California Dreamin’ is Meetin’ with Reality

CalPERS Earned 1.1% on Investments in 2011, Plan Assumptions are 7.75%:

The nation’s largest public pension fund, the California Public Employees’ Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board.

The 2011 performance was well below the estimated average annual return of 7.75% that the fund’s actuaries say is needed to meet current and future obligations to its members.

The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families.

Here’s a compound interest calculator. Start with $10,000. After 10 years you’ll have $21,094 with 7.75% interest. With 1.1% interest you’ll have $11,156. Big difference.

Labor Bureau: Govt. Workers Paid 40% More Than Private Workers

Wall Street JournalGovernment Workers Cost More to Employ:

It costs about $12 more per hour to employ a state or local government worker versus a private sector employee, the Labor Department said Wednesday.

Employers spent $39.81 per hour worked for state and local government workers in the first quarter compared to $27.73 per hour for those with private industry jobs. The numbers are part of the Labor Department’s quarterly series on employer costs for employee compensation and they wrap in wages and salaries as well as health benefits such as health insurance and retirement packages.

Hat tip to Mish.

NY Times on Public Pensions

Padded Pensions Add to New York Fiscal Woes:

In Yonkers, more than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were working. One of the youngest, Hugo Tassone, retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a year.

It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing wrong by adding lots of overtime to his base pay shortly before retiring. ”I don’t understand how the working guy that held up their end of the bargain became the problem,” he said.

The city has even arranged for its police to put in overtime as flagmen on Consolidated Edison construction sites. Though a company is paying the bill, the city is actually reporting the work as city overtime to the New York State pension fund, padding future payouts — an arrangement at odds with the spirit of public employment, if not the law.

PEW Study: States Have $1 Trillion Pension/Benefits Gap

Pew Pension Study

MishPEW Study Shows Trillion Dollar State Pension Gap; Can Anything Be Done?

A $1 trillion gap. That is what exists between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them, according to a new report by the Pew Center on the States.

Retiree health care and other non-pension benefits create another huge bill coming due: a $587 billion total liability to pay for current and future benefits, with only $32 billion—or just over 5 percent of the total cost—funded as of fiscal year 2008. Half of the states account for 95 percent of the liabilities.

PEW Healthcare and Benefits Study

And the actual numbers may be even worse, because most states’ reports haven’t taken 2008’s stock market decline into account:

All but three states—Idaho, Oregon and West Virginia—use a smoothing process in which investment gains and losses are recognized over a number of years. Smoothing is a way of managing state expenditures by preventing contribution rates from suddenly jumping or dropping. The number of smoothing years varies, with five years being the most common. Because only a portion of the 2008 losses will be recognized each year, there is a great likelihood that pension funding levels will be dropping for the next four to five years.

New Jersey’s $2.2 billion state of fiscal emergency

Chris Christie declares fiscal ‘state of emergency,’ paving way for N.J. spending cuts.

Along with eliminating programs “that sounded good in theory but failed in practice” across state departments, Christie is cutting $475 million in aid to school districts, $62 million in aid to colleges and $12 million to hospital charity care. He is pulling all funding from the department of Public Advocate, a longtime Republican target, and folding its functions into other parts of government. He is cutting state subsidies for NJ Transit, a move Christie said could lead to higher fares or reduced services but would force the agency to become “more efficient and effective.”

Cali. pension fund admits board member took $50 mil. in fees to make bad investments

Wall Street JournalCalpers Rocked by ‘Pay to Play’:

America’s largest public-pension fund, Calpers, revealed that a former board member had reaped more than $50 million in fees for arranging investments that could saddle state taxpayers with hundreds of millions of dollars in losses.

The disclosure deepens concerns that alleged conflicts of interest are undermining state retirement funds.

The California Public Employees’ Retirement System said it is launching a “special review” into payments by money managers — including billionaire Leon Black’s Apollo Management LP — to firms including Arvco Financial Ventures LLC. Arvco is headed by Al Villalobos, who served on Calpers’s board from 1993 to 1995.

Via W.C. Varones, who has a roundup of his past coverage of the California pension fund’s malfeasance.


Kansas U: Kansas public pension fund is “bankrupt under current operating assumptions”


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Low interest rates are bad for pension funds

iTulip.comCorporate Pension Fund shortfalls weigh on recovery:

Corporate pension funding shortfalls are a major operating cash flow problem for the corporations that experience shortfalls because by law corporations must finance pension funds to 100% over time. Pension fund shortfalls were problematic for most companies even before the financial crisis. Post crisis, the number of pension funds that are not 100% or better funded has increased from 67.6% in FY 2008 to 92.7% in FY 2009 ending in June. The median funded level is a mere 46%.

The pension funding shortfalls crisis initially appeared between 2002 to 2003 from a combination of falling stock prices and interest rates. The combination turned thousands of previously fully funded pension plans into underfunded plans.

An environment of low interest rates and low stock prices is a double whammy for pension funding because the net present value of liabilities increases as the net present value of assets falls.  As bad as the 2002 to 2003 period was for pension funds, the current crisis is nearly three times worse from a returns perspective, with no letup in sight.

