Dan Walters: Pension fund setbacks will hit taxpayers hard

Sacramento Bee ^ | 1/26/9 | Dan Walters

[SmithL]

There is an unfortunate parallel between the ups and downs of the state budget and the condition of both state and local public employee pension funds.

When the economy is humming and revenue is pouring into the state treasury, pension fund investments often rack up big gains. And just as revenue windfalls induce politicians to raise spending or cut taxes with little thought to the long-term consequences, retirement fund gains often result in fattening pension benefits.

When the economy sours, as it has been doing lately, it not only slashes revenue for state and local governments but adversely affects pension fund earnings, and already-strapped state and local governments must increase payments to maintain benefits.

That double-whammy is hitting California now. Not only is the state budget awash in red ink, facing multibillion-dollar deficits, but local governments are feeling the pinch, and pension funds, having seen big investment losses, are telling governments to prepare for sharp increases in contributions next year.

The California Public Employees' Retirement System, which covers state workers and many local government employees, has lost nearly a third of its value, thanks to stock market reverses and real estate losses, including a billion-dollar haircut in one land investment. The University of California's independent pension fund has also been clobbered, as well as the California State Teachers' Retirement System and many locally managed public pension funds.

The bite has been much deeper than it otherwise would be because during the last decade, state and local politicians – responding to pressure from powerful public worker unions – sweetened pension benefits markedly.

The San Jose Mercury News reported, for instance, that San Jose's pension costs for police and fire personnel have grown by 167 percent . . .

[Oldexpat]

So just in the year that the state and cities have less revenue they must increase contributions to retirement funds.
No on saved for a rainy day when things were good and now they are faced with a double whammy.
CA cannot recover from this without some basic changes in spending..otherwise now or later bankruptcy.

[businessprofessor]

CA cannot recover from this without some basic changes in spending..otherwise now or later bankruptcy.

Bankruptcy is the only answer. Nothing short of bankruptcy will rationalize the outrageous pensions. Most people do not understand funding of state pension plans. While it is true that the state as a whole has a huge funding shortfall, the funding shortfall will also fall very hard on local governments as many local governments participate in these defined benefit plans. Local governments are much more likely to default.

It is long past due to rationalize these outrageous pension benefits. Public employees in many states are receiving huge golden parachutes so that they can retire in their 50s (often mid and even early 50s) with 60 to 90 percent of their highest recent salaries, inflation protection, and subsidized early retiree medical care. The highly subsidized early retirement is the equivalent of hundreds of thousands or even millions of dollars of deferred compensation beyond the employee/employer contributions plus interest. Here is a link to my work on deferred retirement compensation in Colorado.

http://www.i2i.org/files/pdf/IP_9_2008.pdf

[Liz]

BACKSTORY FR Posted on 07/03/2007 by NormsRevenge
State loses legal battle over pension bonds
AP via Bakersfield Californian | 7/3/07 | By Aaron C. Davis -

Gov. Arnold Schwarzenegger's administration lost a long-running court battle over its plan to sell bonds to cover the state's public employee pension costs. The ruling could complicate negotiations over the state's already overdue budget. Republican lawmakers are holding up the $104 billion spending plan in part because they believe it will leave California with an unmanageably large budget deficit next year.

Tuesday's ruling may only add to that concern, depriving the state of more than $500 million to help close the estimated $5 billion-plus deficit in the 2008-09 budget year. Schwarzenegger and Democratic leaders have proposed balancing the current, 2007-08 fiscal year budget with billions of dollars from a prior-year tax windfall.

That money will run out by the time officials begin drafting the budget that begins on July 1, 2008.

