is solvent for as long as possible.

    They just want to pay the current retirees their full pensions as long as they can, on the unquestioned absolute that they'll find steal the money they need to pay future retirees later.

  • John||

    The alternative is admit that the money isn't there. They will never do that until they have to. So they will continue to lie cheat and steal as long as possible. And then when they can't do that anymore, claim the fund is too big to fail, mistakes were made, but that promises have to be kept so tax payers will just have to pay up.

  • EDG reppin' LBC||

    7.5% is fucking crazy. During good years, it is attainable. If someone was to promise me a 7.5% return on my portfolio, I'd check his license to make sure it didn't read "Bernie Madoff".

  • Romulus Augustus||

    This was a typical return used by most pension funds and blessed by the IRS.
    People with pensions should be shouting in favor of free market capitalism and voting against those who destroy the value of the companies
    the pensions invest in.

  • R C Dean||

    That 7.5% number may have been good before Helicopter Ben repressed the fuck out of the return in the bond market.

    When the historical average return on Treasuries is around 5%, 7.5% total return doesn't look so bad. When the return on Treasuries has been manipulated down to sub-2% levels, 7.5% is ludicrous.

  • EDG reppin' LBC||

    CalPERS had a wide array of assets in it's portfolio before 2007-2008 as well. Most importantly, they were lending for commercial and large-scale residential development. Since the RE market took a dump, CalPERS has gotten out of the loan business.

  • MOFO.||

    According to wikipedia:

    As of December 2008, CalPERS managed the largest public pension fund in the United States with $179.2 billion in assets; however, that represented a 31% decrease from the peak value of its assets of $260.6 billion in October 2007.[4]

  • MOFO.||

    Calpers itself claims INVESTMENT PORTFOLIO MARKET VALUE
    $237.6 Billion (As of March 31, 2012)

    http://www.calpers.ca.gov/eip-.....tments.pdf

  • MOFO.||

    And claims a rate of return as follows:

    Fiscal year to date ended 3/31/2012
    1.9%
    3 years for period ended 3/31/2012
    13.5%
    5 years for period ended 3/31/2012
    1.2%
    10 years for period ended 3/31/2012
    5.7%

  • T||

    Okay, so here's my question about San Bernandino: who's going to jail? In my capacity as private individual working for Faceless Multinational Corporation if I make false statements on the documents submitted to the SEC, I get to go to jail when they catch me. I cannot believe that somebody is not criminally liable in the San Bernandino mess.

  • Fluffy||

    I guarantee you their defense will be that since the loans were repaid within the fiscal year it wasn't deficit spending, it was "cash account management".

  • Tonio||

    And I don't have a problem with within-year deficit spending as long as its open and above-board. Say everyone's property taxes are due the same month, then the city will probably be running a deficit until those tax checks come in. Carrying the deficit over to other years and not reporting this to the mayor and council is a problem.

  • R C Dean||

    I guarantee you their defense will be that since the loans were repaid within the fiscal year it wasn't deficit spending, it was "cash account management".

    That would be fine, except I guaran-fucking-tee you they had loans that carried over from one fiscal year to the next. That's what a structural deficit is, after all.

  • Tonio||

    You naive, T. Govt employees have teh immuniteez.

  • T||

    No, man, you don't get the immuniteez when you're lying to other government employees and agencies. Somebody in San Berdoo's accounting department was flat-out bullshitting the City Council. You think the City Council can let that slide? Got to bust somebody, pour encourager les autres, you see.

  • ||

    Just fall in the ocean already, California. But only after my aunt sells her houses in SLO and Palo Alto.

  • ||

    thank god my state's pension system (LEOFF II) is actually substantially underfunded.

    maybe that's because cops and firefighters up here take fewer benefits because we die earlier due to seasonal affective disorder?

    because god knows, fiscal sanity and intelligent investment cannot be the reason. not in WA.

    one of my best friends is a firefighter down in san diego and he may be proper fucked after all.

    his wife is a dispatcher. that's a lot of govt. teat.

    california also faces the problem many big investors do in that they can't move nimbly into investments. they are so fucking big, they ARE the market.

    our retiremement system really does engender a sense of entitlement. it's pretty damn good. i know the reason most people don't cash out earlier rather than later is that once you retire, the big cost becomes health care/insurance which is paid 100% by our employer.

    the old LEOFF I guys iiuc continue to get bitchen health coverage after retirement . LEOFF I was **way** too generous.

