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State pension funds: what went wrong

Original post made by Arnold, Another Pleasanton neighborhood, on Oct 21, 2011

Two CalSTRS programs that expired at the beginning of the new year are an example of what all three state public pension systems did in good times — pumped up pensions for retirees, while cutting payments into the pension funds.

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Comments (11)

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Posted by Yikes
a resident of Stoneridge Park
on Oct 22, 2011 at 5:24 am

This stuff is so very scary. God help this stare

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Posted by Craig
a resident of Canyon Meadows
on Oct 22, 2011 at 7:29 am

Yes, sometimes the stare is even scarier than the blink. God help us and save the stare.

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Posted by no worries
a resident of Another Pleasanton neighborhood
on Oct 22, 2011 at 8:21 am

Cap and trade and the new green economy will save all!


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Posted by Kathleen Ruegsegger
a resident of Vintage Hills
on Oct 22, 2011 at 8:24 am

Arnold, Is it correct that CalPERS can call for contribution increases, but CalSTRS has to wait for legislative action in order to increase contributions? (Don't know about UCs.) The possibility (likelihood) of increased contributions by school districts (and their employees) would have a large impact on their budgets.

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Posted by jill
a resident of Birdland
on Oct 22, 2011 at 8:30 pm

Kathleen, you are correct. CalPERS has the authority, and obligation, to set rates. CalSTRS rates are set by the legislature. That is why it is hitting a crisis. The actuarials for CalSTRS indicate that there is not enough contributions for solvency but they cannot raise the contribution rates, or even adjust the benefit payouts. Only the legislature can do that. I expect the legislature will not do anything to raise rates as it affects the state budget, meaning CalSTRS will eventually default. I would be very nervous being a new teacher. You will probably be in the same boat as those of us that are in social security.

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Posted by Arnold
a resident of Another Pleasanton neighborhood
on Oct 24, 2011 at 11:13 am

“The latest CalSTRS valuation, also as of last year, shows a funding level of 71 percent using the actuarial value of assets. Switching to the market value of assets, the CalPERS method, drops the funding level to 63 percent (63% is the appropriate number to consider, and that number has probably decreased to less than 60% today).

(Critics argue that the real funding level of CalPERS and CalSTRS is much lower because the nation’s two largest public pension funds use an overly optimistic forecast of what their investments will earn in the future, 7.75 percent).

Unlike CalPERS and most California public pension funds, CalSTRS lacks the power to set annual contribution rates that must be paid by employers. So to build support for rate-increase legislation, CalSTRS has been the most forthcoming about its shortfall.

With no rate increase, CalSTRS expects to run out of money in 30 years. To reach 100 percent funding, CalSTRS needs an additional 14 percent of pay (about $4 billion), more than doubling the current total employer contribution of 12.75 percent.)”

Where is the additional 4 billion per year coming from?

“A phased-in rate hike to reach 100 percent funding may be unrealistic now. But officials say enough of an increase to get the funding level moving up would cut future costs and avoid sinking into calamitous underfunding, as in New Jersey and Illinois.” (note: the increased costs won’t even offset the growing unfunded liability that is occurring every year the pension plan fails to hit 13% returns, IMO. It is doubtful CalSTRS can achieve those returns, let alone their 7.75% target ; a meaningless number at this point ).

Often blamed for triggering market-like competition resulting in costly local police and firefighter pensions: a CalPERS-sponsored bill, SB 400 in 1999, enacting a 50 percent pension increase for the Highway Patrol negotiated by their union.

The same competitive pressure can drive up the salaries on which pensions are based. An article in the November issue of Vanity Fair magazine, “California and Bust,” makes the point in a section on pension-troubled San Jose.

“The effect was to make the sweetest deal cut by public-safety workers with any city in Northern California the starting point for the next round of negotiations for every other city,” wrote Michael Lewis, author of “Moneyball” and “The Big Short.” “

The latest from Michael Lewis (Liars Poker, Moneyball, Blind Side,
The Big Short) is a just released book titled “Boomerang”, about the global economic crisis, bank bailouts, and pension obligations.

“Another criticism of bargaining is that managers who can curb retirement costs personally benefit from higher pensions. A lawsuit forced the Sonoma County retirement system to release records last month, showing 98 pensions of $100,000 a year or more.
Rod Dole, 59, a former county auditor-controller-treasurer who retired in May is said to have a $254,625 annual pension, $46,600 more than his final pay. Others with pensions above $200,000 are a former sheriff and a former county administrator.
“What’s particularly discouraging to us is how many of those at the top of the pension pyramid are those — former supervisors and department heads — who had the decision-making authority to be part of a solution,” said an editorial in the Santa Rosa Press Democrat””

…And that is a big problem.

Web Link

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Posted by MoreOfStory
a resident of Bridle Creek
on Oct 24, 2011 at 2:03 pm

What the author and website say regarding UCRP reflects my understanding of things during my employment with UC, working for DOE-funded LLNL in Livermore.

The part not discussed is the political one. When all this was going on, the legislature was essentially controlled by Willie Brown. He saw the "over-funding" of these pensions, and started demanding that they pay back the excess money collected from the State. DOE made similar demands. The regents decided that the best approach was to burn up the excess as rapidly as they could. Hence the increase in benefits, which decreased the actuarial funding level closer to 100%. In addition, they actually gifted employees some UCRP money into private retirement savings accounts (essentially IRAs by another name). In a year or two they managed to fix the "problem".

The lesson from this is one that we are all familiar with. Governments and their various financial entities cannot tolerate a surplus. The excess must be disposed of in some form or another. Deficits are acceptable.

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Posted by GX
a resident of Another Pleasanton neighborhood
on Oct 25, 2011 at 7:00 am

Clearly the boards of these organizations are not performing their feduciary responsibilities when such rosy/eroneous information is presented, not challenged and fundamentally wrong decisions are made.

I understand these boards are dominated by union representatives who have the incentive to present information in the best possible light and maximize the benefits for their members.

Given it is the taxpayers who end up footing the bill, shouldn't we have more independent, rational representation on these boards?

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Posted by Kathleen Ruegsegger
a resident of Vintage Hills
on Oct 25, 2011 at 9:15 am

GX, Of the five elected board members for PUSD, only one has a spouse who is a teacher. The problem is that these board members end up working closely with staff. Nothing wrong with that until they lose perspective on who they represent when decisions are made.

Like this comment
Posted by Stacey
a resident of Amberwood/Wood Meadows
on Oct 25, 2011 at 9:25 am

Stacey is a registered user.

Ed Mendel: what went wrong?

I've become annoyed with Mr. Mendel's rambling, 1-2 sentence paragraphs and reading through his articles now feels like torture. He needs a good editor. It is unfortunate as the site is one of the only blogs out there keeping tabs on the CA state pension funds.

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Posted by Patriot
a resident of Another Pleasanton neighborhood
on Oct 25, 2011 at 9:27 am

One obvious long term fix would be to up the minimum retirement age to something like 65. The federal government did this way back in 1983 or 1984. Why not in California?

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