Consumer rights and anti-tax groups praised Tuesday's ruling. They said it set an important precedent limiting the state's ability to borrow money to pay ongoing expenses without voter approval. "If they had gotten permission to do this, we could have seen massive deficit spending," said Harold Johnson, an attorney for the Pacific Legal Foundation, which fought the bonds. "It's a big victory and a sobering message for the spendthrifts in the Legislature. They can't use the credit card to cover ongoing costs of government." --SNIP--

[Larry381]

I’m basically an idiot when it comes to finance but could someone tell me just why the managers of these huge pension funds have taken such a beating?
A lot of small investors, like myself, were able to cut their losses last January (2008)and move into more secure, though low paying, investments.
Am I missing something?

[GOPJ]

Let's come up with a "freeper pension plan".

We'll each get $10,000 a month

- and when FreeRepublic can't pay us anymore,(after a few days)

we'll ask for our fellow taxpayers to pick up our tab.

We're already doing half ( the paying half )

[Liz]

Will Arnold now have to start acting like a Republican on budget issues? Heck no! The man has grown government faster than a Dem could have dreamed and to finance it, he's deferred, borrowed (unsuccessfully), raised fees, and entered into special deals with Indian tribes.

He was scheming to pump up the volume for his proposed Public Private Partnerships, helping his cohorts loot Government assets if they will just pump some one-time cash into the State's revenue coffers, in return.

Think about the possibilities of Arnie's privatization deals: toll roads, bridges, ports, other privately run highways, schools, housing, security, etc. This man has 3 more years to payoff his donors through sweet deals and favorable legislation.

The Austrian has:

1) Dramatically increased spending

2) Set both state and national records for borrowing

3) Has either deferred payment or refused to recognize significant, long term liabilities.

4) Has dramatically increased per capita taxation on California residents

5) Has announced plans to tax Californians twice for basic services through fascism

6) Has entered into treaties with foreign/sovereign governments supported by domestic taxation.

Schwarzenegger has been, by any measure, the worst governor in the modern era of California. Worse than Warren, the Browns, Wilson or Davis.

[Liz]

"Ach der lieber.....Kaleefurrneeah bankrupt? Duz dat mean
I gotda chainch my plans abat runnin for prezeedunt?"

"Ai kiss anyboty's tookus to gets dah money to bailout Kaleefurnia.
Mebee Ai trow Maria off dah ski livt at Sun Valley. Ai getda
nashynal symputty ven anodder Kennedee goes kaput."

" Chust in case, Chonny and Wooty, and I look vor jobs as Val-Mart
greeters, Home Depot paint mixers unt McD's ketchop pumpers, or
vaiters at Ved Lopstah."

"Ai gotda vunny veeling dah Reepublucan Potty tinks RINOS are pure crapola."

[Osage Orange]

One reason...is it takes a long time to turn around a big giant ship.

IOW...if you are a fund manager...with millions / billions of $$$ "in" certain stocks....it's hard to just sell 1,2,3,4 million shares of XYZ stock...by the push of a button.

Plus half these nimrods running these funds...have no idea about how to "cut their losses"....

Nor do many of these guy's have experience in bear markets.....

Random reasons.....fwiw-

[Faraday]

bttt

[businessprofessor]

I’m basically an idiot when it comes to finance but could someone tell me just why the managers of these huge pension funds have taken such a beating? A lot of small investors, like myself, were able to cut their losses last January (2008)and move into more secure, though low paying, investments. Am I missing something?

The essential problem with public defined benefit pensions is the retirement compensation. The amount of retirement compensation has been purposely hidden from the public. If the public understood compensation, the pension benefits would have been rationalized a long time ago.

Most investment managers have taken large losses this year so losses for pensions funds are not unexpected. Many pension funds have requirements about portions to invest in different categories. The pressure to make the target return (typically 8 to 8.5%) makes the fund managers agressive in investment strategies. Some pension plans including California plans have political interference in pension investments. The public employee unions and leftist politicians have lobbied for social investing. In addition, some plans have corrupt investing practices.

The overridding problems are the outrageous benefit levels and the agressive investment strategies. The entire public defined benefit plan industry is corrupt.

