» California Admits to Almost $1 Trillion in Unfunded Pension Obligations

 

The three largest California public retiree plans (CalPERS, CalSTRS, and UCRS) that administer pensions of approximately 2.6 million State and Local public current and retired employees have been under tremendous scrutiny since last year’s release of the Stanford University Institute for Public Policy report: “Going For Broke”. The study concluded that California retirement plans liability was under-funded by over $500 billion.

The report blamed most of the shortfall on the pension plan’s expectation of future annual investment returns of 7.75%; versus a realistic expectation of a 4.14% annual return. The cabal of California politicians, bureaucrats, and crony consultants that justified granting 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 want to abandon the floundering retirement trusts; the State plans are only willing to credit a 3.8% expected return. If the California State pension plans adopted the same 3.8% 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 a difficult in the extreme. The California State pension plans that currently control $432 billion in assets, suffered a $109.7 billion in losses during the 2008 to 2009 recession. Pension 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 contribution. 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 withdrawal from the State plans. But as calculated below; compounding investments at 7.75% grows to more than three times the amount of compounding investments at a 3.8% rate of return.

When I was elected as Orange County, California Treasurer in 2006, I was flabbergasted to discover that the County’s $8 billion of retirement investments was 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 sky-rocket, the unions will bargain for increased benefits. If the pension investment returns crash; the public employees are protected by rock-solid contract law that prevents any reduction in benefits. In 2007, I was fortunate to gain the support of enough OC Pension Trustees to reduce speculative derivative use by 90%. At the time, Trustees for the California public pension plans solemnly dismissed Orange County as unsophisticated. Shortly thereafter the stock market crashed and the State Pension Trustees stopped making comments.

Once 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 that 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.” Tripling of the burden for under-funded pension liability to almost $1 trillion will probably ruin the taste of California wine for most taxpayers.

 

California state pension funds going broke, Stanford study finds

L.A. Cicero
 

 

Students Howard Bornstein and Lisha Wang spoke with reporters after a news conference where they and the other members of their research group announced their findings about the state retirement system.

BY GWYNETH DICKEY

California public employee pension systems are worse off than anyone previously projected, according to a new report generated by five graduate students in Stanford’s graduate Public Policy Program. The result could be greater pressure on the state budget and a shortage of pension funds in the future.

“This is a really dire situation,” graduate student Howard Bornstein said today at a press conference at the Stanford Institute for Economic Policy Research (SIEPR), which is publishing the students’ findings. “If we don’t do something now, we’re going to have major issues in just a few years.”

Bornstein and his fellow graduate students examined public records of past performance of three pension funds – the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS) and the University of California Retirement System (UCRS), which together administer pensions for approximately 2.6 million Californians.

The students ran computer simulations to predict the unfunded liabilities of the pension funds over the next 16 years.

Major investment needed

“The simulation shows that the state would need to invest more than $200 billion, and possibly as much as $350 billion, today to return the fund to a minimum responsible level of funding,” said Bornstein, who noted that the figure is approximately four times the current state budget.

“It’s an enormous number,” said Joe Nation, a public policy lecturer at SIEPR and the adviser for the research team. He said it’s important to look at the shortfall relative to state resources. Pension funds fluctuate with market performance, but state employees are guaranteed a fixed pension regardless. If the market performs poorly, the state is obligated to step in and provide the missing pension funds. That takes money away from other public projects, such as education and healthcare, Nation said.

“The students did an amazing job providing a better sense of unfunded liability for those three pension funds, and I hope observers out there will begin to understand that this is a financial train wreck that is not very far down the tracks,” Nation said.

In the report, Bornstein and his fellow graduate students suggest policies to fix the shortfall and prevent a similar one in the future.

They propose that the managers of the pension funds project more realistic rates of return, which would indicate higher liabilities in the future.

“The whole approach that the state currently uses is inherently flawed. They look at averages as opposed to a fan of outcomes,” said Bornstein. “If you instead look at the range of outcomes in the future, you’d see there’s over a 60 percent chance of a deficit greater than $250 billion for CalPERS alone. This is something that really scares us.”

