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By CATHY BUSSEWITZ
THE PRESS DEMOCRAT
The board of the nation’s largest public pension fund voted 7-3 Wednesday to leave unchanged its expected investment return rate, which has been set at 7.75 percent since 2004.
The California Public Employees’ Retirement System began reviewing its assumed rate of return about a year ago, after the fund lost about a quarter of its value in the economic downturn. Its chief actuary had recommended reducing the rate of return to 7.5 percent.
The decision was viewed by some as good news to local governments, because if the pension fund reduced expected returns, then cities and schools that rely on CalPERS for their pensions would have to further increase their annual pension payments.
Critics say that investment return assumption is too optimistic and warn that keeping the rate unchanged will push funding problems to future years.
Former North Bay Assemblyman Joe Nation, who has been pushing for a rate of return closer to 6 percent, said CalPERS was under pressure from local governments and unions to keep the rate stable.
“Given the current economic environment, we believe keeping our discount rate unchanged is in the best interest of our members, employers, and taxpayers,” said Rob Feckner, CalPERS board president, in a statement.
The city of Santa Rosa’s pension plans are managed by CalPERS, and this year the city paid $23.5 million in pension costs, a number that’s expected to grow next year.
“I think in the long term it may push the problem down the road, but I think the reason they don’t want to change the discount rate is because this will have a significant impact to the city budgets in the short run,” said Lawrence Chiu, chief financial officer for Santa Rosa.
State Treasurer Bill Lockyer voted against the measure. “The higher you keep it, the greater the chances … that you’re going to take it down the road, and then the shock’s even greater to the government entities, i.e. the taxpayers,” said his spokesman, Tom Dresslar.
CalPERS manages assets worth nearly $228 billion, as of March 11, for 1.6 million current and retired public employees and their families.
The value of its portfolio fell by 5 percent in 2007-08 and nearly 25 percent in 2008-09. In 2009-10, the fund grew by 13 percent.
The California State Teachers’ Retirement System lowered its expected rate of return from 8 to 7.75 percent last year.
“This is no different from going to Vegas and rolling those dice,” Nation said. “In the short term, it makes life easier. In the long term, it makes life much harder, unless you spin that roulette wheel and you win.”
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Would it be OK to say “Ponzi-like” or “Ponzi-ish”?
Seriously though, the amount of debt accumulated by Sonoma County, especially the pension obligation debt, cannot be dismissed. The bloating of the counties’ balance sheet and what’s looking like another year of declining tax revenue could (God forbid) cripple the county financially. To blindly accept that eventually the investments in the SCRERA will come through and be able to pay off all the POB debt and fund all the retirees doesn’t seem feasible to this “arm chair actuary.”
In the meantime, 300-500 rank and file county employees will probably be let go this year. Last year saw over 200 let go. I hope they understand that “the long investment horizon is why public pension systems are economically efficient.”
BTW, I read on a prior post that Mendocino County POBs were downgraded. I see they are now only one step away from becoming non-investment grade (i.e. junk).
RE: Tom Drumm – “A Ponzi scheme is a criminal enterprise in which there ARE NO INVESTMENTS. Every public pension system under discussion clearly does make investments.”
Reading numerous definitions on the Internet, I’ll agree in part with your remark that it is not a Ponzi scheme.
“What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.
Why do Ponzi schemes collapse?
With little or no legitimate earnings, the schemes require a consistent flow of money from new investors to continue. Ponzi schemes tend to collapse when it becomes difficult to recruit new investors or when a large number of investors ask to cash out.”
My guess is that in using the term ‘Ponzi scheme’, people are likely making the connection of many people paying in, for the benefit of few. Using the term Ponzi scheme likely isn’t the best way to refer to the retirement system, but it does seem that it’s taking more and more people at the bottom paying in to pass out the huge benefits for those at the top.
While every public pension plan does make investments, it obviously isn’t enough to off-set what those plans are paying out, or they wouldn’t be so grossly underfunded and you wouldn’t need taxpayer bailouts. And by bailouts, I mean not just monetary bailouts, but cutting services to the public and using those ‘saved funds’ to offset the increased payments into the retirement system.
Call it anything that you want, but I would sure think that SEIU would take issue with that mentality, not promote it.
