 |
 |
By JOE NATION
Joe Nation represented Sonoma and Marin counties in the state Assembly from 2000 to 2006. He is now a lecturer in public policy at the Stanford Institute for Economic Policy Research.
Earlier this year, the Stanford Institute for Economic Policy Research issued “Going for Broke: Reforming California’s Public Employee Pension Systems.” That policy report identified a $425 billion funding shortfall for three state pension systems: California Public Employees’ Retirement System, California State Teachers’ Retirement System and the University of California Retirement System. The study also identified policies that could prevent future shortfalls.
Joe Nation
Last week, I authored a second institute report that examined the funding status of independent, or local, pension systems. These include public employee pension systems operated by cities and special districts and those operating under the County Employees’ Retirement Law of 1937, including the Sonoma County Employees’ Retirement System (SCERA).
These reports are not intended to question the benefits owed to current public employees. With literally every member of my immediate family in public service (from school librarians to firefighters), I believe that those employees are owed what we have promised them. But those commitments to public employees will be worth little if the pension systems supporting them collapse.
These payments to public employees are guaranteed based on case law that guarantees these pension payments as equivalent to compensation. As such, we need to discount the value of future payments at risk-free rates.
Use of this risk-free rate does not imply that pension systems should invest only in risk-free assets. Rather, they should invest long-term in a diversified portfolio, but they should at the same time realistically estimate the commitments they owe. That can only be achieved by using a risk-free rate for future liabilities.
Using that approach and a recent discount rate of 4 percent (similar to the 3.49 percent rate for 10-year U.S. Treasury rates), these independent pension systems in California faced a nearly $200 billion shortfall in 2008, the last year for which data are available.
Based on 2008 data, Sonoma County’s system faced a funding shortfall of $2.1 billion over the next 18-year period.
SCERA’s funded status, measured by assets divided by liabilities, is 43 percent, indicating that SCERA has only 43 cents on every dollar that it owes. Based on subsequent data published in 2009, Sonoma County’s retirement system is unfunded by $2.3 billion, despite having reported an increase in assets. (That increase between 2008 and 2009 seems awkward since other systems reported sharp drops resulting from the financial crisis. For example, San Mateo County’s fund reported an asset drop of 14 percent, San Joaquin County 10 percent, and Santa Barbara County 10 percent).
SCERA’s 2009 funded ratio is estimated at only 40 percent.
In addition to pension obligations, associated local governments face funding challenges for Other Post Employment Benefits, which are typically dominated by health care costs. Sonoma County reported a $259 million unfunded liability for OPEB in 2008, but this is undoubtedly less than what is actually owed since virtually all governments use optimistic assumptions about health care cost increases. For example, most, like Sonoma County, assume medical inflation rates of only 5 percent by 2014. Much higher rates are more likely.
This most recent Stanford study estimated the share of payroll required by Sonoma County to meet its on-going and unfunded pension and OPEB costs. Assuming an 18-year period (the approximate number of years workers receive benefits), the county will need to dedicate 50 to 55 percent of payroll to fully fund its pension and OPEB accounts. That figure is slightly better than the average for all systems examined. But it suggests that other critical county functions will have to be dropped or cut severely because of its pension problems.
Recent reform at the state level, enacted as part of the current state budget agreement, and recent election results provide some possible avenues for reform at the local level. That reform is likely to include increased transparency, reductions in benefits, increased employee contributions and further restrictions on pension spiking. In order to fully meet its commitments, the Sonoma County Employees’ Retirement System and other independent systems will need to explore all of those options.
Subscribe by Email
Follow us on Twitter
@Tom
Why aren’t the $600m POBs listed in SCERA’s 10/31 Asset Allocation report?
http://www.scretire.com/pdf/news/2010/portfolio_20101031.pdf
It lists $350m in total bonds in their $1.75B portfolio. Oh, you have my gender wrong.
Guess what, the truth is:
-SCERA Administrator Gary Bei doesn’t mention that out of that $1.75 Billion pension portfolio, over $600 Million is from Pension Obligation Bonds of which $550 Million is still due…next year’s POB annual debt service principal and interest will be almost $50 Million. A staggering 35% of SCERA’s portfolio is from POB’s presently draining the County’s general fund. Ultimately we will pay over $1 Billion through major cuts of County jobs and a massive loss of essential services.