  • ||

    ugh, typo. substantially OVERfunded.

  • The Hammer||

    So far.

  • ||

    i'm not predictin'. i'm reportin'

  • johnl||

    The determination of what's "overfunded" depends on the assumed rate of return. If a find is adequately funded and the assumed rate of return is rational, then that's OK. If it's adequately funded assuming unrealistic returns, for example, 7.5%, then it's underfunded.

  • johnl||

    I mean what RCD said.

  • ||

    i get that. and again, my point is it's well above maintenance. iow. NOW it's funded to the point that the assets outweigh the liabilities

    i am not saying, for the 100th time, that given future contributions and rate of returns that the status quo will continue

    but right now, it offers a nice contrast to kaleefornya

  • Pip||

    It's over-funded because of Dunphy donated all of the proceeds from his bands world tour.

  • R C Dean||

    Dunphy, I wouldn't be so sure its overfunded, since that conclusion depends on what the assumed rate of return is.

    A pension that is overfunded with an assumed rate of return of 7% is underfunded with an assumed rate of return of 2%.

  • Stormy Dragon||

    The other issue is that the current definition of "fully-funded" doesn't necessarily mean what it does to most people. Basically, it means that if you fired everyone today, you'd have enough funds to cover currently owed benefits. It doesn't mean you have enough funds to cover expected outlaws if things continue to the future.

    This is a significant destinction given that pension benefits tend to be heavily backload (that is, if normal retirement is 40 years, an employee who's been there 10 years is currently owed far less than 25% of their expected eventual benefit). So even if the pension has enough money to pay that 10 year employee's currently vested benefits, it may not have enough to pay what they're owed if they stay another 30 years.

  • ||

    right. again, that's my point. i'm not making statements about the future. but i am saying the levels it is at now is ABOVE "maintenance" which imo (not going to get into a semantical wank) qualifies as "well funded"

    they recently raised the contribution amounts that are taken out of our paychecks and i would support them doing so again. iow, let's get more INPUTS, stefanie.

  • Stormy Dragon||

    It's not semantic wanking. To use your formula from downthread, "wellfunded" means that if there's a 10 year employee on the force right now, the pension will (in 15 years) have enough to pay 10% of their CURRENT salary. But in fifteen years, the pension is actually going to be on the hook for 50% of their FINAL salary when they retire in 15 years. So a pension can be legally "well-funded" and have a tiny fraction of what they're actually going to need to pay out.

  • Invisible Finger||

    In the cesspool of Illinois, the state would jack up the expected rate of return every time they decided to not make payments to the pension funds.

    One would think the rank and file would be super-pissed about this scam. But either they didn't care because the taxpayers would just be looted for any shortfall or, more likely, the few who did the math were laughed at by the union officers who bought into the deal because they expected to cash out before payments became a problem and the rest just believed whatever the officers told them because math like that is hard.

    I'd also like to know the expected WITHDRAWAL rates of these funds. I imagine withdrawals are going to increase from the rate of say ten years ago. It's probably a safe bet that these funds aren't doing any better at planning than Social Security and Medicare.

  • ||

    Right. Because if it's not a problem today it's not a problem at all, correct?

  • ||

    never ceases to amaze me the strawmen and hostility to basic facts. the idea that you have to argue no matter what.

    i never said, nor am i saying that our retirement system may not face problems in the future. i am not making predictions. i am reporting on CURRENT reality

    the current reality is our funding is excellent and unlike california we are CURRENTLY doing just fine

    could that change for better or worse in the future?

    of course. i never addressed that. so, stop making shit up

    i contribute maximally to my deferred comp - i put 15k a year into it, as well as 4k into a roth and another 5 k into general investments.

    so, in addition to my retirement (LEOFF II), i put away 25k or slightly less than 1/4 of my wages into savings for retirement, because i don't plan on depending on just my LEOFF plan for retiremtn $$$

    hth

  • R C Dean||

    the current reality is our funding is excellent

    To repeat: this depends on how realistic your assumed rate of return is. If your assumed rate is 7 or 8% (as is typical), then its way too high, and your fund is most likely underfunded, right now, today.