The students suggest that the minimum level of caution should be for the pension systems to aim for an 80 percent probability of having at least 80 percent of the funds necessary to cover the pensions. They also advocate investing more conservatively, taking fewer risks.

“Funds in other parts of the country are in similar situations, and they are beginning to invest in riskier assets,” Nation said. “That’s exactly the wrong thing to do. If the market doesn’t perform well, the taxpayer ends up paying.”

Suggested fixes

The students suggest either reducing pension benefits or moving to a hybrid system in which retirees receive a smaller fixed pension combined with a 401(k)-style plan. This would relieve some of the burden on the state and give employees more responsibility for their retirement. Two-thirds of Californians would support such a plan, according to a poll by the Public Policy Institute of California.

“The biggest challenge with this is making sure elected officials understand the severity of the problem,” Nation said. “It’s a political hot potato and most politicians shy away from the issue because you offend a lot of the constituencies by acknowledging the problem exists.”

But, he said, citizens and institutions are increasingly aware of the situation and are speaking out.

“The University of California is engaged in this debate because they finally understand that as pension fund benefits grow, there will be fewer dollars for higher education,” Nation said.

The report was prepared for the Office of Gov. Arnold Schwarzenegger as part of the Graduate Practicum in Public Policy, a two-quarter sequence required for master’s degree students in the Public Policy and International Policy Studies programs.

In addition to the masters’  program in Public Policy, Bornstein will earn his Masters in Business Administration degree this June.

SIEPR conducts research on important economic policy issues facing the United States and other countries. SIEPR’s goal is to inform policymakers and to influence their decisions with long-term policy solutions.

What’s funny is the heading above, “major investment needed.”  The left wants to make a major investment, alright.  An Obama-style investment, called enormous tax hikes to fund impossible promises made to public employee unions.

Something will have to give.  Higher taxes to fund impossible-to-fulfill promises will just postpone the disaster, and not by very long.  A complete, structural, top-to-bottom readjustment is needed, and people have to lose the idea that they can work for 30 years and retire at the age of 55 and still get paid till they die at 95.

California is facing serious economic and political problems. How we deal with these problems will affect both California and the nation.

In this first essay of our Advice to the Governor public policy series, the Claremont Institute’s William Voegeli explains that we must strictly limit spending, and we must do it repeatedly rather than just enough to get us through the next budget or election cycle. The path forward is simple but not easy. Ballot measures that seek to restrain budgets and revenues are unlikely to provide lasting solutions unless our legislature and governor are committed to fiscal rectitude. In this long-building crisis, we have great opportunities. As Voegeli puts it, we are likely to see not a teachable moment but a “teachable decade.” The time to act is now, for we cannot escape the inescapable any longer.

As Rahm Emmanuel famously said, it’s a shame to let a crisis go to waste. Pray that California’s new government (really, the same old government) will recognize this, and act accordingly to take this opportunity to make tough decisions and stick to them, even if they are politically unpopular with some.

In the meantime, list your house for sale and start looking for a job in Texas.

My daughter is a journalism major in college and this blog is the result of a class assignment  – write something in the style of Ann Coulter.  I will leave it to you to judge how well she did.

History Repeating Itself – by Embowlee

“I didn’t have a plan,” said Jerry Brown, former Governor of California, in a 1992 CNN interview responding to the question of what went wrong while he was in office.

What’s that you say? Why yes, yes that is the man running for Governor for this upcoming 2010 election.

Flash back to before Jerry Brown tried his hand at being Governor the first time. What do we see?

For starters, California still deserved the title “The Golden State.” We had the best higher education, the best freeways, and affordable and abundant living communities. State and government taxes were low, and the word “inflation” was virtually non-existent.

Flash forward.  The state has stopped building new freeways, and halted new power plants. Taxes are the highest in the nation, and unemployment is higher. Millions of hard-working Californians are leaving for opportunities elsewhere in neighboring states, and for the people who do stay; the livin’ definitely ain’t easy.

