The nation's two largest public pension funds last week reported slim annual investment earnings, CalPERS 1.1 percent and CalSTRS 2.3 percent, as experts continue to say hitting their long-term earnings target, 7.75 percent, will be difficult.
While CalPERS reported weak earnings in 2011, a prominent private-sector investment manager, Robert Arnott of Research Affiliates, told the board last week he thinks the most they can expect from stocks and bonds next decade is 4 percent.
Another major investor, Laurence Fink of BlackRock, told the
CalPERS board during a similar educational session in 2009 that during
the next 15 years: "You'll be lucky to get 6 percent on your portfolios, maybe 5
percent."....
Even a small drop in the earnings forecast could boost the annual employer payment to the pension fund. CalPERS, which may revisit the forecast in March, is not turning a deaf ear to the experts....
... A Stanford professor, former Assemblyman Joe Nation, D-San Rafael, issued a report last month showing what happens if the three state pension funds (CalPERS, CalSTRS and UC Retirement) earn the long-term historical average, 6.2 percent a year.
Nation said in a Sacramento Bee op-ed article the long-term "shortfall is $290.6 billion, or about $24,000 per California household. Like a mortgage accruing interest that's not being paid, that shortfall grows every day the problem is not addressed."...
See the full story at PublicCEO.com
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So, what does all that mean?
If the fund fails to perform as expected, which I think you are right to question, what happens?
What does it mean when they say "a small drop in earnings could boost the annual employer payment?"
Lastly, does a drop in earnings have an effect on the amount paid to retirees?
Thanks. I have been curious about this.
Here's a long answer:
http://siepr.stanford.edu/system/files/shared/Nation_Statewide_Report.pdf
Today, CalPERS financial assumptions are based upon their investments earning 7.75%.
But, they're not earning 7.75%.
At the point in time CalPERS future earnings assumptions are reduced there must be a change made to compensate for that loss in future revenue. Such as an increase in employer contribution rates (City, County and State agencies pay more), benefits must be reduced, or some combination of the two.
In the case the City of Chico, the City will pay this fiscal year into Retirement Funds approximately:
$5,278,989 for public safety employees.
$4,481,325 for all other employees.
---------------
$9,760,314 total
See page 14 of these:
https://docs.google.com/a/marksorensen.net/viewer?a=v&pid=explorer&chrome=true&srcid=0B-rS3rnRL2oYMzM1NTE5ZDctMTFhMi00MTQyLWIyODItMmMyYzkzNmNjZGRh&hl=en_US
https://docs.google.com/a/marksorensen.net/viewer?a=v&pid=explorer&chrome=true&srcid=0B-rS3rnRL2oYMmI5ZGM3NWUtZDlhOS00YTFjLWEwZWEtZTRlNzMxNzRhOWQw&hl=en_US
Mark,
When you say the city will pay into Retirement Funds, is that for current employees, or all current and past employees?
If adjustments are made to pensions, is it future pensions or current pensions?
In other words, are we still paying for Lando's current retirement, or Burkland's future retirement, just to take one example?
Thanks again.
Mark
Retirement fund actuaries are a rare and specialized breed, well beyond my knowledge....
But, my understanding is that CalPers calculates the totality of the obligations to current employees and current retirees (Annuitants), calculates the future earning power of the money in the City's funds, and then calculates the employer annual contributions needed to fund the mechanism.
They make that evaluation for each fiscal year.
I imagine that the hope was that an average employee would pay into the fund enough that interest earned can fund the obligations to that average employee. But, a widely held belief is that it is not working out that way.
I suspect that changing "the obligation" would be difficult at best. That's why the private sector ran away from defined benefit plans long ago. Meaning that employer contributions are likely to take the hit. A big hit.
Those reports that I linked to are the CalPers FY 2011-2012 annual reports for each of the City of Chico's two separate retirement funds.
thanks Mark, for putting this in language small children and housewives can understand. I have these suspicions, but I don't always understand. Now I understand.
"I imagine that the hope was that an average employee would pay into the fund enough that interest earned can fund the obligations to that average employee. But, a widely held belief is that it is not working out that way."
That describes the aspirations in any get-rich-quick-without-working scheme. "Money for nothin', and your chicks for free..." They all end up the same way - BUST.
Did you see this link pypr send me:
http://www.fixpensionsfirst.com/calpers-database/?first_name=&last_name=&employer=CHICO
thanks again pypr
Thanks Mark. I have been curious and was looking for someone who could explain it without a lot of other baggage in the explanation.
After listening to your explanation, I come to same conclusion. Employer contributions are going to increase, but it seems that will also put pressure on reducing obligations. At that point, it will interesting to watch the politics shift.
Thanks again.
Heck Mark, don't worry. Even if the proposed sales tax goes through and things don't work out people like Lando can con the people into raising taxes yet again and then again and again. (Just keep promising them a new baseball stadium and throw in a pony and an ice cream.)
Remember, there is no problem that can't be solved with another tax increase. And this is California, the land of fruits and nuts, where people insist on paying high taxes.
Most people in the private sector may never be able to retire but I assure you that will never apply to those in government.
Hi Mark,
I see you are still posting about this on other blogs. It is fine for the harpies to limit themselves to bitter complaints, but as an elected leader, it seems you should be proposing some solutions, or at least possible solutions/corrections.
What do you think the city or state should do?
Mark
Professor Stemen:
I think that you are refering to my link to this story:
http://www.publicceo.com/2012/02/chiang-unveils-updated-costs-for-funding-state-retiree-health-benefits/
Here's another recent story:
http://www.bizjournals.com/sacramento/news/2012/02/27/calif-underfunded-public-pension-funds.html
And some good foundational background information:
http://www.usdebtclock.org/state-debt-clocks/state-of-california-debt-clock.html
http://articles.latimes.com/2011/feb/26/local/la-me-state-debt-20110226
I think that we covered the likely solutions in earlier postings.....
Bottom line. Something has to give. The current path is economically unsustainable.
Either we continue to divert money from actual services to taxpayers (including the Universities) not only to pay the massive debts racked up at the state level, but also for the growing annual cost of benefits.
Or, the tax base grows by huge amounts to feed the cost structure.
Or, some would argue, that we should just tax our citizens/economy more.
Or, alterations are made to the benefits, and/or how the costs are distributed.
-Multi-tier benefits. Where new hires are placed on lower cost benefits packages.
-Employees pay a larger portion of the costs.
-Benefits are changed. EG: higher retirement ages, lower payout formulas.
Most likely, the solution will contain parts of several of the above. Such as:
http://gov.ca.gov/docs/Twelve_Point_Pension_Reform_10.27.11.pdf
http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_1151-1200/sb_1176_bill_20120222_introduced.pdf
http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0001-0050/sca_18_bill_20120222_introduced.pdf
Mark, Okay, but what do you as an elected official propose we do at the city level?
Dr. Mark
Some concepts have been in process for sometime.... It will be a direction rather than hard rules. And as it is for the State, the solution for the City will contain a mixture of the items above.