-If one includes the recent $291 Million POB, of ALL 58 Counties in the State of California, Sonoma County has by far the highest per capita bond debt (approx. $1700), most of it Pension Obligation Bonds. Most of it as Auditor Rod Dole would say “sculpted” so that most of the big hits…high payments…will be paid by the next generation after all the people who created this mess have retired.
http://www.sco.ca.gov/Files-ARD-Local/LocRep/counties_reports_0708counties.pdf
-These benefits are largely unfunded, they are being paid through a cannibalization of our County work force.
There were 4444 workers at the County in 2004, (page 62 http://www.scretire.com/pdf/documents/annrpt09.pdf)
today there are 3763 and falling (page 15 http://www.sonoma-county.org/auditor/pdf/fy_10-11_adopted_budget_schedules.pdf).
That is a drop of almost 700 workers, yet the salaries and benefits have doubled since 2000, much of it to the upper tier, while those in the private sector have seen a decade long decline in household income. (http://www.pressdemocrat.com/article/20090104/BUSINESS/901030293).
With 4400 workers in 2004, there were 2500 retirees…today there are 3763 active workers and 3761 retirees…2011 will see more retirees than workers (http://scretire.com/pdf/news/2010/retagenda_20101118.pdf).
Not to get everyone to glaze over with all these numbers, but the issue of the day is how to avoid a meltdown similar to what my wife lived through when the Soviet Union collapsed. We don’t need union heads and county administrators poised to retire and cut a fat hog, telling us how wonderful the stock market is doing and how fully funded the pensions are. I know hundreds of government workers, young and old, active and retired; and they know things cannot continue; they are intelligent and worried for their future employment and benefits.
We need to work together to figure out how to make these pensions and services sustainable without all guile and subterfuge.
Looks like Bei got his article on the PD website.
Public pension system funding is an important policy issue, but productive dialogue must be grounded in a balanced view of the topic and based on facts.
———
Wonderful news SCERA. Then you’ll be opening your books, actuarials and investment methodology to a comprehensive external audit soon, right? I’d like to see that since my spouse is a SCERA retiree who has been denied her court ordered medical coverage.
Typical spin…. ‘it’s a complicated issue’.
Based on Mr. Bei’s piece (submitted by Guess What!) I take it all back. SCERA apparently is no longer \in a trough.\
Letter attempted to be placed in the PD and sent to retirement plan members. Written by:Gary Bei, Retirement Administrator
A Reasonable Pension Discussion
(Response to Recent Guest Opinion
Article and Press Democrat Editorial)
For the last 20 years, which included the worst national financial collapse since the Great Depression, the Sonoma County Employees’ Retirement Association (SCERA) has earned an average of 8% annually on pension fund assets. Over the last 30 years, SCERA’s annualized investment return has been 9.5%. These investment returns have been provided through a well diversified investment portfolio and proven long-term investment strategy based on established expectations for returns for various asset classes.
Yet the recent Guest Opinion article by Joe Nation suggested that SCERA should use a 4% discount rate utilizing a risk-free treasury return when valuing pension liabilities. Had SCERA done that for the last 30 years, the pension liability would have been significantly overstated, which would have resulted in misleading information for members, policymakers and the public over this same time period. Instead, SCERA used a discount rate in the range of 8% over the years based on standards for valuing pension liabilities set by the national Governmental Accounting Standards Board and Actuarial Standards of Practice. This discount rate is validated based on actual experience of SCERA’s long-term investment returns.
The Guest Opinion article suggestion of a funded ratio of 43% and a funding shortfall of $2.3 billion is a dramatic misstatement, given that the market value of assets of the retirement trust fund is $1.75 billion as of October 31, 2010 and the actuarial liability is $1.97 billion as of the most recent valuation date utilizing calculations based on established professional standards.
The projections in the Guest Opinion article and in the follow-up comments in the recent Press Democrat Editorial are not based on accepted and well-established methodologies. The resulting statistics do not present a fair or accurate picture of the retirement system funding. Public pension system funding is an important policy issue, but productive dialogue must be grounded in a balanced view of the topic and based on facts.
Gary Bei, Retirement Administrator
@Tom Drumm
Tom, we have to stop meeting like this…how about lunch sometime (tdlynch57@gmail.com).
I would respectfully suggest to our noteworthy SEIU negotiator Mr. Drumm, who has successfully created some of the agreements that others call “suicide pacts”, that the article he quotes from in the Marin Independent Journal…
http://www.marinij.com/sanrafael/ci_16331023
…also references “150 more Civic Center jobs are on the line due to the escalating pension tab alone.
