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Archive for the ‘Pension Funds’ Category

Public Pension Funds Crisis Looming

Posted by Steve Markowitz on September 10, 2015

Defined benefit pension plans are a thing of the past for most private companies.  Those plans guarantee payments to retired employees based on years of service.  While a wonderful concept that was viable when American industry had little competition following World War II, these plans became untenable as worldwide competition increased.  As a result, most American businesses that offer pension plans have moved to 401(k) &plans whose funding requirements are more flexible and can be kept in line with a company’s economic realities.

In defined benefit pension plans, the real costs are hidden within complex actuarial tables that require assumptions on long-term returns.  Should the assumptions be overly optimistic, which they often are, what may look like a financially healthy company quickly become insolvent.

While most of the private sector has addressed its pension responsibilities, the public sector still offers many governmental employees defined benefit pension plans.  This has created a dangerous economic model for many municipal and state governments, which is being exasperated by decreasing returns for pension plan investments.

Timothy W. Martin’s recent article in the Wall Street Journal highlights the growing problem of public-sector pension plans.  The problem is being brought to a head as long-term plan assumptions by necessity are being decreased due to the long term economic downturn and low interest rates available on fixed income investments.

Historically, annual pension return assumptions have been set at 8%.  This assumption was used to calculate the rate of growth of pension fund investments.  This rate of return has not obtainable for some years.  However, the 8% return rate assumption was maintained by pension fund managers as a way of masking problems within their funds.  As a result, states and municipalities were able to underfund their plans and push liabilities off to a future time.  That time is rapidly approaching.

Martin points out that:

  • Over 60% of state retirement systems have cut their assumptions in the past seven years with the average now being just under 7.7%. This Blog proffers the view that even this lower assumption is overly optimistic.  In fact, it has been reported that for the first half of this year the average annual return for pension funds was less than 4%.
  • Last week one of the nation’s largest public pension funds, the New York State Common Retirement Fund, cut its return rate a half a point to 7%. Similarly, the San Diego County Employees Retirement Association cut its assumption quarter point to 7.5%.  The Oregon Public Employees Retirement System and Texas Municipal Retirement System have also lowered their forecasted return rate by a quarter point.
  • America’s largest public retirement fund, The California Public Employees’ Retirement System, is considering dropping its current return assumption rate from 8%.

While lowering the return assumptions by state and local governments is ultimately a positive step, forcing governments to adequately fund their pension obligations, there is significant pain associated with this action.  Increased taxpayer dollars will be required to fund the pension plans.   This will decrease funds available to support governmental services.  For example, Martin reports that Boulder, CO has eliminated 100 positions and cut services in order to add $1.7 million to its pension fund.

States and municipalities have increased their funding of pension programs by over $120 billion in the past 10 years.  That would pay for a lot of government services!

*******

Pension problems for state and municipal governments will grow significantly since even the new lower assumptions are overly optimistic.  In the 1960s, for example, return assumptions were less than 4%.  Should pension fund returns approach those levels, the result would be catastrophic.  As Martin points out, every 1% decrease in a fund’s returns leads to a 12% increase in the pension’s liabilities.

While the looming public pension crisis was created by state and municipal governments using unrealistically high return assumptions and offering benefits that they could not afford, the problem has been exasperated by the low interest rate policies of the Federal Reserve that further depresses fund returns.  This is one example of the significant consequences of the Fed’s interventionist policy that has distorted expenses for some, cajoled investors into higher risk investments as they seek returns, and created bubbles including overpriced equity valuations. These problems are just now beginning to percolate.  When they boil over, books will be written on the fallacy of the Federal Reserve’s low interest rate policies.

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Public Sector Employee Pensions Devouring Tax Revenues

Posted by Steve Markowitz on February 4, 2015

Often proponents of big government justify the related spending on some supposed some altruistic motive. On the Left the justification often relates to helping the less fortunate, education and “investing” in infrastructure. The Leftists also promote their share of crony capitalism by backing pet projects such as green energy, the education and the social services industries.

While the Right likes to portray itself as fiscally conservative, they too are not against spending on favored program programs that often include defense spending with its industries also benefiting from the corporate welfare, crony capitalism. The proof is in the budgetary deficits that have increased under both Democratic and Republican administrations, although Barack Obama has taken this to new heights.

One of the incestuous relationships between government and special interest resides with public sector employees. This con game is simple.   Politicians promise public sector employees increased wages and benefits in exchange for their political support. For pension benefits, they hide the real cost to taxpayers through unrealistic actuarial assumptions that temporarily mask the deficits these increased benefits create.