There are certain statements I’ve really getting tired of hearing on the subject of public pensions:
1) Any statement using a pension system’s earnings over an eight or ten year period of time as evidence either for or against the soundness of the systems. The long investment horizon is why public pension systems are economically efficient; and, by the way what professional actuaries look at (as opposed to the armchair actuaries who inhabit this forum).
2) References to pension systems as “Ponzi schemes.” A Ponzi scheme is a criminal enterprise in which there ARE NO INVESTMENTS. Every public pension system under discussion clearly does make investments. To speak or write otherwise is to slander (or libel) each and every one of the trustees, administrators and employees of these systems over the past sixty years.
3) Statements to the effect that public employees don’t contribute enough toward this or that benefit: First, most public employees locally DO make contributions toward these benefits; and second, “total compensation” is really the bottom line issue. Ask any manager crafting an annual budget: the relevant fact is the total cost of wages and benefits of employees.
…oops
PRMD is Permit and Resource Management Department.
AND “and if one were to factor in the $600 Million”
should read “$600 Million Pension Obligation Bonds.”
I’m becoming jaded with jargon :)
@ David Stubble
First thank you for your years of public service with fire and safety, and hope you are enjoying your retirement.
As to the comment,“If we (the public) push for lower benefits for public employees, we must also push for lower level of public services…” I agree with the follow-up poster that we are seeing public services slashed in order to continue to pay for these unfunded retirement benefits.
Recently 20% of Sonoma County’s PRMD were given notice their positions are being discontinued, i.e. YOU are being laid off, 24 jobs out of 120 in the department. Certainly the downturn in construction has contributed to this; but a major factor as well are large salary and benefit increases, much of it to the “upper tier”, over the last decade.
I fear the Sonoma County Sheriff’s Dept will be announcing soon, dramatic layoffs of the younger deputies and support staff. Much of this due in order to continue to pay retirement benefits that were not properly funded to begin with.
If you look at the escalation in benefits compared to the loss of work force at the County you would be dismayed at the trends…
4444 workers in 2002, down to 3600 today; after this years layoffs of younger less senior workers we will have seen a loss of 1000 workers in less than a decade.
Sonoma County now has more retirees than active hires, by far the highest per capita bond debt of any of the 58 Counties in the state of California, and if one were to factor in the $600 Million ($550 Million still owed) of the $1.8 Billion pension portfolio using a risk free rate of return of 4%, Sonoma County Employee Retirement Assn’s funded ratio would be under 35% to cover future obligations.
As Santa Rosa Councilman Gary Wysocky says,”Somethings got to give.”
Thank you David for your contributions to this thread, I think you’ll find most of the posters are increasingly getting the facts right.
It does suck for some. New York has higher taxes so the California will survive. California will have to adjust it’s payroll withholding to compensate. That is acceptable. Will the sky fall on public employees? No. Bottom line is they have contracts that a few of you don’t like. Politicians, not you, will decide any adjustments. I understand you are upset with a lot of statistics you obviously don’t understand. Buck up, times are changing and the only choice you have is to take a hike. Public employees are here to stay. A few will get laid off. Most will still get unemployment. Stop your griping, you may go now.
Then don’t leave out the fact that state and local governments took ‘pension holidays’ for several years when PERS returns were way over expected and was superfunded. The growth on those monies would have a fairly large impact on the current amounts owed.
I know, … that’s easy to forget. (sarcasm)
Posted by David Stubblebine:
“If we (the public) push for lower benefits for public employees, we must also push for lower level of public services…”
Give me a break!
The whole point is that across the State public services are already being slashed to maintain the insanely high levels of pension “matching” provided by the taxpayer as laid out from the info I posted from the CalPers website.
That’s not opinion, those are facts.
Asking the taxpayer to contribute twice as much, (and in some cases far more), than the employee for their retirement is ludicrous.
If I could do it with a maximum 4% match from my employer than so can others.
Remember, the generation that retired before 2009 did not need these absurd levels of compensation to provide levels of service far beyond those provided by the current generation of gold plated employees in the higher tiers.
For crying out loud, employees of SMART pay NOTHING into their CalPers retirements and the majority of the employees, (including the “vital” position of Spokesman/Community Outreach), earn six figures and can retire at 55!
Madness.
Here’s Fitch’s ‘OPINION’….
They downgraded Mendocino County Pension Obligation Bonds yesterday (March 18).
I don’t think Fitch received the memo from CalPERS.
http://finance.yahoo.com/news/Fitch-Downgrades-Mendocino-bw-3139254240.html?x=0&.v=1
Thanks again for accurate facts!
