[quote=CA renter]Yes, the pension funds were once well-managed by staid, boring pension managers, most of whom were in-house.
Over the years, Wall Street has corrupted the public pension funds, and more and more of the pension money is being placed at greater and greater risk in more “financially innovative” investments. We have Wall Street and the Federal Reserve to blame for this. The Fed’s insistence on keeping rates at ~0% are exacerbating the problems.
As for how it will affect the bond market, I believe that most people who work in these markets understand the risks…at least, I sure hope so.
It’s important to note, though, that public employees have been the ones to take the biggest hits, so far. They’ve been moving more employees, especially the newer ones, into hybrid retirement plans, and most employees with most municipal agencies haven’t been getting retiree healthcare for decades — they’ve been phasing it out since the early/mid 90s. Also, PEPRA has made quite a few changes regarding pensionable compensation, benefit caps, and increased pension contributions from employees.
The above information is related mostly to changes in California, though I know that other states and municipalities are moving in the same direction.[/quote]
Good point, CAR. In fact, SDCERA (mentioned in the OP’s article) has substantially reduced their “Supplemental Benefit Allowance” (intended to help pay healthplan premiums, if not covered by someone else) in recent years for 99% of the workers who retired (or took “deferred retirement”) after March 29, 2002 (Tier “A”):
This probability and also the fact that the SBA was could be withdrawn at any time was known to all active employees at the time of signing up for the plan (March 2002) but the vast majority elected to be folded into Tier “A” (from Tier I/II) at the time due to their future monthly retirement annuity being calculated upon a full percentage point higher of their highest annual salary. The caveat is that they would be required to contribute 7.5% of their salaries towards the (Tier “A”) plan where Tier I/II employees were not. Fortunately, for taxpayers, a very large portion of Tier I/II retirees are now deceased, and, in any case, the portion still living (all folded into Tier I) have much smaller pensions than those in Tier “A” which are based upon a much less generous calculation and smaller highest-year salaries.
In addition, SDCERA has implemented Tier “B”, a “defined contribution” plan or “hybrid plan,” (as discussed above) offered to all employees who were first hired between 8/28/09 and 12/1/12:
[quote=phaster]To show why the current SD county pension “operations” is a bad idea, google “buying stocks on margin” and check out the first search result.
The math is pretty simple to understand (just add “000,000” to the following $ figures):
A Buying Power Example
Let’s say that you deposit $10,000 in your margin account. Because you put up 50% of the purchase price, this means you have $20,000 worth of buying power.
Returning to our example of exaggerated profits, say that instead of rocketing up 25%, our shares fell 25%. Now your investment would be worth $15,000 (200 shares x $75). You sell the stock, pay back your broker the $10,000, and end up with $5,000. That’s a 50% loss, plus commissions and interest, which otherwise would have been a loss of only 25%.
Think a 50% loss is bad? It can get much worse. Buying on margin is the only stock-based investment where you stand to lose more money than you invested. A dive of 50% or more will cause you to lose more than 100%, with interest and commissions on top of that.
Uh, well, I don’t think our fact-skimming newbie, Phaster, had a chance to see this recent piece from the UT (hint: google SDCERA and it comes up first :)):
…. For the past decade, San Diego County and its employees paid 100 percent or more of their annually required contribution to the SDCERA retirement fund. Consistent employee and employer contributions over the years have laid a foundation for investment gains and asset growth. SDCERA’s investment strategy helps the employer’s budgeting process and stabilizes employer costs by reducing the volatility of returns and steadily achieving the rate of return needed to fund the benefit.
At $10 billion, the SDCERA fund is able to pursue certain investment strategies that larger plans like CalPERS cannot access and smaller plans do not have the resources to deploy. SDCERA’s investment strategy is purposely designed to be no riskier than traditional pension fund asset allocation strategies. Risk-parity and trend strategies, which utilize leverage, are limited to 25 percent of the SDCERA portfolio, not the entire set of portfolio assets. The other 75 percent of the portfolio is managed using traditional asset allocation and rebalancing approaches…
