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CA Unfunded Pensions Triple to $884 Bil
By CHRISS STREET The three largest California public retiree plans — CalPERS, CalSTRS and UCRS, which administer the pensions of approximately 2.6 million California state and local public current and retired employees — have been under tremendous scrutiny since last year’s release of the report of the Stanford Institute for Public Policy Research, “Going for Broke.” The report concluded that California retirement plans’ liability was under-funded by more than $500 billion. The report blamed most of the shortfall on the pension plans’ expectation of future annual investment returns of 7.75 percent, versus a realistic expectation of a 4.14 percent annual return. The cabal of California politicians, bureaucrats and crony consultants that justified the granting of lucrative benefits to employees, while failing to contribute enough to support the true pension costs, solemnly dismissed the Stanford report as unsophisticated reflections by academics. But now that a swarm of local governments wants to abandon the floundering retirement trusts, the state plans are willing to credit only a 3.8 percent expected return. If the California state pension plans adopted the same 3.8 percent rate they are only willing to credit when participants want to leave, their published $288 billion in pension shortfall would metastasize into an $884 billion California state insolvency. It doesn’t take a Stanford MBA to realize producing consistently high investment returns since 2007 has been difficult in the extreme. The California state pension plans that currently control $432 billion in assets suffered $109.7 billion in losses during the 2008-09 recession. Paltry Employee ContributionsPension plans normally require employers and their employees to mutually increase contributions to make up pension shortfalls. But public pension plans are notorious for not requiring employees to make significant contributions. California police, prison guards, firemen and lifeguards can retire at age 50, but have never been required to contribute to fund pensions. With headlines that California plans are in big trouble, many government agencies applied to withdraw from the state plans. But as calculated below, compounding investments at 7.75 percent grows to more than three times the amount of compounding investments at a 3.8 percent rate of return.
When I was elected as treasurer of Orange County, Calif. in 2006, I was flabbergasted to discover that the county’s $8 billion of retirement investments were covertly leveraged up by $22 billion of derivatives. I quickly learned that many unions see pension benefits as contracted rights; and pension investing as a no risk crap-shoot for extraordinary returns. If the pension investment returns skyrocket, the unions will bargain for increased benefits. If the pension investment returns crash, the public employees are protected by a rock-solid contract law that prevents any reduction in benefits. In 2007, I was fortunate to gain the support of enough Orange County Pension Trustees to reduce speculative derivative use by 90 percent. At the time, trustees for the California state public pension plans solemnly dismissed Orange County as unsophisticated. Shortly thereafter, the stock market crashed and the state pension trustees stopped making comments. Tarnished Golden StateOnce famous as the Golden State for leading the nation in high-tech growth industries that provided excellent wages, California is now tarnished for having the second-highest unemployment and worst state credit rating in the nation. Forbes recently quoted a top venture capitalist who compared the California business climate to France: “I try not to hire here, and I certainly would not launch a company here. But the wine is good.” For most taxpayers, the tripling of the burden of the under-funded pension liability to almost $1 trillion will probably ruin the taste of California wine. (Feel free to forward or follow our research at ChrissStreetAndCompany.com.) Chriss Street is the former treasurer of Orange County.
Tags: CalPERS, CalSTRS, Chriss Street, pensions, Stanford, UCRS Comments(19) |
May 23, 2012
unbeliveable so sad to see these unions and politicains ruin this state its over caliafornia these pension plans will be the death of this state!
I quickly learned that many unions see pension benefits as contracted rights; and pension investing as a no risk crap-shoot for extraordinary returns.
If the pension investment returns skyrocket, the unions will bargain for increased benefits. If the pension investment returns crash, the public employees are protected by a rock-solid contract law that prevents any reduction in benefits.
California is now tarnished for having the second-highest unemployment and worst state credit rating in the nation
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Chris, Street-you’re ONE SMART GUY!!!!!!!!!!!!!!!!!!!!!!!!!
these pension plans will be the death of this state!
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Mike, we’re already dead, you just don’t knwo it yet.
These multi million dollar retrie at age 50 scams will not be able to be paid, because the only way they can be is if we shut down 99% of our services, we will be service bankrupted instead of money bankrupted. And we are 75% there right now.
You simply cannot compensate unskilled GED gov jobs like FF prison guard and cop $200K per year, and upt to $350K per year with overtime. Does not add up to solvency.
