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Tag Archives | public pensions

California municipal bankruptcies threaten public pensions

The coming battle in public pensions is between CalPERS, the biggest public pension fund in the country, and bond insurers who want pension payments made by bankrupt municipalities to CalPERS cut. This could mean that pension contracts made with bankrupt cities could rendered void.

Public pensions in California are supposed to be sacrosanct and untouchable. The assumption is that public pension agreements are unalterable. However, recent California municipal bankruptcies now threaten public pension contracts and perhaps could even break them. If that happens, then any struggling municipality could target public pension agreements and benefits. We are at the beginning of a serious battle between deep-pocketed players to determine who is first in line for money from bankrupt cities and what cities must do to fulfill their bankruptcy plan.

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California ignores growing public pension crisis

The two major California public pension funds have a combined unfunded liability of about $72 billion (PDF- Pg. 41). Yet Gov. Brown just postponed a pension reform ballot measure and instead is making vague promises about how change will come while offering no concrete proposals.

A Field Poll says voters are not too concerned about pension reform, favoring mild changes and opposing eliminating collective bargaining. However, voters in San Jose and San Diego recently overwhelmingly approved pension reform, including eliminating benefits for existing workers (or making them pay more for them). Thus, the issue of pension reform is beginning to get major visibility in California, a trend that will continue as the crisis grows.

More on IVN, including discussion of how California public pensions can force the state and municipalities to cover their shortfalls, except perhaps when municipalities file bankruptcy. Three California cities have done so in the past two weeks.

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San Jose and San Diego to vote on divisive public pension reform

Credit: sanjoseca.gov

Voters in San Jose and San Diego will decide on Tuesday whether to approve measures to lower public pension costs by reducing benefits. These elections are critical to the public pension reform movement, with many across the nation watching these bellwether votes. If the measures pass, they will provide momentum for other municipalities to use similar tactics to reduce public pension costs. Public unions are understandably opposed to radical change in pension plans even as they, and most, acknowledge that some changes are needed.

The collapse of the real estate bubble damaged the financial health of many cities. Despite this, public pension costs continued to rise steadily. Municipalities are caught in a relentless downward spiral of less revenue and increasing costs.

More at IVN

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Politicians and unions hide liabilities for public pensions

California Gov. Brown proposes solutions but doesn't include assumed rate of return. Credit: latimes.com

Public pensions across the country generally calculate future liability by assuming an 8% rate of return. “The problem with that is the 8 percent assumption is totally bogus,” says Connecticut columnist George Gombossy, noting that that public pension returns there have averaged just 5.7% for the past ten years. Most other states have similar problems with overly rosy projections that do not track reality. When that happens, pension funds have funding shortfalls. Assuming 8% but getting 5.7% means you will be 20% short at the end of ten years.

More about public pension liabilities at IVN.

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CalPERS earned just 1.1% in 2011

The California Public Employees’ Retirement System (CalPERS) announced a disappointing 1.1% return on their investments for calendar year 2011. By their own estimates, they need to average 7.75% a year to meet current and future obligations to its about 1 million members and 500,000 retirees. Some years, like in 2009 and 2010, they did better than the average. But when the real estate bubble popped in 2008 they had severe losses.

The big problem that CalPERS (and all pension funds) face is the amount they must pay out in pensions and medical benefits is generally increasing steadily while their income fluctuates. In addition, more than a few think a 7.75% return year after year is unrealistic, that trying to meet than means taking unnecessary and possibly quite costly risks. We are talking retiree’s money here after all. CalPERS isn’t a hedge fund nor should it be run that way.

In the past ten years there have been two stock market bubbles then collapses. The dot com implosion singed many but had no systemic effects. However the real estate implosion took down the economy with it, and we’ve yet to recover. The entire Eurozone with its ever-looming sovereign debt crises are another example of how assuming a specified return can be difficult in normal times and near-impossible in shaky times like ours now. Even if CalsPERS owns no sovereign debt, others do. Wobbly financial times impact everyone.

But CalPERS and the other big public pensions can by law force the State of California to make up any funding shortfall it has. Even in 2010, when CalPERS returned 12.6%, the State of California made contributions of several hundred million to CalPERS and CALSTRS (the teacher pension fund.) This year it will be over $3 billion. Private pensions can only dream of such guaranteed funding. And where’s the incentive to conservatively manage retiree pension money when the State can be told to make up any shortfall?

Private pensions also have much stricter accounting rules than public pensions. Forbes explains:

States and localities [can] assume they will benefit from the high returns of having part of their portfolio invested in equities, without accounting for the increased risk. This allows public pensions to hide the true cost of public pensions from taxpayers, contributing to the massive pension funding crisis which we now face in the U.S.
If public pensions had to follow the same rules as private pensions, their ability to meet obligations would be questioned by many. This begs the question. Why are public pensions allowed to operate under much looser standards than private pensions?

A new state advisory board is now including a “sensitivity analysis” in their projections for the public pensions. They factor in what the employer would have to pay given differing pension fund returns. If they hit that 7.75% mark, then employers pay 19.5% of pay. But if the fund should drop just 4% in the next few years, then employers would have to put up 28.9% of pay. These employers are public entities, so the amount will eventually come, in one way or another, from California taxpayers.

California has huge unfunded pension liabilities at all levels. These won’t go away by assuming perkily optimistic returns during unstable economic times.

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