Steve Malanga wrote an op-ed last month in the Wall Street Journal titled The Pension Sink Is Gulping Billions in Tax Raises that lays out the insidious effects of the incestuous relationship between politicians and government employees. Malanga points to specific examples of the growing crisis in state and public employee pension funds that include:

·      This year California will need to increase funding for its employee pensions by $1 bil. The funding increase will grow to nearly $4 bil. by 2021.  This increase funding will basically offset a $6 billion annual tax increase that Gov. Jerry Brown promised Californians would be used to improve public schools. Instead, it was in actuality a benefit to state workers.

·      The pension situation in Pennsylvania is also dire. According to the PA Association of School Administrators, nearly every district in the State has increased pension cost for 2014 with three quarters of the districts having increases of at least 25%. This will require higher taxes for the benefit of the State’s public employees. The situation in Philadelphia is even worse with its school system’s pension bill of $55 million in 2011 increasing to $139 mil. in the current fiscal year. At the same time, the school programs are being cut due to lack of funds.

·      West Virginia has had to allow its municipalities to raise taxes to fund their pension challenges. Its largest city, Charleston, added $6 million in local sales taxes to go on top of the $10 million it already contributes to that City’s retirement program.

·      Illinois municipalities reported that their pension funds are only 55% funded. For example, in the early 1990s Peoria spent 18% of its property tax on pensions. That is grown to about 57% this year, clearly an unsustainable number. Chicago’s pension fund is only about 35% funded, a disaster waiting to happen.   It is estimated that the Windy City’s pension bill will be nearly $1 bil. next year, requiring a huge increase in property taxes. On a statewide basis, it is estimated that over the next three decades nearly $150 billion of increased taxes will be required in Illinois.

This is a national problem. The estimated total shortfall for the United States for municipal pension funding is between $1.5 tril. and $4 tril. Assuming the absence of radical pension reform, i.e. cutting benefits, these shortfall will have to be made up by whopping increases in taxes that will not add to the benefit or social welfare of any, but public employees.

The public employee pension crisis began decades ago with politicians of both parties, but with a strong tilt towards the Democratic Party, buying votes by offering benefits that states and municipalities could not be afforded, but would not become problematic until sometime in the future. Detroit, which declared bankruptcy in part because of its huge pension obligations, is but a in the mine.

While the pensions problem can still be rectified, it would not be without significant pain.   Taxpayers will have to pay more for not managing their politicians better, and public sector employees will have to receive less since much of the overpromising of benefits was based on an incestuous relationship with politicians. It is likely that neither these special interests will give in easily, but instead will wait until the can can no longer be kicked down the road.   The likely result will be many more municipal bankruptcies. The irony is that many of the union leaders and politicians who are responsible for creating the pension crisis will be living off fat taxpayer sponsored pensions benefits.

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Public Sector’s Pension Calamity

Posted by Steve Markowitz on March 23, 2014

The discussion of America’s debt and whether one is concerned with it is often dependent on basic political philosophies.  Those who champion big government and its spending often argue that the federal deficits don’t matter for a wealthy country like the United States.

Progressives have used as a proof statement that America’s debt is not a problem the fact that while our debt has exploded, the Country continues to be able to borrow money at historically low rates.  To these believers in alchemy, the fact that the Federal Reserve is buying much it the debt and therefore artificially pushing down interest rates is of no concern.  The fact that history has shown sovereign debt is never a problem until it becomes one, as it inevitably does, is lost on these folks who believe this time to be different.

Much of the discussion concerning America’s debt challenges does not include the debt off the country’s balance sheets including entitlements such as Social Security and Medicare.  Similarly, the pension obligations of the federal, state and local governments are ignored until they drive municipalities into bankruptcy.  However, these pension obligations are huge and are already causing strains in municipalities throughout the country.

Boston Globe writer Jeff Jacoby published an article titled “Public-sector pensions are eating taxpayers alive” that correctly reviews some of the problems governmental pension obligations are causing.  Jacoby shares the following data:

  • It is estimated that all states currently have a long-term unfunded pension liabilities of more than $4 trillion.
  • Some cities have had to file bankruptcy to get out of their unaffordable pension obligations including the Vallejo, CA, Detroit, MI, and Central Falls, RI.
  • Annual retirement payouts for public-sector workers can be up to 90% of their former salaries.  The average career government employee that retires today receives pension benefits equaling 87% of their last working year’s total salary.
  • In the average state, career government employees receive a combination of pension and Social Security income that is higher than 72% of that states full-time working employees.

