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Calpers Dreaming of Dow 28,000,000?
Via Pension Pulse.
David
Crane of the WSJ reports, Dow
28,000,000: The Unbelievable Expectations of California's Pension
System:
In 1999 then California Governor
Gray Davis signed into law a bill that represented the largest issuance
of non-voter-approved debt in the state's history. The bill SB 400
granted billions of dollars in retroactive pension boosts to state
employees, allowing retirements as young as age 50 with lifetime
pensions of up to 90% of final year salaries. The California Public
Employees' Retirement System sold the pension boost to the state
legislature by promising that "no increase over current employer
contributions is needed for these benefit improvements" and that
Calpers would "remain fully funded." They also claimed that enhanced
pensions would not cost taxpayers "a dime" because investment bets
would cover the expense.
What Calpers
failed to disclose, however, was that (1) the state budget was on the
hook for shortfalls should actual investment returns fall short of
assumed investment returns, (2) those assumed investment returns
implicitly projected the Dow Jones would reach roughly 25,000 by 2009
and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls
could turn out to be hundreds of billions of dollars, (4) Calpers's own
employees would benefit from the pension increases and (5) members of
Calpers's board had received contributions from the public employee
unions who would benefit from the legislation. Had such a flagrant case
of non-disclosure occurred in the private sector, even a sleepy SEC and
US Attorney would have noticed.
Eleven years later, things
haven't turned out as Calpers promised. While state employees have been
big winners from the bet, the state budget has been, and will continue
to be, a huge loser. Far from being "fully funded" as promised,
Calpers has already required $15 billion more from the state budget
than projected in 1999 and $3.5 billion is budgeted for this year, a
figure that is more than five times the expense projected by the state
legislature in its SB 400 analysis. Pensions are crowding out important
programs like higher education, parks and health care, and the state
will continue to whack away at those programs because the legislature
refuses Governor Schwarzenegger's request to repeal SB 400 for new
employees.
Of course, all of this
might have been avoided had Calpers disclosed the risks and conflicts
back in 1999. Indeed, legislators might have not passed the lavish
pension pay-out had Calpers simply provided counter commentary from
Warren Buffett and others who were saying its wagers were losing
propositions.
The state's pension funds are still trying to dupe
taxpayers. In response to a recent Stanford University study that
concluded California's pension funds are understating liabilities by
$400 billion, California's pension funds set up "spin" websites and
attacked the study as "shoddy" and "faulty."
Recently, a Northwestern University professor projected that
California's pensions will run out of cash in 2026, threatening even
greater havoc to the state's budget, yet our pension funds have adopted
a "don't worry, all is well" approach and refuse to provide the
information necessary for the taxpayers– i.e., the people actually on
the hook for these bets -- to make an independent analysis.
As
other states consider pension reforms, California's current quagmire
should serve as a reminder of the need to incorporate disclosure
requirements.
Pension shortfalls are already costing California's taxpayers. Cathy
Bussewitz of the Associated press reports, Calif
pension fund asks state for additional $600M:
Facing
massive investment losses, the board of California's giant pension
fund voted Tuesday to make the state increase its contributions to
employee retirement benefits by $600 million in the coming fiscal year.
The
increase comes as California grapples with a $19 billion budget
deficit and a threat by Gov. Arnold Schwarzenegger to eliminate its
welfare program.
The contribution increase would be for one year
starting in July, but the board is likely to require similar increases
in future years. Local school districts, already facing their own
budget struggles, also will see their pension contribution rates grow.
The
development is driven largely by huge investment losses by the
California Public Employees Retirement System, but also because people
are living longer and retiring earlier.
CalPERS, the nation's
largest public pension fund, lost $55.2 billion, or a quarter of its
value, during the 2008-09 fiscal year.
"The biggest reason
why we need increases is the investment losses," said Alan Milligan,
interim chief actuary for CalPERS. "Quite frankly, there's more to
come."
CalPERS sets a state contribution rate every year,
which the state is required to pay. Milligan said the investment
losses will continue to affect the state contribution rate in coming
years because of the "smoothing methods" the board adopted to spread
the losses over a longer period.
