Another excellent Economist Mag article on the terrible state pension issues

[The-Shoveler]

BK and readjustments (regardless of current laws) I think would be the way things will eventually go.

There will probably be minimums where it won’t apply (not all were excessive) but Where there is clear excess.

[SD Realtor]

I guess I see the promise of any given return as orthogonal. If the anticipated return is 1% or if it is 3% it is what it is.

Backstopping the obligations IMO is orthogonal to it.

To me, having taxpayer funds as a backstop creates a moral hazard such that mismanagement or poor performance simply results in someone shrugging their shoulders and going…. well don’t worry about it, taxpayers got your back.

[davelj]

[quote=CA renter]

1. Costs have already been cut. Employees will be making up the shortfall as well, and they’ve already been paying more into their retirement systems over the past few years. Gov. Brown’s reforms significantly increased the amount some employees will pay, while others have already increased the amounts via contract negotiations over the past few years.

2. The way these costs work, the taxpayers may or may not be spending any additional amounts. If pension contribution costs increase, it’s going to fall on the employees, too. If the employer’s side goes up, they might offset those costs with pay or other benefit reductions. [/quote]

This is quite misleading. Yes, employees are paying “more” towards their retirements relative to the past, but… so long as the assumed rate of return on plan assets is higher than the achieved rate of return on plan assets, the employer (the taxpayers) is ultimately getting screwed. This is an axiomatic mathematical certainty. The ultimate shortfall will be covered disproportionately by the employer (taxpayers) in this case.

[quote=CA renter]

3. The “fairy tale” expected return is the same return rate quoted by almost every single financial advisor out there when they tell you how much you can earn on your money. Historically speaking (and I do understand the danger in that), the current return assumptions are low.
[/quote]

You’re smoking crack if you think that the current return assumptions are too low. Everyone on Planet Earth that doesn’t have an agenda knows that the likelihood of a typical pension plan generating a 7.5% annualized future rate of return is not materially different from zero. However, there are LOTS of folks who benefit from perpetuating this fantasy, including: (1) union members and their representatives on the pension boards (see above), (2) politicians (who benefit by kicking the can down the road), (3) consultants and asset managers (who won’t be hired unless they perpetuate the lie… because their competitors surely will!), etc. etc.

Every sentient being who understands return math – including Grantham, Bogle, Buffett, Soros, etc etc… that is anyone without a dog in the fight – knows that the assumptions are ridiculous. My favorite quote on this is from Mayor Bloomberg (from last year):

“The [New York City] actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”

[SK in CV]

[quote=dumbrenter][quote=SK in CV][quote=dumbrenter][quote=SK in CV][quote=dumbrenter]Your fix will have a nasty side-effect of rents going up drastically.
[/quote]

Why? How?[/quote]

The increase in property taxes will be passed on to the renters.[/quote]

Really? You think there are a lot of landlords now that are leaving money on the table, keeping rents lower because their property taxes are lower?

Not. A. Chance.[/quote]

huh?

It is ok for you to have a different opinion about future and it is also ok to say I am wrong. I wish you the best with whatever version of future you are thinking of.

But what is not ok with me is for you to make up things I never said. I never said a word about current rents and margins being made by landlords. Again, I said that the increase in property taxes will be passed off to renters.

While I like to have a conversation with people who hold different views, I do not like your twisting of things (intentional or otherwise), responding with questions and being lazy with words. Do not expect me to respond if you persist with such behavior.[/quote]

I’m not really twisting anything. What you said is that if prop 13 is repealed, rents will go up, because an increase in taxes will be passed on to tenants. There is a presumption in that claim that rents are determined based on a landlords expenses. Hence, the only reasonable conclusion would be that a landlord who bought many years ago, and has lower taxes, would charge lower rents than a landlord who just recently purchased and has higher taxes. If your claim was based on some other conclusion on the effects of a repeal of prop 13, please explain.

[SK in CV]

[quote=SD Realtor]Ummm aren’t bonds callable? I have seen plenty of muni’s that have early call provisions.[/quote]

Some are, some are not. If the state can ignore existing pension agreements, they could ignore bond contracts. Maybe the issuers should just call those high interest rate bonds, irrespective of the bond contracts?

[SD Realtor]

It doesn’t really matter to me.

It is clear you are simply being argumentative.

All bond contracts are very clear as to what is and what is not callable and it is up to the purchaser of the bond to make the decision.

The state borrowing money to build infrastructure is of a higher importance and benefits society a hell of alot more then the state backing failed pension funds. When the state f-cks up, the fix to the f-ck up should not be a meat cleaver but a well thought out solution so you don’t permanently damage the probablity of future investment.

Again, making me spell out this out is just a game you are playing because you already know all this but you just want to play this game.

Morally, there is a distinction between the state borrowing money to provide infrastructure to everybody, as opposed to the state obligating itself to pay for a poorly managed fund that only benefits a small fraction of the overall state population. Using taxpayer money to pay interest on loans that are used to build projects that are for the use and benefit of the entire community makes a hell of alot more sense then using taxpayer money to pay for a bungled up fund that benefits a fraction of the community when compared to the overall state population.

