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Hotel CalPERS: you can check out but you can never leave?

Original post made by Hotel CalPERS on Sep 9, 2011

Hotel CalPERS: You can check out, but you can never leave?

"CalPERS, the big state pension fund, has effectively slammed the door on cities thinking of getting out of the guaranteed pension business.

Last month, the fund's board decided to recalculate the unfunded liability of any agencies that want to leave the system, using a discount rate of 3.8 percent instead of 7.75 percent


That means that a city that believes it owes a bajillion dollars will be told it owes something closer to four bajillion if it tries to leave.

So the door is not officially closed – it just got real expensive to open.
The board's move comes as mounting pension debts are getting more attention from local governments and the media.

Ten Orange County cities now have unfunded liabilities with CalPERS of more than $100 million, the Register recently reported….

Earlier this year, the Costa Mesa City Council asked CalPERS how much it would cost to settle accounts. They were told that a pension liability they thought was $130 million amounted to $221.7 million in exit costs.

Financing that exit payment over 10 years would bring the total to $315 million, CalPERS actuary Rick Santos told them.

(BUT) Under the new statewide policy (just adopted by CalPERS), Costa Mesa would need to pay between $444 million and $514 million up front, according to formulas provided by two experts.

Financing that over 10 years would cost $63 million to $73 million per year; the city's general fund budget is just $93 million.

Costa Mesa is not unique….


HOW WE GOT THESE NUMBERS

The Watchdog contacted two experts to make sure we got the math right: John Bartel, a member of the state's independent actuarial board, and Stanford University professor Joe Nation, whose students got a lot of attention last year by calculating that CalPERS' liabilities were 72 percent higher than previously reported.

They gave us a similar shortcut for calculating termination unfunded liability. If you like pension math (and who doesn't?), you can read the rest of the article to get an idea of why the shortcut works.

Bartel said his rule of thumb is to multiply liabilities by 1.5, then subtract current assets. Nation's formula works out to a multiplier of 1.66."

John Bartel is the very same actuary that presented the disturbing picture of Pleasanton's pension problems during a council meeting three weeks ago. This is a good article: Web Link


My View

CalPERS investment team and their independent consultants recommended lowering the assumed rate of return, or discount rate. The investment team recommended lowering that rate from 7.75%, to 7.35- 7.5%, while the independent consultant told them they would be lucky to return 6% over the next decade. The union dominated board rejected the numbers from staff even though the people responsible for earning those returns projected a 7.4% rate of return for the next decade, which many feel is overly optimistic.

They did this because lowering the discount rate increases the cost cities will have to pay (even though it increases the unfunded liability). Lowering the discount rate to 7.35% would increase the pension cost for public safety by 6% of payroll. Their fear was/is that if pension costs increase even more rapidly than they already are the union members would see increased pressure to lower compensation. Maintaining the status quo, as unrealistic as it was/is, at least defers the debt which doesn't show up on the balance sheet; the unions were/are OK with that. That is about to change with the new GASB rules (public pension accounting rules) that will soon come into play.

How reliable are CalPERS projections? CalPERS made 10 year projections when they introduced the 3@50 pension formula in 1999 (SB 400). They claimed cities would pay little or nothing for the next ten years because CalPERS was Superfunded and the investment staff was projecting a DOW of 25,000, by 2009. I rest my case.

CalPERS has been embroiled in one scandal after another, they've written off real-estate investments at 1 billion per clip for several projects, including the Mountain House project, and they have lost site of their role as an independent state agency.

While Act 37 pensions plans (essentially county & city pension plans that are not CalPERS) like the Contra Costa County pension system have abused taxpayers to know end by allowing for every pension spiking gimmick imaginable, CalPERS has taken a different approach. The Nations largest pension plan has morphed from an independent State Agency into the role of Union Advocate while advocating for increased union benefits, increased union control, and there recent effort of placing union friendly executives on the Board of Directors of our country's largest corporations, like Apple. This is not their role nor was their advocacy, at the request of the unions, to advocate for SB 400 which increased both pension benefits and costs.

CalPERS, and the unions control of the CalPERS Board, is a BIG part of the problem. People need to pay attention to what is going on with this corrupt organization - CalPERS.

Comments (3)

Posted by money madness, a resident of Another Pleasanton neighborhood
on Sep 9, 2011 at 6:15 pm

Gotta fight these guys to win. It's a hold up and that's robbery.