That’s not the worst of it. According to the same source 81% of private medical pensions are underfunded with 65% containing no assets at all.

CalPERS actuary says pension costs “unsustainable”

MishCalPERS Admits California “Pension Costs Unsustainable” – So What To Do About It?

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

“I don’t want to sugarcoat anything,” Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

California’s farce continues towards its final act

Courthouse NewsCalifornia won’t accept its own IOUs for payment:

SAN FRANCISCO (CN) – Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California “paid” her with an IOU that two banks refused to accept – yet she had to pay California sales tax on the so-called “sale” of the uniforms.

I was telling someone the other day to imagine working for a company that was in as bad a shape as California.

It’s obvious that any company that had problems like California’s couldn’t stay in business. Anyone who thinks a government can be run that way is delusional.

Things are going to end badly in California. What happens in California is going to provide a glimpse of the problems the United States is going to have due to excessive spending, debt, and poorly-funded retirement programs.

CALPERS plans riskier bets to recoup losses on previous risky bets

New York TimesCalifornia Pension Fund Hopes Riskier Bets Will Restore Its Health:

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

And there’s this:

Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns.

See Calling BS on high rates of expected return for why a 7.75% annual return – year in and year out – is unrealistic. These municipal pension fund managers and their political bosses have to pretend those returns are possible. Ootherwise they’d have to admit the pensions are woefully underfunded. California is broke and is planning cuts in basic services. They’d have to cut even more if they fully funded their massive pension funds.

California pension funds lose $100 billion in a year

LA TimesCalifornia’s biggest government pension funds lose almost $100 billion:

CalPERS’ preliminary losses were $56.2 billion in the fiscal year that ended last month, while the California State Teachers’ Retirement System lost $43.4 billion.

On Tuesday, the country’s two biggest public pension funds reported losing almost $100 billion in the fiscal year that ended June 30. And the governor is expected to highlight the new numbers as he renews a campaign to trim the cost of providing lifetime, fixed benefits to hundreds of thousands of government retirees.


Californians are getting the best government IOUs can buy

It was 29 days ago that the California comptroller predicted the state would be out of money in 50 days. Unless California’s rich uncle dies (and his estate goes through an exceptionally fast probate) California will be broke in three weeks.

Last week California began issuing IOUs to conserve its cash. California IOUs are like Disney Dollars. They’re only useful in a fantasy world. In Disneyland mice and ducks talk and wear pants. In the California legislature public employee unions can get endless pay and benefit increases.

Part of California’s problem is that tax receipts have fallen disastrously, but the bigger problem is that California’s spending has risen disastrously. Matt Welch likes to note that California’s budget has grown faster than can be accounted for by the rate of inflation and the increase in its population. All the while, public sector union pensions funds have been helping themselves to public money like Scrooge McDuck.

According to Adam Summers—a policy analyst at the Reason Foundation, the nonprofit that publishes this magazine—the state’s annual pension fund contribution vaulted from $321 million in 2000–01 to $7.3 billion last year. According to public databases, more than 5,000 people are drawing pensions in excess of $100,000 from the state of California each year.

This is all going to come crashing down at some point, with that three week deadline looming large. California isn’t the only state with pension problems, but it looks like California is going to blow up first.

More underfunded public pensions

Baltimore SunBaltimore pension dispute illuminates public/private divide:

Severe market downturns lay bare any number of Ponzi schemes, and under-funded defined benefits pensions, public and private, can be justly described as such schemes. The problem with private plans is large enough. The Pension Benefit Guaranty Corp., which insures the pensions of 44 million Americans, said in a report this week that its deficit has tripled in just six months to a record $33.5 billion. Chances are it will have to be added to the growing list of entities to be bailed out by Uncle Sam. But this is trivial compared to the under-funding in public plans, which cover about 22 million workers. The deficits in the latter systems are said to total more than a trillion dollars. And these are not insured.

The gap between the public sector and private business in wages and benefits continues to grow. Last month, USA Today reported federal figures showing that public employees earned benefits worth $13.38 per hour in December 2008, compared to $7.98 for private sector workers.

What would you say about a government whose employees make more money than non-government employees performing the same job? That doesn’t sound like a government that has the best interest of its people at heart.

There was a time when people took government jobs for the security they offered. The bargain was that they would sacrifice pay for that security. Over time, the bargain tilted totally in favor of the government workers as they got both job security and higher pay than their counterparts outside government. Can this system be sustained? I think not, but we shall see.

The nature of our current bailout mania is wealth redistribution in reverse. Ordinary people are bailing out banks, car makers, and unionized and public sector workers who make more than them and who have better benefits. If California gets bailed out it will be bailed out by all of the states that are smaller and poorer. The rich are becoming a burden on the middle class and the middle class is becoming a burden on the poor. This can’t last.

Hat tip to Instapundit.

Automaker collapse will send worker pensions to government hands

New York TimesPlight of Carmakers Could Upset All Pension Plans:

Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.

So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administrationÂ’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.