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The Pleasanton Pension Problem

Original post made by More Money, Another Pleasanton neighborhood, on Oct 10, 2011

Unfunded Pension Liabilities represent an important financial issue facing our state, cities, and NOW are school districts. I hope people take the time to understand this important topic.

The pension issue is one of the most important topics regarding the financial health of our state, our cities, and NOW our school districts.


California Teachers Pension Fund Will Seek Taxpayer Rate Boost


"Oct. 7 (Bloomberg) -- The California State Teachers' Retirement System, the second-largest U.S. public pension, said now is the best time to ask lawmakers for an increase in taxpayer contributions toward employee pension benefits.

Calstrs, as the $146.6 billion fund is known, wants to include the step in a pension proposal Governor Jerry Brown has said he plans to roll out as early as this month, said Jack Ehnes, the system's chief executive officer. The increase would be the first in 21 years and may be as much as 14 percent (not a 14% increase but an additional 14% of payroll or an additional 14k per 100k of payroll), though that likely would be phased in over years, he said.

The pension's unfunded liability, or what it will owe compared with projected assets, has more than doubled since 2008 to $56 billion, in part because of investment losses (and in part from BAD policy). That's something that state Auditor Elaine Howle has said is a "high- risk issue" since California is on the hook for the difference (taxpayers)."

""We think we're at the right moment where it's time to move on the funding strategy politically," Ehnes said yesterday at a board meeting in Huntington Beach. "We're going to see where we come out on this. There may be competing priorities, educational and otherwise."

Yes, there may be competing priorities Mr. Ehnes. The timing of the CalSTRS pension funding proposal is politically driven when it really should be fiscally driven, driven by sound accounting practices, or even a suspension of the teacher's union/CalSTRS side agreement to redirect 25% of their contribution to a side benefit fund. Instead, the CalSTRS board has deferred making the request for increased funding, for several years, for fear it would adversely impact teacher union negotiations. CalSTRS, CalPERS, and union employee groups were hoping to extend contracts for a few years with the expectation that the recession would subside, the taxpayers would lose interest in their desire for pension reform, and markets would rebound to the point it would be business as usual. The markets haven't rebounded, the PUBLIC employee unions haven't conceded anything during the great recession (they have received raises - while private sector unions in the building trades are experiencing 40% + unemployment), and the Public Employee Union pension funds are claiming there isn't a problem. Unfortunately for the union controlled boards their actuaries, and more importantly their independent actuaries, are claiming the 7.75% rate of return is unrealistic in the present environment.

CalSTRS claims the increased 14% of payroll will likely be "Phased in". What that really means is the increased "phased in" cost won't even cover the 7.75% interest expense for several years. In other words the taxpayer cost/funding will increase substantially and so will the unfunded liability, because CalSTRS will imbed the equivalent of a negative amortization loan into their payment structure (the same thing CalPERS has done).

Read the entire article: Web Link

The pension funds unfunded liability has MORE than doubled since 2008, to 56 BILLION dollars? Think about that in relation to our city, county and state budgets. Since 2008 the unfunded liability has risen from less than 28 BILLION to 56 BILLION dollars, as of June 30, 2011 (four years), even though the CalSTRS board has boasted about double-digit returns in the fiscal years ending June 30, 2010 & 2011. Based on dismal first quarter returns (beginning July 1, 2011) that are down 10% on average in the first 90 days of the fiscal year, the taxpayer- state-county-school districts problem is accelerating rapidly.

ADD up the under funded pension liability of all the above mentioned pensions plans that include all public employee unions at every level of our states government, as well as the unfunded liability of the public employee union retiree healthcare plans, and it is easy to see where California is headed. Our state legislators, city council members, county supervisors, and Public Employee Unions have negotiated contracts that can NOT possibly be supported without EXTRAORDINARY sacrifice from taxpayers - if even then. Every one of the groups mentioned, with the exception of the taxpayers, have benefited from a relationship that can best be characterized as incestual; employee union groups bargaining with management employee groups that have a "me-too" clause in their contract.