Posted by You can never leave, a resident of Another Pleasanton neighborhood
on Sep 9, 2011 at 8:15 pm

I would like to offer a new element to this yet to get off the ground discussion. The 7.75% assumed rate of return is essentially meaningless in the world of Pleasanton pension plans which are about as unfunded/under funded as you can get. Let's just consider the PCEA pension plan which, according to the last CalPERS actuarial report, is 52% funded (there is a reason for that) while the average CalPERS plan was about 60% funded. For the sake of simplification, I'll call it 50% funded. If you suffer a 50% loss, meaning your principle investment decreases from $100 to 50 bucks (add as many zero's as you like), you need a 100% gain just to get back to point A. That is the first part of the CalPERS/Pleasanton pension issue.

The second part of the problem is that even if CalPERS were to return 7.75% annual investment gains it would only represent 50% of what they need to return just to keep the unfunded liability from growing - it wouldn't provide 1 extra dollar to pay down the unfunded liability. It would only INCREASE the unfunded liability while defering the additional expense. The reason for that is the 7.75% they need to return ($7.75 in this example) isn't based on the 50% of assets they actually have to invest. It is based on the 100% of assets they should have - expect to have, but do NOT have. Can they do that on annual basis? The answer isn't no - it is HELL NO!

Here is an example.

-If calPERS were 100% funded ($100) and returned 7.75% they would have returned 7.75 cents at the end of year one, for a total portfolio value of $107.75.

If CalPers were 50% funded (based on the original $100) and earned 7.75% they would have returned $3.88 cents, for a portfolio value of $53.88. So even though CalPERS met their rate of return the unfunded liability grew from $50 to $53.88 cents (107.75 - 53.87). That will be added to all the other unfunded liability. At this point the only useful recognition of the 7.75% rate of return is to consider it the guaranteed return/interest rate taxpayers are stuck paying on the unfunded liability.

So, what rate of return would Calpers need to prevent the PCEA union pension plan from growing their unfunded liability - increasing debt? The answer is 15.5%. A 15.5% return will do little if anything to reduce the dollar amount of the unfunded pension liability but it would prevent the number from growing. Can CalPERS return 15.5%? Not a chance! And I haven't even addressed the retiree medical costs that are barely funded yet growing at an average of 8% per year, and create an entirely separate category of unfunded liability that taxpayers will be paying.

I'll leave people with this. From a WSJ article:

Calpers Confronts Cuts to Return Rate
Wall Street Journal, March 1, 2010

"Calpers is considering reducing the projected rate of return used by the giant pension fund to make investment decisions. A cut could force cash-strapped governments in California to pay millions more each year to cover their employee pension obligations (pay the actual cost).

Since 2003, the California Public Employees' Retirement System has assumed that the value of its stocks, bonds and other holdings would increase by 7.75% a year. But the likelihood of an extended period of modest economic growth world-wide is fueling doubts inside Calpers that the pension fund can continue aiming so high.

Pressure to lower the target has been building for months. "You'll be lucky to get 6% on your portfolios, maybe 5%," BlackRock Inc. Chairman and Chief Executive Laurence Fink told Calpers board members last July.""

What has CalPERS done to address the issue - nothing. The union controlled BOD rejected common sense instead choosing to string the taxpayers along at 7.75% interest rates, financed over 30 years, to cover the unfunded liabilities they have been instrumental in creating.

What does a leading pension expert have to say about CalPERS shenanigans? Girard Miller, a pension expert, writes this in Governing Magazine:

"How high will this flood crest? Local employers are now skeptical that they have been told the full truth about how high their pension costs will ultimately surge. Unlike the vast majority of public pension funds, CalPERS uses a 15-year actuarial smoothing process that camouflages the genuine economic impact of market fluctuations. I have no issue with normal industry-standard actuarial smoothing periods of 5 years, in light of the average length of a business cycle — which is 6 years based on 14 recession cycles in the past 84 years. But the CalPERS process is opaque and flunks the transparency test that taxpayers, public managers and municipal bond investors are entitled to expect. As I have explained before, such extraordinary "smoothing" practices deserve SEC investigation as an "artifice and device" to conceal relevant financial information from the investment community — as well as the employers who must now bear the financial brunt of unsustainable pension benefits."


Posted by Susanna, a resident of Downtown
on Sep 9, 2011 at 9:27 pm

All I have to say is Holy Cow! This sounds sooooooo serious. Especially the portfolios. Don't bother reading that post above. It will give you nightmares, chills, and you'll not be able to eat for weeks on end. I'm leaving. I can't stand it. And they think global warming is bad? Ha! Wait til the tsunami.


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