Hymel noted that setting up a system in which any revenue is regarded as “excess” doesn’t pass “the straight face test” in light of the system’s unfunded liability, which in the county’s case alone amounts to at least $700 million. “We’re cutting services in the community” to pay for pension obligations and carving out special benefits rather than using the revenue to retire debt, which is bad policy, he indicated. “When I go and talk to the public, they are outraged about pensions,” Hymel told trustees.” (end of quoted text)
I would say that Graham A. Schmidt, vice president of EFI Actuaries, is one of the many paid shills similar to Moody’s or Segal, who are paid a lot of money to sell out the next generation of public employees and taxpayers.
And to you Tom Drumm, rather than accepting their failed economic theories, you would do better representing your younger less senior rank and file losing their jobs to increased pension costs…by working with everyone to find a more sustainable system. (How about Inn-N-Out Burger :)
@ Lyn Cramer, you are a girl after my own heart. You are ever the keen observer, with the real picture at hand. After studying this mess for many years, I am coming close to the right questions in order to reduce the likelihood of collapse…(the odds are still against us!!).
Plus they raised the welfare expenditure 8%.
No one seems to notice the state budget issue that keeps other items lacking for fund. Pension obligations are currently 2% of the state budget. Welfare programs are currently 2010/11 over 40% of the state budget. If you shaved 10% off of both numbers, which would be bigger?
//. . .to focus on only the ten years from the top of the tech bubble to the present, as Tom Lynch and others sugggest, is to deny actuarial science.//
No it isn’t. First problem, CalPers’ web site doesn’t provide returns longer than 10 years, the standard time period for judging investment performance.
Second, the freakishly good returns of the 90s were extrapolated out to infinity to justify bumping up pensions. Too bad someone didn’t take your point seriously in 1999.
Third, the long-term, 30-year return of the stock market (S&P500) is currently a hair over 7%. CalPers and SCERA assume a return of 7.75%! Do you want them to invest 100% of pension money in the market? One thinks not.
So, unless we are about to embark on another miracle decade of investment returns, CalPers needs to 1) reduce its expected rate of return, or 2) go all in in the stock market . . . . with of course taxpayers assuming all risk with either option.
From Marin IJ, October 24, 2010, regarding Joe Nation’s theory:
“Graham A. Schmidt, vice president of EFI Actuaries, the Marin system’s actuary, acknowledged the philosophical debate involving investment assumptions, but questioned the Stanford methodology, saying its inflation factor may be flawed. Schmidt, who has not seen Nation’s new study, said its calculation that overall Marin system liability exceeds $2 billion \sounds pretty crazy,\ especially in light of a conservative estimate two years ago that roughly $1 billion would pay off all debts if the Marin program went belly up.”
The discount rate IS the expected rate of return. Retirement systems rely on the success of investments over a long period of time; for all the quoting of rates of return contained in the opinion and in the comments, I don’t see any for 20, 30, or 40 years. The reason for this is that the systems have performed as designed over the long haul.
We are in a trough, no mistake, but to insist on “risk free” discount rate (expected rate of return), as Joe Nation suggests, or to focus on only the ten years from the top of the tech bubble to the present, as Tom Lynch and others sugggest, is to deny actuarial science.
@ Bear… who has screwed the public employees are the politicians who signed off on what were largely unsustainable comp and retirement packages. Looked great, on paper, when the economy was relatively robust, even though even in boom times these packages were not truly sustainable in any sane actuarial analysis.
But those boom times are no longer the case and the “promises” that were made have been shown to be what all the promises of politicians ultimately are….. empty.
In 1999, when Gray Davis gave massive raises and 3%@50 retirement to CAHP and CCPOA a well known Democrat state senator (and friend of the union man) said on the floor that Davis had given away every other state employee’s raises for the next several years. Others argued that the pay and benefit escalation was not sustainable even in good times as more and more retirees landed in the system.
No one listened, so now public employee comp and benefits are head and shoulders above the private sector when averaged across the work force. And public employees / retirees whine that they’re the victims of broken promises. Speaking as a former public employee who found better opportunities in the private sector, all I can offer is some cheese to go along with that whine.
You did it to yourselves.
I’m reminded of those great TV commercials that offer to get you out of paying your taxes, or reduce your credit card debt to a fraction of what you’ve spent?