We can thank the 1974 election of a radical, new age leftist Jerry Brown as playing a huge part in this rapid downfall.

In the same interview with CNN, Mr. Brown was asked a follow up question after he stated that he didn’t have to lie anymore, now that he’s no longer a politician. As if he thought he could say that and not expect a follow up question.

What did you lie about, asked the CNN representative?

“It’s all a lie. You run for office, and the assumption is that you know what to do, and I don’t. I didn’t have a plan for California, Clinton doesn’t have a plan, and Bush doesn’t have a plan. You say you’re going to lower taxes, put people to work, you’re going to improve the schools; you’re going to stop crime. But crime is up; schools are worse, taxes are higher. I mean, be real!”

Be real California, our state is hopeless! Thanks Mr. Negativity, but what I think you really meant to say was that you just couldn’t step up and get the job done yourself.

So now-nearly twenty years later, Jerry Brown wants to give being Governor of the state of California another shot.

The recent polls show Jerry Brown leading over opposing candidate, Meg Whitman.

What’s going on California residents? Is suffering through a four year term something you like doing? ‘Cause that’s what we can expect if Jerry no-plan Brown is elected again.

What makes anyone think, after all these years, that this time, he actually does have a plan?

In one of his most recent ad campaigns, Jerry Brown says it’s time to get California working again, and that we have to “work with what we have.” He’s also talked about how he wants to focus primarily on “green-centered” jobs-jobs that are more expensive to fund, and are scarce.

What about the jobs we’ve had around for hundreds of years, Jerry? The ones that are quickly dying off and people are becoming unemployed over, because there’s no money to sustain them and no money to afford workers.

Jerry Brown claiming to have a solid plan the second time around is almost as crazy as the thought of Barbara Boxer running for office again. Oh wait…

I miss him.

In the end, if we cannot reverse this monstrosity, we will all suffer for it, including even the now “uninsured”.

Be not afraid of greatness: some are born great, some achieve greatness, and some have greatness thrust upon them.

William Shakespeare

After reading this article I can only wonder which of these attributes of greatness applies to the esteemed junior Senator from the great State of Minnesota.  Given the times in which we live, given the magnitude and seriousness of so many national and international issues facing our great nation, it is of great comfort to know Stewart Smalley is on the job!

The people from the land of 10,000 lakes must be so proud.

Health premiums could rise 17 pct for young adults

Under the health care overhaul, young adults who buy their own insurance will carry a heavier burden of the medical costs of older Americans — a shift expected to raise insurance premiums for young people when the plan takes full effect.

Beginning in 2014, most Americans will be required to buy insurance or pay a tax penalty. That’s when premiums for young adults seeking coverage on the individual market would likely climb by 17 percent on average, or roughly $42 a month, according to an analysis of the plan conducted for The Associated Press. The analysis did not factor in tax credits to help offset the increase.

The higher costs will pinch many people in their 20s and early 30s who are struggling to start or advance their careers with the highest unemployment rate in 26 years.

Consider 24-year-old Nils Higdon. The self-employed percussionist and part-time teacher in Chicago pays $140 each month for health insurance. But he’s healthy and so far hasn’t needed it.

The law relies on Higdon and other young adults to shoulder more of the financial load in new health insurance risk pools. So under the new system, Higdon could expect to pay $300 to $500 a year more. Depending on his income, he might also qualify for tax credits.

At issue is the insurance industry’s practice of charging more for older customers, who are the costliest to insure. The new law restricts how much insurers can raise premium costs based on age alone.

Insurers typically charge six or seven times as much to older customers as to younger ones in states with no restrictions. The new law limits the ratio to 3-to-1, meaning a 50-year-old could be charged only three times as much as a 20-year-old.

The rest will be shouldered by young people in the form of higher premiums.

Higdon wonders how his peers, already scrambling to start careers during a recession, will react to paying more so older people can get cheaper coverage.