No Surprise here … Public Sector Unions are a Cancer on Society.
“With headlines that California plans are in big trouble, many government agencies applied to withdraw from the state plans.”
How many and which one’s, Chriss? Pacific Grove hasn’t applied to withdraw from CalPERS, even though that city did ask for the numbers should they decide to make such a request.
Who else? Unless you’re going to actually report facts, this sounds like more alarmist hyperbole from you and the other libertarians with an agenda at Cal Watchdog.
The formula doesn’t allow adding annual additional contributions which currently are 23% of payroll for State miscellaneous employees. Adding only the 5% the average employee puts in increases to 4.4 times beginning principle. 1.05 to the 30th power equals 4.322. Try it on any calculator.
Even a junior high school student taking Math 101 would see through not counting ongoing contributions. Nice try Rex!
Skippy still in denial, some things never change, as certain as the sun setting
I simply asked Chriss a question about his claim. Do you want to answer for him, Rex?
Skipping Dog. Calpers enacted the “Pacific Grove Termination Penalty” to teach PG a lesson for asking for the cost to leave and for enacting real pension reform. Calpers lost $55,000,000 of PGs’ $100,000,000 million plan. PG paid off 19 million of the deficit,but now owes 36 million dollar more, which grows at 7.75% per annum. So now Calpers demands 72 million(to terminate) to fund its’ over-funded Termination Pool.Pg owes 36 million for the bonds it issued as a result of more Calpers hanky-panky, and it lost a chunk of that. You can’t make this stuff up.As they say”absolute power corrupts absolutely”Bernie Maddoff would be so proud of Calpers. It is the ultimate statutory corruption machine. It is the new 8th wonder of the world. It can inflict financial pain like no group in history.
John moore – I know about your efforts in PG, but the author said “many government agencies applied to withdraw from the state plans.” I’d just like to know what “many” means, since PG is the only agency I’m aware of that has even worked up the numbers to see how much it would cost to withdraw from the program.
These people claim to be accurate and objective journalists. I’d just like them to back up their extraordinary claims, if they can.
John, Considering Pacific Groves financial condition, has the City considered pulling out but telling CalPERS it will only pay the cost based on the 7.75%?
Actually, consider the town’s condition the City might be in a position to give CalPERS an ultimatum … accept the amount (based on the 7.75% rate) as full payment … or we’ll simply stop paying anything.
Still waiting to read the identity of those “many government agencies [that] applied to withdraw from the state plans” Chriss….
You are going to clarify your claim, aren’t you?
Waiting….
CalPERS Acts to Ensure Benefits of Terminated Agency Members
The above entitled press release can be viewed on the CalPERS website. Skipping Dog-Are the cities covered in the CalPERS release, the same ones that this author in referring to? The release mentions 118 public agencies that have terminated their CalPERS plans, but it doesn’t say what lengthof time-span elapsed over the course of those terminations. I’m a little confused.
If the author was such a great County Treasurer, how come they kicked him out?
SeeSaw – No cities or agencies are mentioned in the press release, but the impression I had is that the 118 agencies in the pool were small and and had been in the pool for awhile. As you know, there have been many small agencies such as agricultural districts, abatement districts, water districts, fire districts, etc. that have either gone defunct or been consolidated with others over time. I suspect those make up the vast majority of the terminated pool, but haven’t heard anything about a wave of applications to withdraw from CalPERS during the past several years.
If anything, you’d think the pension haters would have been all over any story about an agency applying to withdraw from CalPERS, just as john moore and others were all over Pacific Grove’s inquiry about the costs of doing same. I haven’t heard or read anything like that, so was just trying to determine if Street is fabricating his claim to support his vendetta against public pensions.
I suspect that is in fact the case.
Thank you Skip. That helps me put it in perspective. I did suspect that this author is desperate to resusitate, a fallen career in finance.
So, he exaggerates. But it seems to me that for public service unions, economic history is moving in the wrong direction. And, in terms of accuracy, shouldn’t those unions be termed “government employee unions”? I suggest that from the perspective of a long career in government work. After all, we don’t refer to plumbing “service” unions.
If he exaggerates about something as basic as the number of agencies who have applied to withdraw from the CalPERS system, what else does he exaggerate about? How can we trust anything he claims?
[...] California state and local governments’ unfunded liability for future pensions now is so large, $884 billion, that those already retired will see their pensions cut as well. I’ve been predicting [...]