The
governor says the pension system is unsustainable and drains money from
other state programs. A Republican lawmaker has introduced legislation
to reform the system, in part by reducing benefits to newly hired
state workers.
CalPERS provides retirement and health benefits to
more than 1.6 million public employees, retirees and families. The
fund's value was $205 billion as of Friday.
California
is on a collision course and there are reasons to be concerned as some
feel the pension liabilities at these giant state pension funds are
grossly understated. Rosy investment projections and reassuring talk of a
"well diversified portfolio" only serve to mask deep structural
problems that will likely get worse over the next decade.
It's
time for Governor Schwarzenegger to "terminate" this nonsense. Cut these
large pension funds in half, introduce better governance and
compensation based on risk-adjusted returns. Pay senior managers who
perform and fire those who underperform. These pension giants have grown
out of control and left unchecked, they will sink California's budget
into oblivion.
»
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Just throwing out a crazy idea here, but if a pension is designed to essentially continue a particular income flow once a person retires, up until they kick the bucket, why aren't these set up as annuities?
It seems like they're using the wrong product (investment stuff) to achieve a particular goal (annuitized life insurance).
It further seems like this would be cheaper, less risky, and better regulated. Maybe I'm just missing something obvious.
People who would be surprised at the 26,000,000 scalar figure simply do not adequately grasp exponential growth curves.
Using an 8% compounding rate, in 9 years, 52M, 9 years hence, Dow 104,000,000 and on to infinity.
I understand exponential growth curves.
What I don't understand is how any professional can believe that the stock market will consistently go up in value every year. 8% is China growth...<cough>lie<cough>...type numbers. Where did they expect to get that kind of growth consistently? The growth dream...err..forecast is the problem, not the math.
Arnold understands politics in california. He tried to cut back the power of public service Unions in 2004 with a series of Propositions and lost.
Since then he has adapted remarkably to become a popular if somewhat ineffective governor.
This is a political problem. 30% directly or indirectly benefit from government pension largesse: 50% pay no State income taxes and its kinda hard to build a constituency from the remainder.
Are these real numbers? Where can I find them?
Adult supervision needs to step back and take a look at the big picture.
CALPERS is managing $200b. Assuming their goal is actual investment returns, they have no business screwing around in PE/venture startups, far-flung real estate projects like Stuy Town, or really even the entire small cap equity asset class. None of these are big enough to move the needle.
Given how poor their long-term investment performance (3.01% annual return with a standard deviation of 11% over the last 10 years), I cannot understand why they don't choose a dead-simple asset allocation, eliminate all the advisory fees they pay and let the computers run it for 5 basis points per year. That ought to be the starting point of any discussion involving state pension reform.
8.06% annualized large cap equity doesn't seem so outrageous, given the past 89 years was fairly similar. have we maxed out our card? mebbe... but just saying there is a certain sensationalism in this statement that makes me tune out anything else he has to say
When Bremer disbanded the Baath party in Iraq and all the government employees who became Baath party members to get those jobs lost their pensions, the people loved it and responded accordingly. What comes around goes around.
Pensions are the 800-pound gorilla sitting on top of every local, state and federal government.
Not sure how the Calpers numbers of DJIA 28,000,000 were calculated, but my calculations as the the value of equities by 2099 (DJIA) come to a much different conclusion. Using the high in 1929 of 400, and the 2007 high of 14,000, I find an increase of 35 times in 79 years, where prices averaged about an 11% gain annually. If one projects from the 2007 high, forward to 2099, and assumes a similar, proportional rise, I arrive at a DJIA of around 565,000. Certainly other, more growthy, segments of the markets would provide greater gains, but this would be a good basis for judgement as to the value of a portfolio 92 years forward.
Color me confused...
Where is my hopium..who took it huh? i need it man..badly..
why would anyone vote for the Terminator as Governor in the first place? Thats so fucking freaky californian people!
It is a culture of celebrity worship here. If I didn't have a custody issue to deal with, I'd have moved already. These people are so addicted to MSM. Our State motto needs to be changed to "The land of the sheep."