Unlike the federal government that has so far been able to overspend by printing money, states and municipalities do not have this luxury.  Unless they declare bankruptcy, they are by law required to make the pension payments and can only meet these obligations by cutting basic services to their citizens, their main reason for existence.  This reality gives quick visibility to the states and municipalities pension problems, once they become burdensome.

How did states’ and municipalities’ create these pension demons?  The answer is simple; pure politics.  When pension benefits are initially given or increased, their cost is hidden in future obligations that can be made to look small by paying financial magicians to come up with unrealistic assumptions on pensions’ long-term returns.  Therefore, politicians trade pension favors to public-sector unions in exchange for their votes that keep the politicians and their bureaucrats in power.  And yes, these folks also get their pensions increased.

The piper is now demanding payment on the excessive states and municipalities pension obligations.  As Jacoby points out, this reality has created unusual bipartisanship.  Some municipalities and states with the largest pension obligations have historically been run by Democratic mayors and governors who continue to maintain little power.  They realize that their governments can no longer supply the public services that Progressives so often promote until and unless these pension obligations are brought under control (decreased).  Liberals who have come out promoting the need to cut these pension obligations include San Jose, CA Mayor Chuck Reed and Chicago’s mayor Rahm Emanuel.

While the pension problems for states and cities can result in catastrophic cuts in governmental services in those localities, the government workers who obtained these benefits are not the problem.  The culprits are the politicians who were/are more concerned with preserving their own political power and wealth instead of serving the long-term good of the people.  Irrespective of this reality, it will be difficult to put the genie back in the bottle.  It is understandable that governmental employees, especially those near retirement, do not want their benefits cut.  However, economic reality will demand such action.  The longer it takes to make these difficult political/economic decisions, the more significant the cuts will ultimately be.

Posted in economics, Pension Funds | Tagged: , , , , | 1 Comment »

Pension Crisis in Europe Looms

Posted by Steve Markowitz on June 8, 2012

Europe plays the game of economic “Wach’em”, attacking problems only as they pop-up.  Its current focus is on sovereign debt and banks.  Unfortunately, the problems are broader and systemic.

The Wall Street Journal reported on the looming pension problems that European countries face.  Many of these countries have pension obligations exceeding 200% of their gross domestic product.  Only Sweden, Denmark and Poland have funded their state pension obligations.  The other countries have kicked the can down the road leaving the liabilities to be paid for from future tax revenues, the next generation.  Making matters worse, these pension liabilities are not included in the countries’ public debt figures.  This smoke and mirrors methodology is also used for U.S. governmental pension obligations and even Social Security.

Showing the extent of the problem, in England for example, the current shortfall is over $300 million.  In addition, the Journal reported that in 2010 each European pensioner was supported by four workers, a number that will drop to two within a few decades.  The Ponzi scheme that European governments use to fund their pension obligations is unsustainable.

The chart indicates the size of the public pension problems in Europe.  The worst offender is France whose current liabilities are 362% of GDP.  Remarkably, newly elected French President Francois Hollande’s first act was to lower the retirement age in France from 62 to 60.  For this incredibly stupid act Hollande should join Bernie Madeoff as a cellmate.  Instead, he will be viewed as a hero to many French, at least until the smelly stuff hits the fan in the not too distant future.

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United States Post Office Stops Employee Retirement Contributions

Posted by Steve Markowitz on June 23, 2011

The U.S. Postal Service announced that it will suspend payments for its employee pension obligations to conserve cash.  According to the Associated Press, this move is justified due to the $8 billion loss suffered by the Postal Service and the fact that it will run out of money by September.

The Postal ervice was paying $115 million every two weeks into its employee etirement fund.  The fund’s current urplus of about $7 billion will allow it to continue making payments to etirees, but without the bi-monthly payments the fund will run out of money at n the future leaving employees then collecting out of luck.

The Post Office’s financial condition continues ven though over the past four ears it cut staff by 110,000 and reduced costs by $12 billion.  It business model based on a monopoly that no onger exists is broken and is no longer sustainable.

The economic state of he Postal Service is another canary n the mine for the United States.  It is n example of the failure of government to spend the peoples’ money
wisely.  It is also an example of the overnment not addressing financial issues until they become crisis.  Finally, it is an example of government mployees receiving a benefit, i.e. a defined benefit pension plan, that their mployer, the taxpayers, cannot afford to pay.