//. . if those 10 years include 2008, 28% is pretty respectable. It sure beats what my savings account really did.//
Fair enough. But if you discount returns of the last 10 years because they include an outlier bad year, 2008, shouldn’t you do the same with outlier good years?
CalPers makes note of your point, the last decade wasn’t typical. But they don’t do the same with the previous decade.
@John, in 1999 the “professional Board at CalPers” went to California’s legislature and said the state could increase pensions at essentially no cost to the state or local govt members. They could, in effect, guarantee permanently high returns.
Those predictions are looking a little shaky these days, as the state and local govts are having to pony up larger and larger amounts of money to fund those generous and “free” pensions.
I wouldn’t bet the farm of CalPers’ crystal ball.
I find it hilarious that all of these ‘OPINIONS’ somehow trump the collective knowledge of the professional Board at Cal PERS.
I have to agree with David.
Sorry: typo in the last comment. That hypothetical savings account should have been opened in 1999 and run for 10 years to 2010. My bad – sorry.
For: “Reality Check”
I got my figures from the same table you did: CalPERS Historical Rates of Returns. You replicated the column for years ending 6/30 going back 10 years while I used the figures from the adjoining column for years ending 12/31 going back 8 years. I found this table in a different document than you did [CalPERS Facts at a Glance, March 2011: http://www.calpers.ca.gov/eip-docs/about/facts/investments.pdf and this table goes back 20 years. This document also shows CalPERS “Growth of Fund” figures for the same period. This is where I based my statement that “CalPERS has completely regained all the ground lost and is fully back up to its 2006 gross assets.” I did cross columns to make this statement (12/31/2010 vs 6/30/2006) but I also assumed that since 12/31/2010 the fund has made up the 2% difference between the 12/31/2010 & 12/31/2006 comparison.
Using the numbers from your comment, if I were lucky enough to invest $100 in a savings account in 2009 with the rates of return you listed, that account would be worth $128 today. Normally, a 28% return over 10 years is not considered a terrific rate; but if those 10 years include 2008, 28% is pretty respectable. It sure beats what my savings account really did.
I stand by my earlier comment but I will likely not post again on this thread. Those who post here seem more interested in patting each other on the backs for their already entrenched opinions than in seeking any breadth of knowledge. This may suit this community but it is not for me. I view this exercise as an entertainment thread rather than a discussion of the news. I leave you with this thought: If we (the public) push for lower benefits for public employees, we must also push for lower level of public services – the two are joined at the hip. Be careful what you ask for and if wasteful government spending bothers you, don’t be fooled into following the “pension” red herring.
Okay, that was two thoughts – sue me.
I was curious how much the employee and the taxpayer contribute to CalPers compared to my 401k which I thought was quite generous in that if I put in 5% I’d get a 4% maximum…but both my wife and I put in the most we could, 15%, and got the 4% employer match mentioned before, for a total of 19% maximum.
Here is what the employee contributes, (but not, often, with Public Safety and our very own Smart Train the taxpayer pays the employee portion as well as the employer portion):
“The employee contribution is 5% of salary for Miscellaneous Tier 1 members and 8% for Peace Officer/Firefighter members…”
http://www.aba.csueastbay.edu/HR/Benefits/RetirementPERS.htm
But remember, some employees contribute zero.
Here’s what the “employer” (ie. you and me) pay:
“Employer Contribution Rates
Listed below are the remainder of the 2010-11 fiscal year. These rates are effective with the first payroll period that ends in January 2011:
Member Category Employer Contribution as a Percentage of Compensation
State Miscellaneous Member First Tier
17.528%
State Miscellaneous Member Second Tier
16.442%
State Industrial Member
14.683%
State Safety Member
15.702%
California Highway Patrol Member
29.956%
Peace Officer/Firefighter Member
28.556%
http://www.calpers.ca.gov/index.jsp?bc=/employer/actuarial-gasb/emp-contrib-rates.xml&pat=STER
So, in the worst case if you’re a Tier 1 Miscellaneous Member you might have to fork over 5% while the taxpayer kicks in an additional 17.5%.
It goes up from there!
Insanity.
I started my IRA, as did my wife, when we were 21, (IRA’s have no match). We only had a 401k for 10 years but still we have done a decent job in our 54 years as our joint retirement is now worth about $1.5 million and when we reach 59 1/2 should be significantly higher.