Or "The State of Confusion"
leo, the 28,000,000 is not a typo but how about the 19999?
govmint and financial sector is partying like its 19999.
Hyperinflation, baby
Any ideas on how to short CalPERS, and the rest of these state pension entities using bogus valuations, without recourse to CDS on the state itself?
Short viagra.
Actually, and i know next to nothing of california, it'll likely play out in the eventual collapse of the USD as the Fed bails the states. Short CA municipal bonds, long CDS, whatever, i dont follow that state stuff at all.
Retirement at 50? with pensions set at 90% of the salary? (likely 6-figure number)
You know what? Fu** CALPERS! FU** the Calpers board who took bribes contributions from union fu**s. FU** the union fu**s who gave bribes contributions to the calpers board. Anf FU** thsoe who will try to bailout Calpers in the not so distant future.
I am sorry, but you can NOT retire at 50 and receive 90% of you salary via CalPERS. Only Safety Employees receive 2% at 50, and that 2% is for each year worked. So, they would have had to start working as a safety employee (police, firefighter, emergency responder at age 5 FIVE to get that much.
Most of them retire at 50 and get 50% of their salary (Start at age 25 after academy) after spending 25 years trying to save peoples lives.
Hell, the military give you 50% after 20 years...
For the normal rank and file non-safety employees, they do not receive 2% per year until age 62. So assuming the same age 25 start, they get to retire at 64% of their salary at age 62. (it does ramp up radically from 62 to 65 though).
Also, to get this benefit, that 25 year old needs to contribute ~8% of their salary to the system, which is then matched by 8% from the state. If they decide to not take the lifetime payout, the money they put in will be returned to them in a lump sum having earn a contractual 2% per year, no more, no less.
I am in a similar system as the nosafety employees. Except I started at age 30 and will retire at age 64 with 100% of my salary. I am forced to contribute 11.23% of my salary per pay period to the pension, and the county I work for matches that amount.
My job duties are effective that of an insurance underwriter, however, I only make ~$43000 per year. I have 6 years in the field now. (I was in the insurance business before I went to work for the government, so yes, my job is insurance underwriting) Now, go google how much an insurance underwriter in the private sector can make with 6 years experience. The calculate what their retirement amount would be assuming they contribute 11% to their 401k, and the company matches for 5%, they contibute for 34 years and make 5% ROI.
Now who is the overpaid employee?
Stop believing the media bullshit. People dont work for the government to get rich, they work there to have a stable job to raise a family. (This does NOT include elected or appointed representatives or the executive level of government employment)
Want more examples? My brother also works foe the same government agency. He works over on the computer side of the house. He is responsible for 400+ servers and 4000+ PCs - He makes ~$65000 per year and has 15 years experience.
"People dont work for the government to get rich" ... Sorry Dude, you just worked for the wrong Government.
Government workers, teachers etc. can retire in New York after 30 years with 80% of the averge of their last three years of salary ( which they pump up with OT for their last three years ), and with full Benefits. Are you freakin kidding me. These do nothing boxcheckers are retiring at the age of 50 + and are set for life. Try to find that deal in the private sector. What a joke.
SamuelMaverick,
For New York I can not speak as I have not read their laws.
I was only talking for California.
And yes, it is actually possible to retire with 100% of your salary after 25 years even here in California. But those 25 years must be between 45 and 70. The way the public retirement system works is that you get a percentage of your pay for each year worked. That percentage is determined by what your age is when you retire.
So you could work 25 years from 25 to 50 as a non safety employee and receive 31.25% of your salary. Or you could work 25 years from 45 to 70 as a non safety employee and receive 100% of your salary.
It is all about the age you retire at, much more so than the years of service you have.
Heck right now, I could buy an additional 5 years of retirement time. This 5 years would allow me to retire at age 61 instead of age 64 while still retaining 100% of my salary.
Oh and you want a private sector example. Friend of mine worked a Gilead Pharma for 22 years. Invested all of his money in their stock plan. For years he made ~$2700 per month. He now has $800k worth of stock in the company. If he rolled that into JNK paying $0.30 per share monthly dividend he would have a $6000 per month retirement benefit with NEVER touching the principle. Gee, god damn private sector employees get to retire at 211% of their salaries after 22 year. Such bullshit, we need to confiscate all this wealth to pay the national debt.