If the U.S. Postal Service was a private company t would have to declare bankruptcy and either come up with a sound business odel or close its doors, unless the government deemed it too big to fail.  However, being an arm of the government, the nuckleheads in Washington will instead state that unless we bail them and
their employees out, the world will come to an end.  Nonsense!

The Postal Service and the government as a whole have promised their mployees benefits that they cannot afford.  I is just matter of time until the gravy train ends.  It would not be surprising to see those affected mployees react in a similar way, rioting, as the Greeks now facing the music re reacting.

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CalPERS Once Again Rigs the Pension Numbers

Posted by Steve Markowitz on March 17, 2011

On March 16, 2010 this Blog posted an article CalPERS and the Coming Pension Bubble that reviewed the shell game being played by the state of California with the California Public Employees’ Retirement System (CalPERS).  This largest of state run public employee pension plans is basically insolvent.

The earlier posting reviewed how determining the real costs of any pension plan depends on key variables and assumptions that are subject to manipulation by the states that manage the plans.  Two key variables include life expectancy and the estimated long-term return on a plan’s investments.  Life expectancies have increased to a greater level than projector earlier.  However, this was the result of advances in science, not bad intent.

On the other hand, assumed long-term plan investment returns are determined by a plan’s administrator, in the case of CalPERS the state of California.  This creates a conflict of interest as California can and has used rigged figures to show less expensive and viable pension plan when it is neither.

In March of 2010 when the original posting was made, CalPERS maintained an already unrealistic annual rate of return on investments of 7.75% even thought the stack market had been flat for the previous ten years and interest on bonds were at historically low levels.  To placate the investment community who purchase State bonds and understood the fallacy of California’s return rate assumptions, California indicated that it was considering lowering this return assumption to 6% in 2011, a number that still may be too high in the current economic environment.  However, a decrease in this assumption from 7.75% to 6% would increase the amount of cash injection required by California by about $2.8 billion at a time when the State is already statistically insolvent.

Instead of biting the bullet with honest accounting, California today announced that it will continue running the state like a Bernie Madoff Ponzi scheme.  They will not lower the assumed return on CalPERS investments even by a fraction of a point, against the State’s own actuary’s recommendation.  Making matters worse, CalPERS main retirement pool is only 70% funded, meaning it is not prepared to meet its obligations to its workers when they retire even with the currently used bogus return rate.

The CalPERS matter should be one that State employees and their unions protest since that State will not have the ability to meet its pension obligations.  Instead, the California public employee unions continue to take dues from State workers while ignoring the coming train wreck.  Unions at a national level have diverted members’ attention from CalPERS and similar problems by marching on Madison to attack Governor Walker for addressing a similar problem in Wisconsin.  The irony is that at the end of the day, Wisconsin retired public employees will get their pensions while many in California will lose at least a substantial portion of these.  Public employee union members would do well to heed the words the ancient Chinese General Sun Tzu who said:

If you know the enemy and know yourself, you need not fear the result of a hundred battles.  If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.  If you know neither the enemy nor yourself, you will succumb in every battle.

 

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Calpers, Pensions, etc. – Part II

Posted by Steve Markowitz on March 17, 2010

Yesterday this Blog posted an article about the problems the country has on the issue of pensions supplied by various government agencies for their employees.  Specifically, it addressed the huge liabilities that are being placed on taxpayers, yet are not being properly funded setting the stage for another major financial crisis.  Reader response has been very gratifying, as the purpose of this Blog is to foster discussion about the problems we as a country face.  One response was particularly enlightening and I have posted it below.  It’s a must read for all.  Thanks Tough Love for a dose of reality!

Tough Love said

March 17, 2010 at 12:50 PM e

State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.

Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.

Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.

More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.

In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.

In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.

Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).

Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRENT employees is “questionable”.

Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.

One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.

Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.

The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.

Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.

But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.

Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.

Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).

I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.

So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.

The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.

But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.

A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.

Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?

It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.

Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.

Posted in Bailouts, California Public Employees’ Retirement System, Calpers, Debt, Deficits, economics, Pension Funds, Politics, Wasteful Government Spending | Tagged: , , , , , , , , , | 2 Comments »

Calpers and the Coming Pension Bubble

Posted by Steve Markowitz on March 16, 2010

The recession that began about two years ago has delivered a dose of reality to nearly all sectors of our economy, with the exception of the Federal Government for who the good times keep rolling.  We have had the well-publicized popping of the housing bubble with the problems continuing until the supply of houses balances with real demand for them.  Banks also face challenges as they are forced to right off bad loans made during the bubble days.  Until these loans are realistically valued, banks will remain hesitant to make new loans, hindering economic growth.  The unemployment rate remains high and will continue at high levels until consumers start increasing spending.  A recent addition to this list is the problem of sovereign debt brought to the forefront by Greece.