Hiding behind poorly written pension contracts or antiquated requirements seems to be your path chosen here rather then going, okay that was a major f-ck up, let’s try to make things right.

[SK in CV]

[quote=SD Realtor]
Hiding behind poorly written pension contracts or antiquated requirements seems to be your path chosen here rather then going, okay that was a major f-ck up, let’s try to make things right.[/quote]

I agree with trying to make things right. But what you’ve proposed is changing a contract. And it’s no more easily done on a very straight forward pension agreement than it is on a very straight forward bond contract agreement. That one was a bad idea in the first place doesn’t make it any easier to change.

[CA renter]

[quote=SK in CV]

I’m not really twisting anything. What you said is that if prop 13 is repealed, rents will go up, because an increase in taxes will be passed on to tenants. There is a presumption in that claim that rents are determined based on a landlords expenses. Hence, the only reasonable conclusion would be that a landlord who bought many years ago, and has lower taxes, would charge lower rents than a landlord who just recently purchased and has higher taxes. If your claim was based on some other conclusion on the effects of a repeal of prop 13, please explain.[/quote]

Nailed it, again.

Landlords do not pass the tax subsidy to the renters in most cases (some exceptions with long-time tenants in SFHs with low tax rates where the LL tends to leave rents alone, instead of raising them every year).

It’s like corporations saying they will pass extra costs on to the customers. Hogwash. The market will pay only what it’s willing to pay. Margins can grow and they can shrink. That’s life in a “free market.”

[The-Shoveler]

OK so you screw the bond holders, and you get rid of prop 13 for non-owner occupiers ,

In the extreme Case that is L.A. city, That will Still not get L.A. out of the giant hole they dug, or get them any further from the impending insolvency.
On top of that no one will ever (EVER) lend you money ever again (EVER!).

[CA renter]

[quote=The-Shoveler]OK so you screw the bond holders, and you get rid of prop 13 for non-owner occupiers ,

In the extreme Case that is L.A. city, That will Still not get L.A. out of the giant hole they dug, or get them any further from the impending insolvency.
On top of that no one will ever (EVER) lend you money ever again (EVER!).[/quote]

What makes you think that won’t cover it? We can’t really know until we get a market valuation for all properties that are not single primary residences that are paying below-market taxes.

Whether it covers it entirely or not, we don’t really know, but the housing stock in LA is quite old compared to SD, and there are many longtime owners and corporate owners (Prop 13 tax rates can be passed to new owners without reassessment through certain ownership types) who are not paying anywhere near market taxes on VERY, VERY expensive properties.

[CA renter]

[quote=no_such_reality]IMHO, the unions have repeatedly said how they DIDN’T ask for the 3% formulas. Seems like the easiest fix is to give up the unrealistic 3% formulas.

That’s really were the problem is, 3% at 50 or 55. People retiring with an 8-90% of max year payout with 37 years of life expectancy left.[/quote]

Absolutely. At the very least, retirees should only receive benefits based on what they’ve put in. IOW, if someone worked under the 2% formula for 29 years, and then 1 year under the 3% formula, the benefit formula should be calculated based on that. As it works now with the “retroactive pension increases,” those workers are getting benefits based on the 3% formula that CURRENT employees and employers have to pay. Additionally, most of those older retirees also have retiree healthcare, whereas most municipal employees who’ve been hired since the mid-90s do NOT get these benefits.

Again, taxpayers do NOT pay benefits directly to retirees. The fund calculates a percentage required to fund the entire fund for current and future retirees, and this percentage is charged to the employees and employers. It’s the “employer portion” of the pension contribution costs for CURRENT employees that represent what “taxpayers” have to pay toward the retirement funds.

[CA renter]

[quote=SK in CV][quote=SD Realtor]
Hiding behind poorly written pension contracts or antiquated requirements seems to be your path chosen here rather then going, okay that was a major f-ck up, let’s try to make things right.[/quote]

I agree with trying to make things right. But what you’ve proposed is changing a contract. And it’s no more easily done on a very straight forward pension agreement than it is on a very straight forward bond contract agreement. That one was a bad idea in the first place doesn’t make it any easier to change.[/quote]

Exactly.

I would also point out that the pension costs are the payments required to maintain the social/legal/safety infrastructure of the state. There is no difference between promises made to bondholders and promises made to people who do the actual work that enables us to live in a civilized society. If anything, pensions have a priority position above bondholders, since employees (including retirement plans) have priority over bondholders in a BK.

[The-Shoveler]

Even if the most optimistic case (~3 time total revenue) maybe, just maybe if we never never get a recession ever again.

In the more realistic case ~ 8 times total revenue,

I don’t think it will even come close.

[CA renter]

It would certainly bring us closer.

Of course, there is NO reason for us to subsidize the profits of landlords and other land/building owners. At least with a primary residence, one could make the argument that people won’t be “taxed out of their homes,” which was how Prop 13 passed in the first place. As usual, it wasn’t grandma who benefited the most, but corporate interests who gained the most from Prop 13.