See, this saw can cut both ways.
Oh, I forgot, he worked in the mail room.
Granted, the media bullshit is really talking about those government regulators who leave public sector jobs to get cushy high paying jobs in the private sector (for favors rendered) and then go back to public sector (Rahm Emmanuel and thousands of clones like him).
I am really attracted to public sector jobs because in the past 10 years, in the private sector, I currently make $17k less than I did in 2000 and have been laid off 3 times losing my home once and being basically homeless for a year (almost in a van down by the river except I didn't have the van). I have 25 years of experience and have been responsible for literally millions of dollars of product design, manufacture and quality at small, medicum and huge companies. Try 70-80 hour work weeks for a year straight...oh the joy and reward when you're laid off and the job goes to India.
You can say "fuck." Let it all out.
Ahnold has saggy titties. He ain't terminating nothing. Amusing how a strong man could be intimidated by the teacher's unions.
California in general befuddles me. The hippies, the corporate culture, the government-worship, the celebration of hobos, the freeways...
Can you believe that Eric Schmidt is actually advising Obama? Especially after the guy was caught diddling a chippie? How popular could that guy be among the rank and file at Google? Is that company totally full of pussy nerds? I mean, great products, whatever, but the management seems to be deluded...
Dead Kennedies - California Uber Alles
http://www.youtube.com/watch?v=UW8UlY8eXCk
Ahnold is an economic girly man when it comes to brass tacks and solving serious problems. He himself proves he was simply projecting his own true character when he accused others of being what HE truly is. He didn't figure out the riddle of steel.
If you're in the mood for more befuddlement:
http://www.youtube.com/watch?v=dChBN_zfofY
Calpers was using the industry standard assumptions for equity price growth back in 1999. It was the actuaries and financial community that said that the average growth would be 10% pa.
As an example, corporate schemes used an averaging method to calculate value of assets in a scheme, using average of previous, current and future (current plus 10%). Any surplus or deficit went to the profit line. In 2000, this averaging (rather than the actual mtm) was equal to 65% of the profits of the S&P500. It always was ludicrous, like the assumption property prices never go down, but if you try to raise your voice, you get shouted down by all those who gain (i.e. pensions industry, senior execs, bankers, politicians) in fact, those who have the short term upside but none of the long term downside.
When I raised my concerns and tried to persuade corporates to shift into longer duration fixed income when they could, they ignored me and when it was too late, they said, "who could have known."
That's so strange.
It's as if the world is run by morons and criminals...
Those bankers/politicians/execs, by the way, almost certainly REALLY BELIEVED in the shit they were peddling.
Schwarzenegger is full of shit. Well, time is coming when people start to understand that, by electing spineless, incompetent assholes with big and empty promises, all they get is poverty and civil unrest. Welcome to a real world.
As for California, an amendment increasing the pension eligibility retirement age by 15-20 years will solve all finding problems.
ok...you guys simply HAVE to understand the personality types of politicians that we elect.
They are ALL narcissists in POPULARITY contests. It is psychologically IMPOSSIBLE for them to do ANYTHING which might cause them to be disliked. They feed on adulation and applause.
Expecting them to do anything hard or which might make them unpopular or subject to criticism is foolish. They cannot STAND criticism.
On the flipside, the people CANNOT handle truth anymore. Tell someone the unvarnished truth - they actually in some cases get violent. All they want and are ENTITLED to is to have whatever makes them happy RIGHT NOW at this moment. Anyone who stands in the way of that MUST be expelled.
Anyone who works in business...when management floats yet another insane scheme, just see how they react if you bring up the possibility of failure and a mitigation strategy. They become apoplectic.
Gosh, watch Star Wars Phantom Menace to see just how bad echo chamber jihad against dissenters can fuck something up.
Gray Davis was a disaster. Ahnold is worse.
Gray was a disaster.
I don't think Ahnold is worse but he's sure bad.