Of course, these people who are telling you that your premiums will go up by 17% are just trying to break it to you gently, to let you find out the truth in stages.  But this IS the government we’re talking about, and this IS an entitlement program, so you know, don’t you, that the real cost is going to be more.  Much more.  Social security, Medicare, Medicaid, etc., all cost much more than anyone dreamed they ever would.   So will this.

And, of course, for the many young adults who could afford health insurance but have simply chosen not to buy it themselves (something like 1/3 of the currently “uninsured” if memory serves), their cost under the new regime will be much more than they currently pay…  which is nothing.  But we really need to grab these deadbeats and shake some money out of them.  Don’t they know that their turn will come later, to have the generations after them pay for their healthcare?

The young musician in the article above, Nils Higdon, is a perfect representative for your demographic, because even though he’s about to be soaked, he is willing for it to be even worse, by being for single-payer health care (you can read about it at the link above).  Very generous of him.  And you, since I’m sure you agree, being a young Obama voter who really respects your elders, and wants to take care of them even more.

I suppose it’s just a good thing for me that most young drummers haven’t read Adam Smith, or F.A. Hayek, or Milton Friedman, or Thomas Sowell.  Undoubtedly, the screeds from these promoters of the greed motive would have poisoned their young, impressionable minds.

I see that Mr. Higdon is a self-employed drummer.  In the real world, in this economy, that sometimes means he makes most of his living as a golf caddy.  I’ve always thought that golf caddies should pay more for the health care of the old duffers, er, golfers, that they serve.  I mean, since the caddies already fund their retirement via social security and incompletely funded government pensions and so on, it just seems reasonable. 

If you’re going to carry their clubs, you may as well carry them, too.

A $100 million item for construction of a university hospital was inserted in the Senate health care bill at the request of Sen. Christopher Dodd, D-Conn., who faces a difficult re-election campaign, his office said Sunday night.

The legislation leaves it up to the Health and Human Services Department to decide where the money should be spent, although spokesman Bryan DeAngelis said Dodd hopes to claim it for the University of Connecticut.

The provision is included in a 383-page series of changes to the health care bill that Senate Majority Leader Harry Reid, D-Nev., outlined Saturday. Scattered throughout are numerous items sought by individual lawmakers, many of them directing money explicitly to programs or projects in their home states.

The one sought by Dodd provides $100 million for “a health care facility that provides research, inpatient tertiary care, or outpatient clinical services.” It must be affiliated with an academic health center at a public research university in the United States “that contains a State’s sole public academic medical and dental school.”

This health care bill is so laden with sweetheart deals and outright corruption in the form of direct vote buying that it may set a new high for sheer quantity and brazenness.

I’m sure that Connecticut needs a new hospital worse than anywhere else in the USA.

Heavenly Father,
We come before you today to ask your forgiveness and seek your direction and guidance.
We know your Word says, “Woe to those who call evil good,” but that’s exactly what we’ve done.
We have lost our spiritual equilibrium and inverted our values.
We confess that we have ridiculed the absolute truth of your Word and called it moral pluralism.
We have worshipped other gods and called it multi-culturalism.
We have endorsed perversion and called it an alternative lifestyle.
We have exploited the poor and called it the lottery.
We have neglected the needy and called it self-preservation.
We have rewarded laziness and called it welfare.
We have killed our unborn and called it choice.
We have shot abortionists and called it justifiable.
We have neglected to discipline our children and called it building esteem.
We have abused power and called it political savvy.
We have coveted our neighbors’ possessions and called it ambition.
We have polluted the air with profanity and pornography and called it freedom of expression.
We have ridiculed the time-honored values of our forefathers and called it enlightenment.
Search us O God and know our hearts today; try us and see if there be some wicked way in us; cleanse us from every sin and set us free.
Guide and bless these men and women who have been sent here by the people of Kansas, and who have been ordained by you, to govern this great state.
Grant them your wisdom to rule and may their decisions direct us to the center of your will.
I ask it in the name of your son, the living Savior, Jesus Christ. Amen.

It would, of course, be lovely to hope that such a prayer might ever have been prayed Rev. Jeremiah Wright, not just Rev. Joe Wright.