The incresed funding shouldn't be unexpected. I would like to know what the PUSD has done to prepare for this upcoming day?

Comments (11)

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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 10, 2011 at 8:05 pm

" The timing of the CalSTRS pension funding proposal is politically driven when it really should be fiscally driven, driven by sound accounting practices, or even a suspension of the teacher's union/CalSTRS side agreement to redirect 25% of their contribution to a side benefit fund."

More Money - can you elaborate on the 25% redirect point you made above? Does this mean that not all of a teacher's 8% contribution makes it to the main CalSTRS investment pool - the one that is currently underfunded?

Thanks


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Posted by b
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 9:00 am

People are growing tired of your rants.

As usual, you pick convenient statistics. We all know what happened to investment markets (and thus pension funds) in 2008. So what happened 2009-2011? Quite a different story, isn't it? How about being honest with your readers.

The local economy has continuously improved the last two years, and this has progressively become less of a problem during that time. On our current trajectory, this will be a distant memory in two years.

Stop reporting old news. Show us the new stats!


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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 9:38 am

b - you may have missed my response to you on another blog, so I'll repost it here as it is relevant to the discussion:

"But weakening your neighbors to put money in your own pocket doesn't pay off in the long run." - b, this is an interesting statement. Makes sense.

What is your take on the fact that compensation of Pleasanton City employees has grown from 65% to 79% of the budget, and that unfunded liabilities have grown from zero to $180M?

Do you think this will weaken the city in the long-term for both future residents and future employees?


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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 9:41 am

Also b - I understand that even with CalPERS 20% return (still less than the 30% return of overall market), that CalPERS has underperformed for the past 5-10 years.

And now they are communicating that they will be underperforming for the next couple of years.

So I am not so quick as you are to dismiss More Money as misrepresenting the situation.


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Posted by Arnold
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 2:37 pm

"More Money - can you elaborate on the 25% redirect point you made above? Does this mean that not all of a teacher's 8% contribution makes it to the main CalSTRS investment pool - the one that is currently underfunded?"

The redirection of 25% of teacher pension contributions was a ten year program that ended January 1, 2011. But like all pension plans this was only one of the pension enhancements that occurred in the early 2000's. Below is the information on the redirection of 25% of the teachers contribution. As you will see, this represents 7.4 Billion of the 56 Billion unfunded CalSTRS liability.

"In the other program, a quarter of the employee contribution, 2 percent of pay, was redirected to a separate individual investment fund, the Defined Benefit Supplement, that adds a 401(k)-style plan to teacher pensions.

The supplemental fund earns what the CalSTRS investment portfolio earns, which was 12.7 percent last year. But a guaranteed minimum prevents the supplemental fund earnings from dropping below the 30-year Treasury bond, now about 4.7 percent.

The redirection to the Defined Benefit Supplement, $652 million last fiscal year, expired after a decade on Jan. 1. Duran said the supplemental fund holds about $7.4 billion for 544,000 active and retired employees."

"Five other bills enacted a decade ago did a number of things to increase teacher pensions (notably a longevity bonus that expired Jan. 1 and a retroactive increase for retirees) and reduced the state contribution to CalSTRS.

A report to the CalSTRS board in June 2009 found that a teacher at age 63 after 34.5 years of service could retire with 103 percent of final pay, if they have the pension, the supplement and have put $100 a month into a tax-deferred investment planů.

The report also said CalSTRS needs an annual contribution increase of 13.9 percent of pay, $3.8 billion, to be fully funded over the next three decades. So what can CalSTRS do if it can't raise contribution rates?"

The article: Web Link

The two percent @60 formula is a bit misleading. Teachers retiring at age 63 receive 2.4@63. If they've worked 25 years they also receive a longevity bonus of 400 per month. And, as this article mentions, they also receive the 401k benefit from the redirection of 25% of their pension contribution.