There are other structural issues in the economy that need correction that are also starting to get publicized.  This includes the challenges that pension funds are starting to encounter, especially those in the governmental sector.  Pension funds costs are more difficult to value than other employment costs such as wages, medical benefits and taxes.  For example, the annual medical cost for an organization is basically determined by the annual cost of this benefit per employee times the number of employees.

Determining the real costs of pension plans is much more difficult due to the many variables and assumptions used to produce these numbers, making this expense subject to manipulation.  Two main variables used are life expectancy and estimated long-term returns on plan investments.  While life expectancy has increased, this number is calculated by independent parties keeping the number “honest”.  Assumed long-term plan returns are determined by the plan administrators, usual employees of the organization supplying the pension benefit, and are little better than guesses.  This creates an obvious conflict of interest and leads to figure manipulation.

One type of pension plan, Defined Benefit Plan, have had their costs skyrocketed during the past two decades due to sagging returns and increasing life expectancies.  As a result, many private companies have eliminated these plans in favor of lower cost 401K type plans.  However, the pension plans offered to governmental employees have remained unchanged, greatly increasing the liability (cost) for current and future taxpayers.  This problem has been aggravated by government agencies hiding from taxpayers’ the real future liabilities.  This will create another financial crisis if not quickly addressed.

Calpers (California Public Employees’ Retirement System) is the largest state run Defined Benefit Plan in the country.  The Plan’s administrators has maintained an expected return assumption on the Plan’s investments of 7.75% annually.  This assumption is unrealistic, as anyone managing a retirement or 401k plan knows.  Calpers is finally considering lowering this assumption to 6% in 2011, a number that still may be too high.  However, even the decrease to 6% will increase the amount of cash injection required by billions from the insolvent state of California to fund the obligations.

The Calpers is one of many government pension plans at the national, state and local levels that have created huge and unaccounted taxpayer liabilities.  As the various plans assumptions are corrected, already strapped budgets will need to throw more money into the plans by either increasing taxes and/or cutting spending in other areas to fund the liabilities.  This will create tensions between the retiring Baby Boomers and the next generation when the real costs of these benefits are finally addressed.

There are solutions to this looming governmental pension crisis, but they are not painless.  It will require a capping and/or actually cutting the liabilities (benefits) as has occurred in the private sector.  Given the power of the public employee unions and their relationship with the Democrats and other Progressives, the people required to give back part of these benefits will not go down without a fight.  But, the battle is inevitable as previous knuckleheads in government promised benefits to their employees that the taxpayers could never afford to pay in the long-run.

Before solutions to the public pension issues can be disused and implemented, we the people need adequate information.  Actual pension liabilities at every level of government should be clearly spelled out, as well as the assumptions used to create the numbers.  To insure that the numbers are not rigged, independent auditors should be engaged to calculate them.  Finally, once the numbers are confirmed, current taxpayers must be required to pay for the outlays due.  We should not be allowed to use barrowed money to finance the mess thereby passing the problem on to the next generation.  Only this type of discipline can insure a proper balance between the recipients of the benefits and the taxpayers.

OK Mr. President, you campaigned with a promise of transparency.  Here’s your chance to walk the talk!  Tells us what we owe in pension liabilities at the federal level and how we are going to pay for this liability.

Posted in Bailouts, Bubbles, California Public Employees’ Retirement System, Calpers, Pension Funds | Tagged: , , , , , , , , , , , , , , | 15 Comments »

California’s Public Pension Fund – One of Many in Trouble

Posted by Steve Markowitz on October 19, 2009

Caplers logo-subThe California Public Employees’ Retirement System, referred to as “Calpers“, is America’s largest pension fund.  Calpers recently revealed that a former board member obtained $50 million in fees from it for arranging investments that ultimately went south.  The matter smells like “Pay to Play” where insiders take advantage of their positions to raid the public coffers.

Pay to Play occurs too often in American politics.  In the Calpers matter, the former board member Al Villalobos, made his connections by working as a consultant for then Governor Ronald Reagan, was a large donor to the Nixon administration, and helped raise money for then Governor Pete Wilson.  His Republican connections have done well for Mr. Villalobos, but was not so good for Calpers who purchased the bad investments. Read the rest of this entry »

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