He promised to stand up for the people and then folded like a cheap
suit.
It is interesting to note that when the economy was raging, nobody wanted a public worker job because there wasn't enough money in it. The only way the municipalities could compete was with benefits. Now everybody's crawling up the public workers a$$ to claw back whatever they can get.... Usually public workers give up reward [$$$] for lower risk [security]... Looks like they get neither.
Not true in places like NJ, NY, CT and MA. Public jobs are ALWAYS wanted in these places and they are always filled because political cronies need the voting base.
What happened was, when the tech and housing bubbles were booming, these public employees and their unions were able to push through reforms via the pols they helped elect, and the private sector, high as a kite on booming stock or house prices, didn't see or care that their elected officials were signing away the future.
Fast forward to today, people paying property taxes based on valuations that won't be seen again for years (decades?) to help pay for the likes of a $200k/yr education bureaucrat (and his/her step raises/cola increases/4 yr avg of highest-paid-years-pension, etc), and you get some pretty pissed off people.
It's just plain unsustainable.
not true. My brother-in-law has a degree in social work and is pulling in over $50k in another state (somewhat cheaper cost of living than CA) as a state worker. He thinks he'd make more in the private sector too, however a good friend of mine's wife is a social worker in the 'private sector' and doesn't make jack shit and has worked in it for 20 years longer than the bro-in-law.
Other in-law's all do, or are, working in the public sector making far more than they ever would in the private sector...now they are all running off to their retirements with 80% or better pension benefits of their highest salary in their former jobs...then they double dip by going back to work for the state as 'consultants' while collecting their benefits.
Ask a state worker what a layoff is and 90% have no clue what it is like after years of 'service'.
I don't know what it's like in California, or any other state for that matter, but in Ontario, there are ticket takers at the public transit stations in Toronto who pull in $30/hr - that's over $52,000 a year, plus benefits, for a less stressful job than the average check out girl at the supermarket (who gets minimum wage of $10.25). With overtime, there are fare collectors who make over $100k a year, plus they can retire with a fully indexed pension after 25 years.
If I were a pragmatist, I'd say the best way to fix California's system is grab a gun and shoot a few civil servants. But I'm way too nice a guy to even suggest that.
Arnold prefers an AXE: http://www.youtube.com/watch?v=VOOWnE4aVwc
Pay to government employees is way out of line in many states. These clowns would not get a fraction of what they do in the private sector. Overpaid government employees are a major cause of bankrupt governments (that and governments just being inherently inefficiently and wasteful)... one example:
http://globaleconomicanalysis.blogspot.com/2010/02/rapid-transit-salarie...
3 years ago, I was offered at job at a county here in SoCal. Had I taken it, I would be making almost double my average pay over the last 3 years, for performing far less challenging work (documenting for a bunch of politically attached IT wannbes, rather than getting it done).
Crazy thing was they had two guys in this department, who could do the work and then some. One left on disability, the other sat in his office all day, and downloaded nude anime pictures...sadly, I am not kidding.
I turned them down because I had no desire to be an unproductive paper pushing, purple wearing brownshirt leech.
buy buy buy
3 G's.
Don't forget.
Don't stick your head in the sand.
You have been warned.
The three G's? Gold. Guns and Gasoline?
It's time for Governor Schwarzenegger to "terminate" this nonsense.
Let's face it: What are the chances of that happening? It seems that the public employee pension bogey is everybody's time bomb (Illinois has the same problem; as does New York). And, of course, the issue is being addressed with the same courage shown by gutless politicians everywhere. As usual, this too will end with blood in the streets.
Yes. The Nazis too supported those within the Reich with a bounty of benefits!
Shut all pensions down. The taxpayer has no business taking on unbounded risk.
These people were promised generous pensions based on hypothetical dollars . . . dollars that did not cost anyone anything. As reality sets in, and the promises become real budget costs, significant conflict is inevitable between the people who were "promised" and the people who will now have to pay. Think Greece.
Maybe California should take another look at Sutter's Mill. The retirees already have a grubstake in hand. Some of those retirees could do some panning and split the take with the State Treasury.