[c21sac]

California is in a world of hurt and there is no one here in Sacramento that knows what to do, except to raise taxes. The fools here, and that includes Arnold, think that true leadership is looking all us servants in the eye and telling us to dig deeper and give more.

I would like to thank that with California on the verge of BK and the terrible way things are done here that the people would throw the rat bast**ds out. But they will reelect these fools over and over again. So nothing changes and the problems grow

FWIW, My sister is dating a California Prison guard. He makes $120,000 per year, he will retire at age 52 with 90% pay. So the State will pay him $108,000 for thirty years. Wow

[TenthAmendmentChampion]

The California Public Employees' Retirement System, which covers state workers and many local government employees, has lost nearly a third of its value, thanks to stock market reverses and real estate losses, including a billion-dollar haircut in one land investment.

Is anyone going to jail for fraud or malfeasance?

[Red Boots]

It is long past due to rationalize these outrageous pension benefits. Public employees in many states are receiving huge golden parachutes so that they can retire in their 50s (often mid and even early 50s) with 60 to 90 percent of their highest recent salaries, inflation protection, and subsidized early retiree medical care. The highly subsidized early retirement is the equivalent of hundreds of thousands or even millions of dollars of deferred compensation beyond the employee/employer contributions plus interest. Here is a link to my work on deferred retirement compensation in Colorado.

I knew you were the poster before I even got to the last paragraph. I thought of you when I read Saturday's GJ Sentinel article about teacher's pensions.

They pretty much glossed over the problem, and, being the Sentinel, there were only government spokespeople available to comment. Here's the link; maybe a reply to the editor is in order ?http://www.gjsentinel.com/hp/content/news/stories/2009/01/24/012509_PERA_problems.html

[nufsed]

Retirement pay is not based upon overtime. It’s based upon the highest base salary year for the individual.

[SierraWasp]

Excellent summation!!!

Astute analysis!!!

[marsh2]

Not easy to back out of it because of the unions. They would rather you lay off employees and keep pay and benefits the same than to lower pay and benefits.

An additional problem is the articulation between Counties. An employee in a small county can go to a larger county for his/her last years to “spike” base pay. Or they can transfer to a rural county in last years to ease into retirement and stick the rural county with paying their retirement earned elsewhere.

[SierraWasp]

Well, Supervisor, there's nothing like public servants manipulating their "hard won benefits" to benefit only themselves far more than originally negotiated, at the expense of the "easy money" extracted by force of law from unwilling taxpayers!!!

Oh! And their usual Socialistic tendencies disappear quite quickly when they don't care what happens to their fellow public servant's job just so long as they can keep their "hard won, collectively bargained, benefits!!!"

If I sound horribly frustrated, it's because I am!!!

[marsh2]

It is quite frustrating. We look at a graph of benefits and salaries and it keeps climbing in comparison with flat lined or decreasing revenues. Our contracts were for several years term, so unless they want to come to the table and reopen, there is not much we can do about it.

After many years of holding the line, we had gotten to the point that we could not fill professional positions. No one would apply for them because they paid so low in comparison with other Counties. We had to do some realignment to try and be somewhat competitive. We still have key positions, such as a Planning Director, that have been vacant for almost a year. That is part of the problem - not reflecting pay and benefits of local private sector jobs, but being in this competitive pool among counties.

[Grampa Dave]

“FWIW, My sister is dating a California Prison guard. He makes $120,000 per year, he will retire at age 52 with 90% pay. So the State will pay him $108,000 for thirty years. Wow!”

With many of the California Prison in lower housing/living cost areas, these jobs are becoming dream jobs.

We know of a couple, who retired from this system when they were 55. Six years later, they are doing very well, getting degrees in fun things, traveling overseas and funding their late 30 something Daughter’s MA’s and PhD’s in instant unemployment degrees. If this game is still around, the daughter will probably finds employment with this system.