What’s sad is that this is not a partisan prayer.  Some of the items in it might easily be applied to the Right as well as the Left.  But in it’s Kansas legislature appearance, it was Democrats who got up and walked out.

Alas.

But I don’t want the folks who created the mess to do a lot of talking. I want them to get out of the way so we can clean up the mess. I don’t mind cleaning up after them, but don’t do a lot of talking.

Compare his statement with the following quotes on the subject of protest and dissent. All but one of the persons cited below are Democrats. The last quote is from a significant and influential German Nazi. I threw it in there as a nod to Nancy Pelosi, who seems to be fascinated with all things Nazi these days. I will leave it up to you, dear reader, to draw your own conclusions. In the mean time, if you haven’t already done so, be sure to report this blog to flag@whitehouse.gov. There is definitely something “fishy” about this posting!

We who in engage in nonviolent direct action are not the creators of tension. We merely bring to the surface the hidden tension that is already alive.

Martin Luther King Jr.

We do not move forward by curtailing people’s liberty because we are afraid of what they may do or say.

Eleanor Roosevelt

Once a government is committed to the principle of silencing the voice of opposition, it has only one way to go, and that is down the path of increasingly repressive measures, until it becomes a source of terror to all its citizens and creates a country where everyone lives in fear.

Harry S. Truman

I am sick and tired of people who say that if you debate and you disagree with this administration somehow you’re not patriotic. We should stand up and say we are Americans and we have a right to debate and disagree with any administration.

Hillary Clinton

We can’t be so fixated on our desire to preserve the rights of ordinary Americans…

Bill Clinton

Without debate, without criticism, no administration and no country can succeed — and no republic can survive.

John F. Kennedy

We must not confuse dissent with disloyalty. When the loyal opposition dies, I think the soul of America dies with it.

Edward R. Murrow

Freedom is hammered out on the anvil of discussion, dissent, and debate.

Hubert H. Humphrey

To announce that there must be no criticism of the President, or that we are to stand by the President, right or wrong, is not only unpatriotic and servile, but is morally treasonable to the American public.

Theodore Roosevelt

If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.

Joseph Goebbels

Snopes attempts to debunk the email with a lot of explanation and clarification here.  What’s sadly funny is this:  the Snopes people seem to believe that their explanation somehow makes it all better, when what they end up admitting is nearly as bad as what is alleged in the original email.  Especially risible is Snopes’ attempt to de-link the Democrat party from increases in SSA taxes, increases in SSA benefits/spending, and congressional misappropriation for other purposes than originally intended, by using smokescreens like “borrowing from the social security ‘trust fund’,” etc.  Sure, a few Republicans erred here and there.  But it was overwhelmingly Democrats who pushed the spiraling ponzi scheme.

An example:  FDR did not “promise,” as alleged in the email, that the tax to fund SSA would only be 1% forever.  What he did, in the time-honored, incrementalist tradition of leftist-liberals everywhere, is create a system where the initial tax would be relatively light, and would increase slowly, over several years, so that most people who even understood what was going on at the time thought the tax would only be 1% for the forseeable future.  (How many people in mainstream USA at the time carefully reviewed legislation in detail, with all planned future changes, before forming an opinion of it?)   It is now a total of 15%, half directly out of your check, half “paid by the employer,” but in fact part of the employer’s cost of having you as an employee, by federal law.  It is going to go up, and the income ceiling that will be taxed is going to go up.

I hope you younger folks enjoy paying for my benefits.  Serves you right for voting for Democrats, in a spasm of hopey-changey good feeling.  We’ll see how good you feel when you’re paying for my 30 year vacation after retirement.

Read the Snopes article, and see if you don’t find Snopes’ defense to be nearly as damning as the email was in the first place.

And here is another take on the issue.  And another.

Exit question:  does any person who knows anything about the history of entitlement programs believe that when a national health care system for everyone is created, it will cost as little as proponents claim at its founding?

Only people with their eyes screwed tightly shut, and earplugs snugly in place.