You should read the entire article


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Posted by b
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 2:46 pm

It is an investment plan. Surprise! Its value fluctuated with the investment markets.

Budgets and pensions looked great in 2007 and lousy in 2009. That's the cycle. Real markets aren't tidy and smooth.

This is yet another TEA Party attempt to kick people [removed] while they're vulnerable, nothing more.


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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 3:24 pm

b - it would be great to get your perspective on the personnel cost points I brought up above and on another blog. What impact will these elevated personnel costs have on future residents and employees?


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Posted by Arnold
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 6:42 pm

"Posted by b, a resident of the Another Pleasanton neighborhood neighborhood, 9 hours ago

People are growing tired of your rants....As usual, you pick convenient statistics. We all know what happened to investment markets (and thus pension funds) in 2008. So what happened 2009-2011? Quite a different story, isn't it? How about being honest with your readers.

The local economy has continuously improved the last two years, and this has progressively become less of a problem during that time. On our current trajectory, this will be a distant memory in two years."

Hi,b

You say people are growing tired of my rants. Which people are you refering to, besides yourself (and the poster that said I should expect a knock on my door)?

I try my best to be factual. Do I make mistakes, probably. Will I correct them them if you demonstrate my error - absolutely. Your comment, "How about being honest with your readers." is an invitation for me to challenge you to show where I've been dishonest. Where have I been dishonest, b?

I hope we can engage in an honest discussion regarding pensions.

I'll start the dialogue.

You say, "The local economy has continuously improved the last two years, and this has progressively become less of a problem during that time. On our current trajectory, this will be a distant memory in two years."

Calpers has lost 17.5 billion in the past three months. The 20.3% returns they were claiming on June 30,2011, have morphed into an average rate of return of 7.75 percent over the past 15 months. That 7.75% return on assets ignores the 7.75% interest rate charged on the unfunded liability. Those interest charges equate to over 10 Billion dollars.


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Posted by Arnold
a resident of Another Pleasanton neighborhood
on Oct 11, 2011 at 7:23 pm

b, that should have read CalPERS FY 2010-11 returns were 20.7%. CalPERS started the Fiscal year with 200.5 Billion in assets. They ended the year with 237.5 billion in assets. Today assets are about 220 billion.

Maybe you can help me understand this pension math/equation? If you start with 200.5b and return 20.7% shouldn't the total assets grow to 242 billion? 200.5 billion * (1 + .207) = 242 billion. Yet they ended the year with 237.5 Billion in assets. Where did the other 4.5 billion go?


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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 12, 2011 at 9:09 am

I found the following Pimco comments on expected returns interesting. The longer we let CalPERS/CalSTRS play the game that everything is OK and they will reach their return targets, the more future citizens will be short-changed.

Please don't be fooled by the spin that is coming from these agencies.

Pimco's Prediction For Pension Plans: "Pain"

While it won't say much new to those "stupid enough" to exist in the intersection of the "Retired" and "Alive" Venn circles under the Bernanke central planning regime, we suggest any pensioners who hope to see their life savings generate some...any... return (on capital, or of capital) in their lifetime, to simply skip this article and read some of our cheerier fare.

So here is the punchline for pension fund managers which now predict an utterly insane 11% equity return which is the only thing that would make their Pension Plans whole: "In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11% is pure jibber-jabber. It is wishful thinking. I dare not predict the level of the S&P 500 ten years out, but an ERP this high suggests the S&P would have to reach unprecedented levels. If this is what plan sponsors are counting on, I, like Clubber Lang, predict Pain." And "Hope is neither a training plan nor an investment strategy." Uh, wrong. Have you seen the EURUSD these days?

Web Link


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Posted by lazzboy
a resident of Another Pleasanton neighborhood
on Oct 12, 2011 at 11:31 pm

"I would like to know what the PUSD has done to prepare for this upcoming day?"

Well, when you get elected to the school board, you will know.


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