Some info on Howard Jarvis and Prop 13:

Regarding the motives of Jarvis in promoting Proposition 13 and the role its passage had in rent control subsequently being enacted in most large cities in California, Greg Katz has written: “There was little doubt from his rhetoric that Howard Jarvis, who penned Prop. 13 with his on-again-off-again political ally Paul Gann, hated taxes of all kinds. But his intentions were, at best, turbid; Jarvis was at the time employed by the Los Angeles Apartment Owners Association as a lobbyist. In a fundraising letter to the landlords that employed him, he claimed, ‘We are the biggest losers’ if Prop. 13 fails. (Not to mention: The Yes on 13 headquarters were located in a Los Angeles Apartment Owners Association office.) He tried to persuade renters to vote for Prop. 13 by saying it would drive down rents, by decreasing the property taxes that landlords paid. Post-13 news reports found rents weren’t going down, despite Jarvis’s promises – apparently landlords were just pocketing their property tax savings. That revelation prompted many of the rent controls still in effect around California.”[5] San Francisco community activist Calvin Welch has stated “Jarvis was the father of rent control.”[6][7] Mark Evanier has dubbed him a “horrible man” and summed up Jarvis’ years as a lobbyist for landlords with these words: “He spent a lot of time ‘n’ money trying to ram through bills that said, in essence, that if I’m your landlord, I can do any damn thing I want to you, including tearing up contracts and raising your rent or evicting you whenever I feel like it.” [8]

http://en.wikipedia.org/wiki/Howard_Jarvis

——-

Note: rents did not go down, so the belief that rent would go up as a result of its repeal doesn’t really hold water. What would probably happen, is that properties would flood the market in anticipation of the repeal, which would drive down prices in many cases. Some of us would like to see this happen, as we believe that the rights of people to own their own (affordable) homes trumps the “rights” of landlords to collect rents/profit from people who need housing. Some properties could be excluded from the tax increase, but ONLY if the savings are passed on to renters (especially low-income renters) instead of padding the pockets of the profiteering parasites. At least with pensions we’re getting something in return (the best possible public employees who provide for our safety and security); with Prop 13 subsidies to landlords/landowners, we get NOTHING in return.

[CA renter]

[quote=davelj][quote=CA renter]

1. Costs have already been cut. Employees will be making up the shortfall as well, and they’ve already been paying more into their retirement systems over the past few years. Gov. Brown’s reforms significantly increased the amount some employees will pay, while others have already increased the amounts via contract negotiations over the past few years.

2. The way these costs work, the taxpayers may or may not be spending any additional amounts. If pension contribution costs increase, it’s going to fall on the employees, too. If the employer’s side goes up, they might offset those costs with pay or other benefit reductions. [/quote]

This is quite misleading. Yes, employees are paying “more” towards their retirements relative to the past, but… so long as the assumed rate of return on plan assets is higher than the achieved rate of return on plan assets, the employer (the taxpayers) is ultimately getting screwed. This is an axiomatic mathematical certainty. The ultimate shortfall will be covered disproportionately by the employer (taxpayers) in this case.

[quote=CA renter]

3. The “fairy tale” expected return is the same return rate quoted by almost every single financial advisor out there when they tell you how much you can earn on your money. Historically speaking (and I do understand the danger in that), the current return assumptions are low.
[/quote]

You’re smoking crack if you think that the current return assumptions are too low. Everyone on Planet Earth that doesn’t have an agenda knows that the likelihood of a typical pension plan generating a 7.5% annualized future rate of return is not materially different from zero. However, there are LOTS of folks who benefit from perpetuating this fantasy, including: (1) union members and their representatives on the pension boards (see above), (2) politicians (who benefit by kicking the can down the road), (3) consultants and asset managers (who won’t be hired unless they perpetuate the lie… because their competitors surely will!), etc. etc.

Every sentient being who understands return math – including Grantham, Bogle, Buffett, Soros, etc etc… that is anyone without a dog in the fight – knows that the assumptions are ridiculous. My favorite quote on this is from Mayor Bloomberg (from last year):

“The [New York City] actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” Mr. Bloomberg said during a trip to Albany in late February. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”[/quote]

davelj,

Yes, I agree that the return assumptions are too high, but based on the historical return rates for these pension plans, they are in line.

The problem with the pensions is that govt entities tend to spend everything they take in, and then some, and many make commitments (not just to employees) that they can’t keep when things go bad. The boom/bust nature of our Fed-created economic system is the primary problem. We need to fix that first, then we can address any problems with the pension systems. For as long as we allow the Fed to manipulate the economy as we do, the inevitable result will be huge overhangs and promises of all types that are made during the good times that cannot possibly be kept when things normalize or turn down.

You can add to this the movement of pension funds from the public sector, with in-house managers and “safe” govt bonds and highly-rated corporate bonds (and much more predictable and stable return rate assumptions), to private management/investment advisors who have major conflicts of interest where these funds are concerned.

[Author]

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