  • ||

    I am actually glad that our state (I live in WA) is not in the shape that CA is in. But I still think the funds should be structured like 401(k) plans. Defined benefit plans are a recipe for disaster.

  • ||

    generally speaking, i agree.

    WA is kind of a mixed plan halfway between defined contribution and defined compensation, in that the compensation IS tied to (and varies with) your level of contribution

    iow, contribute MORE and you get more.

    one thing that really helps keep the system solvent is the fact that retiring officers don't get to keep the bitchen ass medical insurance

    most of the guys i know with 30+ yrs on say a substantial aspect of their continuing to work is to retain the medical benefits for their families

    a guy who works 35 yrs and retires older will of course ceteris paribus get benefits for a shorter period of time

    also, i suspect that grinding away that long shortens lifespan so it works doubly (retire later, die earlier)

    i'm not really sure if i'd retire in 11 yrs, but it's nice to know i COULD.

    i'd really like to amass way more personal savings/investments than i have now

    again, buying gold in bunches from 98 to 02 really helped my status, but economic comfort and being able to be there for my keeds is important as fuck

  • Night Elf Mohawk||

    his wife is a dispatcher. that's a lot of govt. teat.

    Pics or GTFO.

  • ||

    she's pretty fucking hawt. she does crossfit, and if there is one irrefutable fact it's that crossfit does women's body's VERY VERY GOOD

    i coach at a local crossfit, and imo the guys are too skinny for my taste (i coach weightlifting and i like more muscularity in men), but the women look AMAZING.

  • Tonio||

    [Councilwoman] McCammack said she repeatedly asked officials what the balance was in those restricted funds and wasn't answered.

    And somebody should be fired or indicted for this, too.

  • John||

    Notice how none of the liberal sock puppets ever come on these pension threads. They really do live in an alternative reality.

  • Eduard van Haalen||

    I heard on Bill Moyers that pensions were doing badly because unregulated Wall Street Banks were stealing the money and powerful interests were scapegoating labor.

    How's that for a sockpuppet?

  • John||

    Wow. Why is it so hard for them to admit the obvious?

  • ||

    because it's a religion to them.

    similar to how some people here would actually characterize a cop KNOCKING on a door as a raid. when you have a compelling, bedrock to your soul metanarrative, cognitive dissonance is your fellow traveler

  • ||

    oh btw, because facts trump unsupported assertions, here is the latest report ( i can find) ... note specifically pages 6 and 7 . we are very well funded.

    http://www.leoff.wa.gov/publications/LAVR/2010 LAVR.pdf

  • Jerry on the road||

    Page 37 says economic assumption is a return on investment of 7.5%. Is it still well-funded when you recalculate using say 4.5%?

  • R C Dean||

    There you go. Assumed rate of 7.5%. You, my good man, are most likely not overfunded at all. If it were my pension, I'd want to know what rate of return is necessary for it to be considered adequately funded. If its anything over 4%, I'd be getting nervous.

  • ||

    again, i am not talking predictively. i am saying the CURRENT level of funding, which again is present in my link is well above "maintenance levels".

    i am not saying (for the umpteenth time for the strawman builders) that it will remain overfunded

    jesus, some people want to argue so badly they will erect anything to do so.

    reason writes an article about how fucked up the CURRENT state (primarily) of california retirements systems is.

    and it's fucked up

    i offer irrefutable data that MY retirement system, as a contrast is well funded.

    NOW

    i never said, nor am i saying, anything about the future

    hth

  • johnl||

    Dunphy, you are wrong. And it's a good illustration, because you are not trolling. But it can not be a "fact" that a pension is adequately funded, only an assessment based on the assumed return. And the assumption of a 7.5% return is unrealistic. 20 year AAA corp bonds are 3.9%, any attempt to earn more than 3.9% is not risk free. 7.5% is really pie in the sky.