Isn’t welfare for the overspending set a wonderful thing? Isn’t it great that you evade your personal obligations?
Where the hell did I go wrong?
If you’re going to screw retired public employees out of promised benefits when they’re making on average WAY less than managers and ex-members of the Board of Supervisors, you’re going to have a war on your hands.
We can always park our RVs on YOUR street.
To “Got Mine”;
You get yours as long as the State of Ca. is still a solvent legal entity.
Come bankruptcy, everything changes, as the “law” you cite becomes null and void at that point.
I’m not saying you did not work hard and play by the rules as they were written at the time. I’m sure you did.
But the retirement bonanza was an unsustainable pipe-dream when it was signed, regardless of what you were told.
You may have to make a few adjustments re: your retirement.
Like the rest of us.
The ones expected to pay for it.
@ Hillary…
I think you need to revisit history. Tax cuts, generally speaking, always result in higher gross tax revenues particularly when measured over time. And while I disagree with Governor Schwarzenegger on many things, he was absolutely correct when he opined that the state does not have a revenue problem but, rather, it has a spending problem.
I am guessing that you are referring to Prop 13. If so, that is quite typical bilge. While 13 capped property taxes on property owners who held their real estate pre-13, it absolutely allows those taxes to raise when property is turned over. I have two neighbors, on a street with over 30 homes, who are original owners of their 1970′s vintage tract homes. Their taxes and increases are capped by 13. The other 28 on the street, my home (bought in the early 1990′s during a slump) are not capped and while our annual increases are set to the same percentage as everyone else, we pay far more than the folks who held out.
Perhaps you weren’t around before 13, when there were no curbs and when a rapacious government… at the state, county, city and district level could all assess against real property without any restriction or grant of the voters. When real estate began to boom in the middle 1970′s, people all over the state were being taxed out of their homes… my parents among them.
I have no desire to go back to those bad old days, particularly when government shows absolutely no sign of restricting it’s spending to within the constitutionally required / voter approved balanced budget act.
But if tax cuts were, as you suggest, really the culprit for all our ills, then perhaps you could tell us all when, exactly, has the State of California within the past 25 years enacted commensurate spending cuts?
Guaranteeing a civilized standard of living to people who’ve worked their entire lives is not my definition of “inefficiency”. These budget problems started out as tax cuts.
Thank goodness I got out when I did and secured my retirement. $112,000.00 for my 32 years service. I earned it, I got it and the law says I get to keep it.
Good luck.
@waiting for the truth – Where else does any public sector money come from but the taxpayers?
You also seem to be fixated on ROI, which is clearly below inflation, much being enough to cover an increasing demand for payouts. Making up losses, even if it happens, does nothing to cover an already existing shortfall, which is what we inarguable have now, and worsen every day.
The main problem is the same as the banks after the repeal of Glass-Steagall: yes, over time, the stock market has always risen. But nobody lives in 10 year increments, we live day to day. A possible gain in the future is always trumped by a current actual loss.
//I am not even going to list [CalPers returns] here, but it sure isn’t 2.8%.//
Really? From CalPers web site on their total investment returns:
Fiscal year ending 8/31/10: +3.00%
3 years ending 8/31/10: -4.86%
5 years ending 8/31/10 +2.18%
10 years ending 8/31/10 +2.88%
http://www.calpers.ca.gov/eip-docs/about/facts/investme.pdf
Apology accepted.
@Waiting for the truth
The truth is, Calpers June 30, 2010 annual rate of return of 13.2% was during a period the Dow was making up for some of its’ historic losses … from June 26,2009 to June 26,2010 the Dow rose over 20%. http://www.google.com/finance?q=INDEXDJX:.DJI)
But its’ 10 year overall rate was 2.88%… note the story below…
“Calpers made a series of disastrous bets on real estate after letting its internal risk controls break down and ceding too much control to outside investment advisers during the housing bubble. The pension fund has earned an annualized 2.88 percent return on its assets through the 10 years ended on June 30,(2010), far below the 7.75 percent it must collect every year to meet its obligations to 1.6 million beneficiaries.”
http://www.bloomberg.com/news/2010-09-09/calpers-after-scandal-embraces-risk-for-pensioners-facing-240-billion-gap.html
Sonoma County Employee Retirement Associations’ (SCERA) portfolio increased 10.4% from June 2009 to June 2010, its 10 year overall rate of return was a 2.1%…
(http://scretire.com/pdf/news/2010/portfolio_20100630.pdf)
The Stanford Study used a more realistic bond rate of 4.14%, which is much higher than the current 10 year average of both CALPERS and SCERA, see the story below.