Had we had a 401k longer, our retirement monies would be far higher.
So yes, IRA’s and 401k’s can work out just fine.
The choice CalPERS made to continue using a 7.75% discount rate is more a financial management decision that balances the short with the long term than it is a statement about what fund earnings is expected to be over a certain period of time.
CalPERS is not “deferring” costs to the next generation. They are deferring costs one year. Next year they get to once again make the decision about what the discount rate should be. At that time we’ll see what they do. If they repeatedly go against the actuary’s proposals to lower the rate (let’s say for 3-5 years in a row), then I think we could say they’re deferring the problem to the next generation.
I have to believe the CalPERS board (including State Controller Chiang and State Treasurer Lockyear) are well aware of the financial implications of their decision and have balanced (a) the need to contribute sooner rather than later with (b) the ability to contribute this year.
Look at it this way. Suppose CalPERS is $150B underfunded. That means the pension plan has a mortgage it must pay off over time (e.g., 30 years). How big is your mortgage relative to your salary?
For me, my outstanding mortgage at one point was over twice my annual salary. According to the following website California’s annual salary (i.e., Revenue) is $350B. That means the outstanding pension dept of $150B is less than 50% of annual income.
http://www.usdebtclock.org/state-debt-clocks/state-of-california-debt-clock.html
Of course, the above website shows California has other debt totaling roughly $370B, but including that still doesn’t get you to twice the State’s income.
Joseph Dear’s comments on CNBC (thanks for the link GAJ) are an attempt to justify the assumption as a reasonable average earnings rate over the next decade or so. This is “reactionary” to the CalPERS decision, not an explanation of why the decision was made.
California has to comply with GASB accounting standards, which requires pension funds to set discount rates based on a reasonable expectation of what actual fund returns will be. As a result of CalPERS Board’s decision to keep the rate at 7.75%, Joseph Dear has to change the asset mix so it can be called “attainable” and, thus, be called a reasonable assumption.
It is interesting that Joseph Dear mentioned that, in order to obtain this return, he’ll have to increase exposure to international markets (where more growth is expected). Sounds even more risky than staying in US markets. This concerns me.
The Moral Hazard does exist for politicians (Chiang/Lockyear) to use aggressive strategies to ease the pain on current year finances in order to advance their own agendas/careers at the expense of the long-term agenda of the public good. The decision to hold the line on the interest rate is not a make or break thing, but should they repeat this behavior over the next few years is.
Personally, I think the fact that they did this once is indicative that they’ll likely do it again. I’m disappointed in them. I don’t have confidence that our markets are being reformed to reduce volatility in the future. This would push me in the direction of getting more conservative given recent experience. As a result, I think they should instead get a little more conservative in both their discount rate and investment mix.
Our politicians should be focusing on reform and balancing the budget by cutting services, jobs, and/or inefficiencies…not employing more aggressive financing strategies to attempt to make up for mistakes of the past.
I guess we can simply ignore some other dirty little facts:
“Calpers recently requested an additional $600 million in funding from debt-soaked California, which would bring the state government’s contribution to the pension system up to about $3.9 billion a year.”
But perhaps Fortune magazine is lying as well.
http://money.cnn.com/2010/06/30/news/companies/calpers_pension_risks.fortune/index.htm
CalPers must make assumptions about future returns. Nothing wrong about that. It’s their assumptions that are questionable.
The 1980s and especially the ’90s were outlier decades for investment returns. They make 20- and 30-year investment returns look great. Will they repeat? No one can know. If they do, no problem. If not, big problem.
But, U.S. demographics–a future with more retirees and fewer workers–and our large debt level suggest the odds of the stock market repeating the generous returns of the 90s are not good.
A nation with an aging population and one that needs to drastically curtail its growing debt, is not a nation likely to experience robust economic growth, CalPers’ rosy scenario notwithstanding.
@ David Stubblebine
Thanks for providing the accurate facts and reasonable conclusions. What a relief. I was really getting worried about how much debt (especially the pension obligation kind) the county has. I’m also worried that investors in Sonoma County bonds will get nervous and sell their bonds, driving borrowing costs higher. The fact that the county has or will have more retirees than employees soon was also worrying me. The fact that from 2000-2009, investment income only contributed 27.5 percent to funding of pensions in Sonoma County.