  • ||

    btw, here's how our retirement benefits are calculated:

    Service credit months ÷ 12 x 2% x Final Average Salary = Monthly Benefit

    so, assume a 25 yr career... that's 25*12 / 12 * 2% * final average salary

    final average salary is the AVERAGE salary you made in your five highest paid consecutive years (including Overtime, etc.)

    so, assume a final average salary of 120k. that equals a monthly salary of 10k

    so, monthly benefit will be 10,000*.5 (for 25 yrs) = 5,000 monthly benefit upon retirement

    that aint half bad, sunshine

  • Night Elf Mohawk||

    Inflation adjusted?

  • ||

    not sure what you mean.

    the high 5 system certainly incentivizes one to have a 5 yr period where you work metric assloads of overtime

    with a base pay of about 95k, it's pretty easy to bump that to 110 or 120k, which makes a big difference in retirement payments

    the optimal solution is to get on a unit that get's 10% pay incentive, like bomb squad

    or you could (god forbid) apply for sgt.

  • R C Dean||

    that aint half bad, sunshine

    Ask a few taxpayers, who will be working into their 70s to qualify for much lower SocSec benefits, what their opinion is of people who will have been retired for 20 years on higher benefits while they went to work every day.

  • ||

    as a libertarian, i believe it's a duty to invest for retirement. personal responsibility... how does that work?

    there are exceptions , but many people who rely solely on SS are in that boat because they didn't take personal responsibility

    look at, for example, people who smoke pack(s) a day.

    no excuses. kick that habit and invest that cig money.

    the poor have higher rates of smoking. thats money they could invest

    also, spend some time in the hood and see how many (often obese) people spend inordinate $$$$ on expensive fast food

    buy $2 for french fries or buy a sack of potatoes?

    we make choices and we reap the benefits or pay the consequences.

    all of a sudden, alleged libertarians sound like bleeding heart libs when it suits your metanarrative.

    seriously. make your choices, and live with the results.

  • Invisible Finger||

    but many people who rely solely on SS are in that boat because they didn't take personal responsibility

    I'm assuming most people on this board AREN'T in that boat.

    I made the assumption when I started working that Social Security would be insignificant peanuts when I retired. Now my property tax rates are escalating and if that trend continues I'm going to NEED that social security money or I'll never be able to afford the taxes. Note that TAXES are never figured into CPI.

    The problem is public employee funds using other people's personal responsibility as another source of revenue.

  • Marshall Gill||

    Wasn't someone bitching about being on the government teat upthread? Oh, yeah, taxpayer money for you bad, taxpayer money for me, "ain't half bad".

  • ||

    bitching? i wasn't bitching.

    i work hard and am compensated very fairly.

    fwiw, i believe retirement saving is a moral duty.

    relying on just SS or even your employer's retirement plan is not enough.

    my grandfather taught me to put away at least 20% of my earnings into investments for retirement

    as a libertarian, i believe people need to take responsibility beyond reliance on retirement programs

    make sacrifices in the present to invest for the future

    i assume we could agree on that

    i did 25% last year and do 20%+ every year

    personal responsibility - a libertarian value

  • ||

    speaking of dumb-ass DV's and drugs n stuff

    go to a dv yesterday, moronic female tries to take her boyfriend's bong so she could (in her words) take it to the police station and get him arrested.

    seriously the stupid.

    so, they wrestle over it and fall to the ground and both suffer injuries. she also claims he dumped bongwater in her hair

    lol

    imnsho, her real intent in taking it and trying to turn it in to the police was because they were breaking up and she thought she could use it as "proof" that he was a doper and thus she could get better child custody treatment for her.

    the childishness of some of these DV's is astounding. people hear DV and they think of evul wife beaters, but the reality is for every real wife beater, there are dozens of these cheezy he said/she said bullshit dv's

    needless to say IF she had brought the bong into the station no matter how much bud it had in the bowl, it wouldn't have resulted in his arrest or even citation and she was a moron

    assault by bongwater. i've seen it all

  • Scion of SoCal||

    Swell, I live in Stanton. If the city can't afford fire and police, then I guess it's time to stock up on fire extinguishers and ammo.

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