“The report, from five Stanford graduate students and their faculty adviser, said the funds estimate average annual returns of 7.5 percent to 8 percent. The funds ought to use a more conservative calculation of 4.14 percent, the report said. “You should not use an 8 percent rate when the liabilities are set in stone,” said Joe Nation, the faculty adviser in a telephone interview.
http://www.businessweek.com/news/2010-04-05/california-pensions-are-500-billion-short-stanford-study-says.html
The truth is, Waiting for the truth, that Joe Nation and his students are doing a very credible job in educating the public and our public servants as to how unsustainable and unfunded these retirement systems really are. As SCERA’s administrator Gary Bei recently said, for each point SCERA misses its’ target rate of return of 8% there is an additional $19,000,000 in unfunded liability. Who pays for the current $1 Billion of unfunded liability that Sonoma County has, based on an 8% target (not Joe Nations’ 4%)? It is not only the taxpayers, but also the less senior rank and file of teachers, cops, human services and all public workers in Sonoma County, they are paying into a program that is destined to fail.
Just about all the folks who created and control the present pension system have retired or will retire soon. This is not a fight against our hard working public servants, though some would present it as “class warfare” to obfuscate the real issues. This is more of a struggle for generational equity and creating a sustainable system that continues to honor all public servants for their service, with a just and sustainable pension system, as well as a government that continues to provide the essential services the public funds.
2.8% over the last decade for the S&P. OK, does anyone even know what CALPERS returns for the last decade are? No. Because no one bothers to check it out. I am not even going to list it here, but it sure isn’t 2.8%. So many experts and so little knowledge. But man can those headlines sell.
By the way, is anyone aware of the fact that only a 1/3 of the pension money comes from taxpayers? I bet most have no clue of the payment structure. Oh, well. Facts aren’t important here.
Well if its any consolation private sector retirees depending on Social Security and Medicare may not be in much better shape.
The real problem is rooted in the idea that government employees are somehow entitled to wage and benefits equivalency with the private sector.
Taxpayer dollars should not be used to fund a pension for anyone.
Our government is bloated and wasteful at all levels, local to the fed, and this County pension liability is a glaring example of the result of having big government for the past 4 decades.
The explanation why the Stanford study used a long-term bond rate to estimate pension fund returns is no mystery. Once upon a time, pension funds invested pension money with safety foremost. A long bond, with predictable yields, was thought to best guarantee that pension promises would be met.
Then more “modern” pension managers lobbied for greater flexibility in investments, to take greater risks in search of higher returns. They were spectacularly successful in the 1990s, a decade in which the S&P500 grew at a compounded rate of, I believe, 15%. A dunce made money in the stock market in the 90s.
Unfortunately, CalPers managers confused a freakishly good decade in investment returns with investment genius, something they could do regularly. So, they sold the legislature on increasing member pensions, with the assurance it “wouldn’t cost the taxpayers anything.”
Of course, the next decade saw returns collapse, to about 2.8%. Since the assumed rate of return is nearly 8%, an almost impossible rate without putting pension money at significant risk, public pension funds today are woefully underfunded.
Maybe a miracle will happen. Returns will again skyrocket. If not, this generation will not be as well thought of as previous generations. Likely it will be known as the “greediest generation.”
Need I say more?
Any shining of light on this festering sore is worthy of praise. Nation’s message, from a friend of public employees, needs repeating until everyone gets it. And I guess it will take widespread recognition that this is just not another problem to kick down the street a bit, as California does with so many issues, before something significant gets done.
Unfortunately, Nation’s solution paragraph is short and vague. At some point proposed solutions will need to be specific. The sooner, the better.
Color it any way you want to. This report is based on loose research and doom and gloom rants. The Stanford report was written by a graduate student as a finacial model. It took out the earnings history of CALPERS, a solid history, and input a 2% and 3.5% bond rate. No explaination. Yes CALPERS lost big like everyone else in the recent big dip. Has anyone reported that they have recovered over 80% of those loses since the dip? No. That would defeat the strategy of the class warfare trying to be waged. Has anyone read that CALPERS earnings so far this year has been 13.2% ?? No, no one will publish the truth… Those who love drama and whinning will love the headlines. Don’t research it yourself, you will be disappointed when you find out it was hype.