Now that I have the accurate facts, I’m relieved. Thanks again!
//CalPers has ” . . achieved at least that rate 7 of the last 8 years.”//
Please provide a link for that misstatement.
According to CalPers, the 10-year return rate is 2.6%, through the latest fiscal year.
https://www.calpers.ca.gov/mss-publication/pdf/xC9FZ3lYuQf3O_2010%20CalPERS%20CAFR_0%206_FINAL.pdf
Performance by year:
01 – (7.2%)
02 – ((6.1%)
03 – 3.7%
04 – 16.6%
05 – 12.3%
06 – 11.8%
07 – 19.1%
08 – (5.1%)
09 – (24.0%)
10 – 13.3%
Unfortunately, all those good years were essentially wiped out by a couple bad years.
When Bush proposed Americans should be able to invest 25% of their SS accounts in the stock market, critics cried that was way too risky. Today, CalPers has 49% of its portfolio in the stock market, then add real estate, global debt, and more. This is one risky portfolio.
@David Stubblebine…What do you think you’re doing? Facts have no basis in this threat or any thread about public pensions.
5 of the 6 comments posted before this one have no accurate facts or reasonable conclusions in them. CalPERS has had its expected investment return rate set at 7.75% since 2004 and they have achieved at least that rate 7 of the last 8 years – twice doubling its expected rate. The one year they did not was the year the economic downturn was at its worst, 2008, where CalPERS investments were down 27.8%. Even with that big dip, CalPERS’ investments AVERAGED a positive 8.8% return over the past 8 years. Even with the dip in the economy, CalPERS has completely regained all the ground lost and is fully back up to its 2006 gross assets.
Public Pensions are not the culprit for cash-strapped local governments. Of every dollar CalPERS pays out in a pension, 80 cents comes from investment returns and only 20 cents comes from payroll contributions – and that 20% is collected over 30 years. Those who post comments should take a few minutes to check their facts. Even the most basic facts, like whether Sonoma County is in CalPERS, belie how facts are secondary to fueling an unthinking, trumped up scandal.
Historically, Sonoma County has been a democratic voting, pro-labor constituency. Why is this voting block now so eager to beat the ultra-right Republican drum over pensions? I especially wonder why Joe nation is championing this Tea Party agenda.
Sonoma County is not part of CalPers. Criminals? Really?
Credit should be given where credit it due. And the credit due is the openness with which CalPers admitted its expected return rates are determined by politics, not likely investment performance.
This should remove all doubt, if one had any, to the extent of moral bankruptcy of those responsible for public pensions.
The question is will SR’s city council face up to the cost of properly funding its pension system, reform it, or also choose kick the problem onto the next generation?
Watch this interview on CNBC from this morning and tell me the CIO, who has never come close in his tenure to achieving that goal, makes you feel.
My take?
In order to try and make that number, which he has yet to achieve, he’s hoping his bets in emerging markets will pay off.
If not, no problem; we make up the difference.
This guy does not seem like the sharpest tool in the shed.
http://www.cnbc.com/id/15840232/?video=1846297884&play=1
Fuzzy math. Time for bankruptcy to bail us taxpayers out. I am tired of my hard earned money going to these jokers. Just plain old sick and tire. If I could I wouldn’t give them a single penny. I would rather give my money to an honest homeless person who really needs it than these criminals who haven’t got a clue.
The average, annual rate of return on the S&P 500 from December, 2000 to December, 2010 was 0.899 per cent, including the reinvestment of dividends.
Do you still think CalPERS will achieve its target rate of return of 7.75 per cent?
Who pays the difference?
Why you do, stupid! You, the taxpayer!
Expect the State of California and its counties and cities to start talking about two things: 1.) new taxes, and 2.) new and massive issues of Pension Obligation Bonds.
We will need both to bail out the deeply flawed and unsustainable public pension system.
Sound familar? Sonoma County just issued $290 million of Pension Obligation Bonds. On a per capita basis, Sonoma County now has the dubious distinction of being the most indebted county in all of California.
As a society we are as much addicted to debt as your garden variety tweeker is addicted to crank. And over the long-term, debt will prove to be as destructive as crank.
As is the case with any addict, we will need more and more just to function at a very basic and maintain our own perverted sense of “normalcy”. Then, we will overdose.
For us financial types, that’s called a “crash”.
Boy-no change in investment return forecast since 2004–they are really earning their money at CALPERS!